Thursday, 9 March 2017

SHENG SIONG STABLE AMID WEAK RETAIL INDUSTRY




Most of us Singaporeans would be familiar with the Sheng Siong supermarket chain. In my estate alone, there are two Sheng Siong supermarkets, conveniently located just a few bus stops away. Sheng Siong Group's financial performance has been phenomenal - investors who held Sheng Siong's shares from its IPO in 2011 till today would have tripled their initial investment, when dividends are included. Sheng Siong's presence in Singapore has also increased greatly - from 25 outlets at its IPO to 42 outlets today.

After such a strong run up in share price over the past five years, many of us wonder if Sheng Siong can continue to grow its profits for shareholders. Sheng Siong has been consistently trading at P/E ratios of above 20, which indicates that the market expects Sheng Siong to deliver strong growth. However, while I believe that Sheng Siong's fundamentals are good, there may be limited potential for further earnings growth.


Revenue mainly driven by opening of new stores



20122013201420152016
NUMBER OF STORES3333343942
REVENUE (S$M)637.3687.4726.0764.4796.7
SAME STORE SALES GROWTH (%)3.0-2.03.30.70.2
NEW STORES SALES GROWTH (%)11.39.92.34.66.2
CLOSURE OF OUTLETS (%)-4.0-2.2



Sheng Siong's growth is mainly through the opening of new stores, and same store sales growth has been muted on most years. Sheng Siong's strategy is to expand its number of outlets in Singapore. However, Sheng Siong has faced stiff competition in securing new retail spaces from other supermarket chains, as Sheng Siong noted in its 4Q 2016 report:


"The Group is still looking for suitable retail space particularly in areas where the Group does not have a presence. However, competition for retail space has not abated and looking for suitable retail outlets may be challenging. In addition some smaller supermarket operators have been aggressively bidding up rent of new HDB shops in the last six months."  

Sheng Siong also announced that its supermarkets at the Verge and Woodlands Checkpoint would be closed by 31 May and 31 August 2017 respectively, as their landlords would be redeveloping the sites. These outlets together contributed 8.6% to FY 2016’s revenue. This means that if same store sales growth remain weak, Sheng Siong's revenue for FY 2017 may fall, as there are fewer new stores to offset the fall in revenue from the closure of two key outlets.

In the long term, I think that there would be limited expansion potentail for Sheng Siong in Singapore, as our land area is small. Sheng Siong's growth in the local market would probably depend on our population growth, allowing Sheng Siong to serve consumers living in newly developed housing estates.

Another opportunity for growth would be Sheng Siong's upcoming expansion into Kunming, China where its outlet is expected to be operational in 3Q 2017. While expanding into China opens up a huge consumer market, there would also be intense competition from the local firms there, and operating margins there should be comparable to that in Singapore. Expanding into China would also mean local regulatory and foreign exchange risk for Sheng Siong.


E-Commerce threat 


Some investors are also concerned about Sheng Siong facing competition from e-commerce competitors such as RedMart, which is backed by Alibaba, and Amazon, which is set to launch its AmazonFresh service in Singapore. I believe that in the near team, the threat from e-commerce is not significant due to our social demographics. Currently, most of the consumers buying groceries are the elderly, who may be less tech-savvy, thus online shopping may not appeal to them. Furthermore, consumers would generally prefer to be able to personally touch and feel when selecting fresh food times. I believe it would be difficult to change this mindset in the near term, thus online sales of perishables may not take off.

However, in the long term, e-commerce is definitely a threat supermarkets. In probably ten years of more from today, when millennials make up the majority of consumers, most would likely be drawn to the convenience of online shopping for groceries. To address this issue, Sheng Siong has also launched its own online shopping website, a move that shows that it is aware of the need to adapt to changing consumer demands.


Valuation



Sheng Siong's current valuation of around 22.5x earnings seems a little overvalued to me, given the challenges that lie ahead. Sheng Siong's management maintains a dividend policy of distributing 90% of its net profit after tax, which provides a stable dividend payout for yield-seeking investors. Currently, Sheng Siong has a dividend yield of around 4%. Nonetheless, being in the consumer staples industry means that Sheng Siong would not be affected much in the event of an economic downturn, as most of its goods are necessities. 

Sheng Siong's fundamentals remain sound to me, with a strong balance sheet of S$63.5m in cash and zero borrowings. I would wait for any further price weakening as a result of higher interest rates to accumulate shares in the company.





Disclaimer

This research report is based on information obtained from sources believed to be reliable. AlpacaInvestments does not make any representation or warranty as to its accuracy, completeness or correctness. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, you should not act on it without independently verifying its contents. This publication has not been reviewed or authorized by any regulatory authority in Singapore or elsewhere. AlpacaInvestments accepts no liability arising whether directly or indirectly as a result of the recipient acting on such information or opinion or estimate. This report is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. AlpacaInvestments may from time to time have interests in the securities mentioned in this report, and our opinions expressed in this report are subject to change without notice. This report is intended for information purposes only, and should not be regarded as a substitute to your own judgement. 

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