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

Hi everyone! I will just give some stats here that might be relevant for the members.

Business Profile

Source: Singapore Business Review

Most of us are similar with this supermarket chain that is usually nestled in the heartlands. As of now, they have more than 50 outlets, as compared to the 24 outlets that they had when they first listed on the SGX in 2011. Sheng Siong is most likely well known for it's more "wet market" setting as compared to other grocery chains like NTUC Fairprice, and appeals more to the older generation in Singapore. It recently ventured into China too.

Source: Singapore Business Review

Based on FY18's results

Income Statement

Source: Sheng Siong Group Annual Report 2018

Both Sheng Siong's top line and bottom line have grown over the past few years. With a CAGR of 6.2% from 2011 to 2017 for its revenue. In 2018, a portion of revenue growth could also be attributed to the growth in the Chinese market as well. Profitability have also improved, with the different profitability margins, such as gross profit and net profit, improving significantly. The opening of new stores have hampered such growth a little due to the increase in admin and staff costs.

Balance Sheet Strength

Compared to other firms, I do believe that their liquidity term liquidity is not as strong. However, the nature of their business do requires them to hold more inventory, so Sheng Siong isn't an exception. The company seems to have paid off all their debt as well.

Cashflows

The company seems to be quite a cash generating machine, as others have mentioned. This is evidenced by their high free cashflow, as well as free cashflow to equity. Despite having high capital expenditures, the firm is more than able to account for such cash outflows.

Working Capital Management

Sheng Siong's working capital management seems quite strong, with a negative cash conversion cycle. This is supported by Sheng Siong's trade payable days of more than 60, while having much shorter receivable days of 5-6 and a inventory cycle of 30 over days. This means that Sheng Siong has more cash to operate with based on their working capital management because they can delay payment to their suppliers. The short receivable days should not come as too much of a surprise though, since their B2C grocery store model requires payment from customers upon selling of the items.

Valuation

DBS forward P/E ratio for 2019 was 25X, slightly lesser than their projected regional average of 26X. If you were to compare Sheng Siong to their regional peers like that, it seems that Sheng Siong is valued at the right price. However, this slightly higher valuation may not be warranted because their growth rates may not be able to be sustained over time, since the Singapore market for groceries is already becoming increasingly saturated. I am particularly worried about the high P/B ratio that they have. Given that the business might have trouble growing earnings over time, I think that such valuation isn't quite justified.

Risks

Source: Intelligence Nodes

I think that Sheng Siong faces similar risks to the disruption that faces other retail businesses in Singapore. Firstly, there has been large speculation on how e-commerce will disrupt traditional grocery purchases in Singapore, especially with players like Red Mart. One silver lining for Sheng Siong is that they have traditionally served the older generation, who may be less tech savvy.

Another bigger risk that they face is the saturation of the Singapore grocery space. Since Singapore has an aging population and slow population growth, increasing the market size of this industry would be quite tough.

For players like Sheng Siong to grow and compete, they probably need to adapt to newer trends and innovate, or expand into other international markets as they already did. But with such moves comes great risk as well. Sheng Siong may also have to change its strategy of continually opening new stores, and focus on increasing same store sales. (SSTS)

Share Price Performance

Source: Yahoo Finance

Relative to the STI, Sheng Siong's stocks had performed better. This is probably due to the positive earnings resulst that were released throughout the year, and the strong fundamentals that I believe Sheng Siong possesses. In contrast, so far in 2019, the STI had actually outperformed Sheng Siong. For the past 5 years, Sheng Siong has actually made a share price return of almost 70%! This is reflective of the strong growth that the firm has achieved over the years. Currently, the firm is trading at 89% of their Last Twelve Month's high.

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.