(Stocks Discussion) SGX: Sheng Siong Group Ltd (SGX: OV8)?

The setting of the AGM...

I just attended Sheng Siong’s AGM this morning! This one of the most unique AGMs I had attended so far, for a couple of reasons.

Firstly, unlike most other AGMs, this one was held at Sheng Siong’s own premises, in what seems like one of their conference rooms. The size of the entire room was actually quite small, as compared to other AGMs, with much fewer people attending this one (about 50 pax).

Next, the Q&A, which was actually just one question, was done in Mandarin, which really took me by surprise. I managed to roughly understand what management was talking about, though my mandarin really leaves much to be desired.

Lastly, the AGM actually had a mini-buffet counter at the end, unlike all the other AGMs I had attended which did not have buffets at all. Although this was a nice touch for the attendees, the “buffet” was really just a spread of pastry from Polar.

Some background about Sheng Siong…

Source: Singapore Business Review

Sheng Siong is one of the largest retailers here, with 54 stores located over the island. The stores both focus on “wet” and “dry” shopping options, with a wide variety of groceries and household items available for us. They have also developed their own selection of products, which currently has 1,200 products under 18 house brands.

Source: www.shengsiong.com.sg

As some of you might know, they also started their online shopping platform and delivery services to compete with the e-commerce space, which is quite convenient as well. They also have their own centralised warehousing and distribution centre in Mandai, which was where this AGM was held.

Sheng Siong’s Financial Results

Revenue

Source: Sheng Siong Group Ltd Annual Report 2018

Management had mentioned that the retail environment in Singapore for 2018 was tough, which was a point cited by other retail businesses as well that I had covered. Regardless, revenue still increased by 7.4% to 891m that year. This was driven mostly by the opening of 10 new stores in Singapore, and with some small increase in revenue from same store sales. Management did mention that this growth was dampened by increasing e-commerce competition and the closing of 2 stores in 2017.

Source: Wikipedia

As I had mentioned in a previous post, I do believe that the opening of new stores can’t always be a source of revenue growth locally. As of date, with 54 stores locally, I believe that the grocery market in Singapore is already quite saturated, and that future growth will be quite limited due to the strong competition and lack of population growth.

Source: Inside Retail Asia

Additionally, Sheng Siong is also more popular among the older generation, but as their population bracket shrinks over the next few decades, Sheng Siong’s competitive advantage of being a “dry” and “wet” market may become weaker. Management also had the foresight to recognise this, which is why they have expanded into China as well.

Costs and Expenses

Source: Sheng Siong Group Ltd Annual Report 2018

Overall, costs and expenses have increased from 2017 to 2018. This was mainly driven by the increase in operating expenses from the opening of new stores. For example, admin expenses increased by $16.1mn due to higher staff costs, rent, depreciation and utilities. However, cost of sales as a percentage of sales had decreased, mainly from better rebates, strong efficiency in the central distribution and better buying prices.The increase in costs from simply opening new stores as you can see, is actually quite high.

As management had mentioned, revenue usually takes quite a while to be reaped after the opening of new stores. This means that there will be significant costs outlay, such as capital expenditures on grocery shelves, equipment, staff costs and rent before the new stores start to generate revenue properly. (more on this later)

Strategy and Outlook for 2019

Opening of New Outlets

Management is aiming to open new outlets in untapped markets in Singapore, especially in areas that are new or redeveloping as they are looking for more exposure to the millennial segment.

Source: Time Out

As mentioned earlier, I don’t think this can’t be a very sustainable move because of saturation of the local market. Targeting the millennial market is probably the right move, since this population segment is starting to settle down and have their own families, and so the demand from this age group would increase over time. However, I do feel that Sheng Siong thus far has not done enough to reach this segment, based on my own consumer experience as a millennial. For Sheng Siong, their marketing strategy would need to be revolutionised since much of their efforts have been through offline marketing and targeted at older customer segments.

Developing E-Commerce Segment

Management wants to focus on their “All For You” online grocery segment as well. I believe that this should be one of their key strategies moving forward. Apart from targeting millennials and making it a lot more convenient for customers, there are a lot of costs and efficiencies that might be able to benefit from this move.

Firstly, I believe that this strategy as a form of customer acquisition, incurs less fixed costs and upfront costs than opening new stores. Such deliveries can already tap on existing stores and distribution centres, therefore, I think that acquiring customers through this manner would be more profitable. Secondly, as the number of deliveries increase, the costs to perform each delivery would reduce as well, due to economies of scale. For example, one trip by the delivery man can cover multiple deliveries, which reduces cost per delivery.

Automation

Source: The Straits Times

Management believes that more automation can be carried out. The most obvious example is the self check-out system when we pay for our items. There will also be some automation done in the warehouse also. This is an important strategy to consider, as management has mentioned that labour costs and issues have troubled the company before.

Additionally, over the decade, many of their staff will retire, and labour shortages might become a more acute problem. However, I do believe that with tightening foreign worker levy and quota, this should be an urgent issue that management needs to address.

Final thoughts…

Overall, I do believe that Sheng Siong’s financials look good so far, especially with strong growth in 2018 despite tougher retail challenges in Singapore. However, I am more concerned with their growth strategy in the future, especially with how topline can be maintained.

Though i feel Sheng Siong is a good company but it is not scalable. It is difficult for them to open up a new store. How many more stores can they open in Singapore?

