Sheng Siong Group - Phillip Securities 2016-04-29: Opportunities Prevail in Tough Times

Sheng Siong Group - Phillip Securities 2016-04-29: Opportunities Prevail in Tough Times SHENG SIONG GROUP LTD OV8.SI 

Sheng Siong Group - Opportunities Prevail in Tough Times 

  • Sales held up by new stores with stable GPM. Results are in line with our expectation.
  • Four new stores in 2Q16, on track to its 50-stores target.
  • Maintain Accumulate rating with a TP at S$0.97 based on estimated 4.20 cents FY16 EPS and a PER ratio of 23x.

Analyst briefing key takeaways

Adverse impact continued from 4Q15 

  • Adverse impact continued from 4Q15 – tepid Chinese New Year demand against dull economic conditions; ongoing renovation in the vicinity of Loyang store disrupted footfall; stronger SGD against MYR affected Woodlands store sales, and regulatory changes on alcohol sales caused structural change in Geylang store. 
  • 1Q16 revenue grew 5.1% yoy and net profit increased by 16.8% yoy due to higher other income and slight improved on OPEX ratio. 

Soft demand at mature stores, but contractionary pressure easing. 

  • Same store sales growth (SSSG) was down by 0.5% yoy, weighed by Woodlands store. Excluding Woodlands store, SSSG would be a flattish 0.1%. These figures signalled recovery from the drastic downturn in 4Q15 which contracted 1.7% yoy. The management noted that the negative impact from liquor sales should ease in 2Q16, as the alcohol ban took effect from 1 Apr-15. 
  • New stores underpinned growth – namely the 5 new stores opened in 2015: Tampines Blk 506 (Jan-15), Punggol (May-15), Bukit Panjang (May-15), Pasir Ris (Jun-15) and Dawson Road (Dec-15). No new stores were added in 1Q16. 
  • At least an additional 37.5k sqft retail space, or 8.7% increase in total retail area over the next four quarters. 
  • New retail areas in 2Q16 – 
    1. Circuit Road (opened on 17 Apr-17); 
    2. Upper Boon Keng Road (by end Apr-16); 
    3. Fernvale Street (by early Jun-16); and 
    4. Yishun Junction 9 (by Jun-16). 
  • Interim closure for bigger space in 1Q17 – 
    1. Loyang Point Blk 258 was closed in 15 Apr-16 and is expected to reopen in 1Q17; and 
    2. Tampines Blk 506 is expected to close in 4Q16 and reopen in Jan-17. 

Maiden store in China remains a wild card but limited downside risk. 

  • The Group shared that it has signed a lease for its first store in Kunming, China. The supermarket will be located at the basement of a new shopping mall, which is approximately 54,000 sqft. The management expects the supermarket to open in 4Q16, to coincide with the soft opening of the shopping mall. 
  • Against the economic slowdown in China, the new venture may take a longer period to breakeven. However, the management also shared that there should not be further capital injection other than its initial US$6mn investment.

How do we view this?

Results are generally in line with our expectation. 

  • Both sales of profit of the first quarter usually logged c.26% of their full year figures due to seasonality factor (higher sales during Chinese New Year). 
  • Gross profit margin edged up by 0.1 percentage point to 24.5% in 1Q16 compared to last year, despite tepid Chinse New Year demand. We expect gross margin to pick up in subsequent quarters to its 4Q15’s level at c.25%, post Chinese New Year promotion. Nonetheless, we remain cognizant that the margin is still vulnerable to competition pressure.
  • S$5.3mn cash flow generated from operating activities in 1Q16 is 59% yoy lower due to a higher level of cash used to fund working capital change (mainly due to changes to timing of bonuses payment and a larger reduction in inventory, post Chinese New Year). 
  • Nonetheless, the Group remains debt-free with healthy cash position at S$113.9mn as at end 1Q16 to support its expansion plan. 

On track to its short-medium term 50-stores target. 

  • 39 stores as of 1Q16 and will be reaching 43 stores by 2Q16. See Table 1 for more details. We expect the Group to continue to benefit from the HDB’s rejuvenation programmes. Management shared that the HDB is expected to release some new shops for bidding and the management remain prudent in its expansion plan. 
  • The upcoming four new stores and momentum from the five new stores in 2015 should drive this year’s sales, while mature stores are facing slow turnover coupled with the downtime of its two big stores (at Loyang Point and Tampines Central). 

Investment Actions

  • We maintain Accumulate rating and TP at S$0.97, based on estimated 4.20 cents FY16 EPS and based on same PE ratio of 23x.

Soh Lin Sin Phillip Securities | http://www.poems.com.sg/ 2016-04-29
Phillip Securities SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 0.97 Same 0.97