Sheng Siong Group - CIMB Research 2016-10-26: Gross margins remain high

Sheng Siong Group - CIMB Research 2016-10-26: Gross margins remain high SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group - Gross margins remain high

  • 3Q16 net profit (S$15.7m, +8% yoy) was in line with our and consensus expectations. 3Q/9M formed 25%/74% of our FY16F.
  • Sales growth (+1.2% yoy) was entirely driven by new stores as same-store-sales growth (SSSG) was negative at -1.2%, made worse by the store closure at Loyang.
  • The positive was the company’s ability to maintain high gross margins (25.9%), mostly driven by lower input prices from higher rebates.
  • Slight delay in China, expected opening in 2Q17F now vs. 4Q16F previously.
  • Maintain Add. We raise our FY18F EPS on better margin assumptions.

Sales growth entirely driven by new stores 

  • New stores contributed positively (+5.3% yoy) as they continued to mature but were let down by weak SSSG (-1.15%), which management mainly attributed to poor festive sales during the Lunar Seventh month. 
  • The temporary Loyang store closure (will reopen in 1Q17F) further dragged down sales by 2.95%.

Weak discretionary spending likely reason for poor 

  • SSSG 1Q and 3Q are traditional festive periods (Lunar New Year and Lunar Seventh month) that carry an element of discretionary spending. We think the weak SSSG in both 1Q16 (-0.5%) and 3Q16 (-1.15%) is a reflection of the general pullback in discretionary consumption trends. 
  • We believe this is likely to have been an industry-wide phenomenon as a result of the weak macro conditions, and not an idiosyncratic problem.

Gross margins remain high at 25.9% (2Q16: 26.1%; 3Q15: 24.3%) 

  • On the bright side, 3Q16’s gross margin (25.9%) remained on the high side. 
  • Note that 3Q is typically a seasonally-weak quarter in terms of margins as retailers push for higher volumes during the Lunar Seventh month. However, the high supplier rebates that lifted 2Q16’s GPM to record high levels were still prevalent. These rebates, given for volume, display and bulk handling, were the main drivers for 2Q’s continued high GPM.

Slight delay in China supermarket plans 

  • With regards to the planned c.54k sf store in Kunming, the group has not obtained a firm handover date from the landlord and the expectation is now for operations to commence in 2Q17F and not 4Q16F, as previously projected. The delay does not change our forecasts as we had not expected any meaningful contributions from the 60% JV in FY16-17F.

One more new store opened in 3Q16 

  • Yishun J9 (15.5k sf) is the group’s latest store, commencing operations in Sep 16 and adding c.4% to the group’s total retail space. This is a sizeable store and should meaningfully drive new store sales going forward. This brings the group’s total store count to 43 (including the Loyang store under renovation) and closer to its target of 50.

Maintain Add 

  • We raise our FY18F EPS on higher margin assumptions and roll forward to CY18F. This lifts our TP to S$1.14 (based on 23.3x CY18 P/E, 3-yr historical mean). 
  • In our opinion, the stock’s premium valuations reflect stable earnings and attractive yields in tough times. 
  • Re-rating catalysts include upside from China or better-than-expected SSSG.
  • Risks include a drop in margins.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2016-10-26
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.14 Up 1.040