And for me i do not feel there is any moat in sheng siong compare to NTUC. I will go to any one of the which is the nearest to me.

Their financials are good.

But the only thing that stops me from investing is their growth. Think about it, how much more Sheng Shiong can open in Singapore now? Unless you have more BTOs coming at a super high rate since SS only opens up in the neighborhoods and don't compete with Cold Storage and NTUC at malls.​​​

Hi everyone! These are a few reasons why I advocate a BUY call for Sheng Siong:

Strategic Positioning & Competitive Prices

Sheng Siong adopts a strategic position by opening its supermarket stores in the heartlands. With more than 80% of Singaporeans living in public housing, this enables them to cater to a large target group and provide convenience for their customers. In an attempt to mimic the wet markets that Singaporeans visit to purchase their groceries, Sheng Siong provides their customers with both “wet and dry” shopping options consisting of 40% fresh-produce and 60% non-fresh products.

Sheng Siong also prices its products competitively to target the large number of seniors and budget-conscious residents in HDB estates. They are also able to reduce their operating cost with relatively cheaper rentals in neighbourhood estates. This makes them well-positioned in customer acquisition and long-term growth.

E-Commerce Entrants Not A Market Disruptor

In recent years, online grocery delivery services provided by RedMart, Honestbee and Amazon Prime have gained traction. However, NTUC Fairprice has recently ended its partnership with Honestbee, and RedMart will be consolidated by Lazada. This shows that the new entrants are unable to compete profitably as they were unable to build scale by ramping up volumes, product varieties, and obtaining favourable credit terms from suppliers. These challenges allow brick and mortar incumbents like Sheng Siong to showcase their differential product offerings and strengthen its foothold.

Potential Expansion of Market Share with Healthy Store Tender Pipeline

The local pipeline of supermarket store tenders is expected to grow healthily for the next few years. There are 5 opportunities in the first half of 2019, and 15 more available in the second half of 2019 until end 2022.

This would give Sheng Siong the opportunity to grow its store count and capture market share when its 2 biggest competitors are fixated on other goals. NTUC FairPrice is taking a less aggressive stance on HDB supermarket bids whilst Dairy Farm International is in consolidation mode.

The Group is also cautious not to participate in aggressive or irrational store bids as it will greatly affect their operating costs.

Investment Risks

However, here are some of the risks of investing in Sheng Siong:

Market Saturation

The local supermarket industry has 2 other main brick and mortar players, NTUC FairPrice and Dairy Farm International, on top of the existing wet markets and minimarts. They compete aggressively against Sheng Siong for its market share in the small domestic market. The close location of grocery stores in the neighbourhoods might also lead to consolidation of stores, cannibalizing Sheng Siong’s existing store sales.

However, with NTUC FairPrice taking a less aggressive stance on HDB supermarket bids whilst Dairy Farm International is in consolidation mode, this will give Sheng Siong some tailwind.

Rising Input Prices

Despite irregular weather patterns which increase prices, food inflation has been generally benign in FY2018. However, the occasional weather changes will cause input prices to rise, which may affect SSG’s gross margin if the increase in price cannot be offset. However, by increasing their economies of scale through engaging in direct and bulk purchase, the Group remains committed to working towards selling a higher proportion of fresh produce. Thus, the greater sales mix should allow them to offset the rising input costs.

Uncertainty in China Market

The opening of the new supermarket in Kunming recorded a loss of $0.7 million in FY2018. Moving ahead, a new lease for a second supermarket in Kunming has been signed and should be operational in 3Q2019. According to SSG, the Chinese grocery industry is still dominated by traditional wet markets and neighbourhood convenience stores. Thus, in order to penetrate the Chinese market, Sheng Siong must engage in strategic competition against large existing local grocery stores. Their competitive strategy is also subjected to the limitation of time lag, as it takes time for China consumers to make the switch from purchasing their daily necessities in their local supermarkets to buying from Sheng Siong stores.

Difficulties in Lease Procurement

Although Sheng Siong adopts a rather prudent approach of not over-bidding to lease new HDB shops, in order to keep administrative expenses as a percentage of sales to between 16% to 17%, their store expansion strategy inevitably increases their exposure to risks associated with lease procurement. Related risks include competing with other larger players who have greater bargaining power to negotiate the terms of lease such as the location, tenure and floor area.

Will Costco be a better company if we want to be exposed to supermarkets or consumer staples?

Issac and Jonathan has covered quite extensive information and analysis on Sheng Siong

I would may add one 2 more points that I think is crucial to their business.

i) The Management Team - I admire the Lim Brothers who have been working really hard, together with the entire Organization. They took care of their employee, and providing lot of support even to their kids. And they are also very prudent in term of business expansion, especially when they shared about the way they expand in China. I vividly remember Mr Lim shared that, His WealthPot has already filled, now his Mission is not to filled up his own, but to help to fill up the rest of the organization.

ii) The Online Grocery spaces - if I didn’t remember wrongly, they do have their online infrastructure ready. However, they find it is very economical viable to run at the current volume in the general market. If they would continue to do that, it would only bleed shareholders money. But they do aware of the changes, and observing how the other players are doing.

Valuebuddies has a very good coverage on Sheng Shiong. Here's the link:

https://valuebuddies.com/thread-1240.html

Personally I feel the company is rather recession proof and its competitor is NTUC Fairprice and Giant. With its ability to supply good pork products, it can cater specifically to the chinese community