Sheng Siong Group - CIMB Research 2017-03-13: No new stores; still a tough bidding environment

Sheng Siong Group - CIMB Research 2017-03-13: No new stores; still a tough bidding environment SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group - No new stores; still a tough bidding environment

  • Management provided us with an update on the bidding environment for new stores and the outlook is not favourable. There are no new store wins for this year as yet.
  • There have been no meaningful sequential changes to consumer sentiment or spending in 1Q17. But at least same-store sales are not declining.
  • Gross margins are sustainable for now, but a longer-term threat could come from a price war if online retailers become more aggressive.
  • The group’s China supermarket is expected to be operational in 3Q17.
  • Maintain Hold given a lack of catalysts. Our TP remains unchanged at S$0.94.

Yet to win any new stores from HDB this year 

  • Broadly, the group has two avenues for new stores: 1) open bids from HDB, and 2) close bids from private landlords. 
  • On the first, our channel checks reveal a still heightened bidding environment. Sheng Siong has not been able to win any new stores YTD and we think the near-term outlook remains bleak. 
  • Interestingly, competition for sites used to come from new entrants/mom-and-pop shops but they are now less active. Instead, we are seeing competition from the bigger boys (NTUC and DFI).

Still trying for closed bids, but no news so far 

  • On the closed bids, we understand Sheng Siong is bidding/have bid for two stores but results are still pending. Each store is in the 8k-10k sf range (fairly sizeable relative to the 3k-5k sf stores the group has opened in the last two years). 
  • Management’s prudent approach to store openings mean that it will not overpay for stores and this should be a positive. However, competitors have not shied away from bidding, making it doubly hard for Sheng Siong to win new stores. 
  • All in, new stores will not be easy to come by.

Same-store sales growth likely to remain flattish 

  • We also spoke to the company to get a sense of the retail environment – management remains lukewarm on outlook. 
  • While it did cite a marginally-better Chinese New Year season this year, the current sales environment remains unexciting and consumer sentiment in 1Q17 is largely unchanged sequentially. Therefore, in terms of same-store-sales growth, we do not expect to see any sizable recovery this year (FY16: +0.2% yoy).

Gross margins will be sustainable in the near term 

  • The bright spot for the group has been its continued gross margin improvements. 
  • FY16’s 25.7% GPM was stellar (FY15: 24.7%), and we do not see any near-term threats to margins as the drivers (supplier rebates, bulk handling and fresh/dry sales mix) remain intact. However, management cautioned that these are unlikely to be sustainable levels in the longer-term due to increased competition from online retailers. Any price war will be a big threat to margins.

China supermarket to be operational in 3Q17 

  • The handover of the group’s retail space (c.54k sf) in Kunming, China will take place later this week and management is expecting the supermarket to be operational in 3Q17. 
  • While we have not factored in this 60% JV in our FY17-19F EPS, initial gestation costs could pose downside risks to our single-digit FY17-19F EPS CAGR.

Maintain Hold on a lack of catalysts 

  • No change to our Hold call and TP of S$0.94 (still based on 23.3x CY18 P/E, 3-yr historical mean). 
  • Overall, store closures and a lack of new store wins are hampering the stock, while the stock’s c.4% yield should provide some cushion. 
  • Upside/downside risks include new store wins/margin compression.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2017-03-13
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.940 Same 0.940