Sheng Siong Group - Phillip Securities 2015-10-27: Expecting to capture more market share

Sheng Siong Group - Phillip Securities 2015-10-27: Expecting to capture more market share SHENG SIONG GROUP LTD OV8.SI 

Sheng Siong Group - Expecting to capture more market share

  • Higher 3Q15 revenue and net profit in line with PSR/consensus estimates. 
  • Muted comparable same-store sales growth (SSSG) amidst intense competition and lacklustre demand. New stores and newly renovated stores helped to cushion the weak sales growth. Continue expansion and rejuvenation plans. 
  • New store at Dawson Road (expected to start in Nov-15) will bring retail space up by 6.4% y-y and the total number of stores to 39 by end of this year. 

Analyst briefing key takeaways 

 Intense competition on volume growth in expense of lower prices. 

  • 3Q15 gross profit margin edged up 0.1 p.p. y-y to 24.3%, but fell on quarterly basis. Margin pressures came from: 
    1. Seasonality sales mix shift Typically, retailers would compete for volume sales during Lunar New Year and the Lunar Seventh Month. Sales mix shift to higher groceries sales, as supermarkets often offer bundled goods, e.g. hamper. In addition to the competitive pricing, demand were softer as compared to last year’s due to subdued economy and weak consumer sentiment. 
    2. Prolonged smog Vegetables prices rose on supply squeeze from Malaysia, thanks to the haze. Although the fresh food prices could be adjusted daily, SSG is reluctant to pass on the additional costs to consumers, in its effort to drive volume. Prolonged smog will continue to negatively impact fresh foods, which are the margin drivers. 
    3. Stronger greenback Fresh foods imported outside the ASEAN region (e.g. poultry from Brazil and U.S., fruits from Australia, Europe and South Africa, etc.) felt a pinch from USD strengthening. Similarly, higher costs were absorbed by SSG. 

 New store and expansions will gradually lift revenue from 2016 

  1. The new HDB-leased store of approximately 4,300 sq ft at Dawson Road is expected to be operational in Nov-2015, bringing the total number of stores to 39. 
  2. The store at Block 506 Tampines could be expanded to ~20,000 sq ft by end-2016. With most of the leases with the existing tenants would have expired, the Group could re-configuring the retail layout thus capturing more footfall. 
  3. The store at Block 258 Loyang Point (~6,000 sq ft) will be closed for 15 months starting from the 2Q2016, due to renovation by HDB. Subsequently, retail area in Loyang is expected to increase to ~8,000 sq ft. 

 Cautious approach amid China’s slowdown. 

  • The prevailing uncertainties in the business environment have deferred its expansion plan in China. The Group and its partner are still on the lookout for potential sites in Kunming and expect to kick start its first supermarket earliest in 2016. 

 Strategic approach on E-Commerce. 

  • The still-growing retail network across Singapore should help SSG to build an optimal logistics distribution route as it ramp up volume for its e-commerce. A decentralized warehouse management would help to SSG to increase efficiency (e.g. faster delivery time). 

 Waiting for competition to normalize and an economic turnaround 

  1. Persistent competition alongside a still-tepid economic outlook has put consumers into cautious mode. 
  2. Labor cost pressure due to domestic restructuring remains a headwind to the Group, while lower electricity tariffs due to lower oil prices will continue to benefit the Group. 
  3. Nonetheless, the five new stores opened since December 2014 as well as newly renovated stores will continue to support sales. 
  4. The company will also continue to expand its domestic retail network while nurturing the six new stores (inclusive of Dawson Road) as well as rejuvenating old stores to revive footfall. The management also shared that, seeing the tail end of 2011 building frenzy, where new HDB-leased stores supply is expected to ebb, competition for retail space will remain keen. 

How do we view this? 

  • SSG’s 3Q15 performance affirms our optimistic view on its outlook. We think that SSG’s growth strategy will position it to capture market share when the business cycle turnaround. 

Investment Actions 

  • We maintain our “Accumulate” rating with TP of S$0.96, based on estimated S$3.83 cents FY15 EPS and a P/E ratio of 25.0x.

Dehong Tan Phillip Securities | http://www.poems.com.sg/ 2015-10-26
Phillip Securities SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 0.96 Same 0.96