Sheng Siong Group - Phillip Securities 2019-07-12: New Stores & Market Share Gains


Sheng Siong Group - New Stores & Market Share Gains

  • Record 10 new stores in 2018 and market share gains will drive revenue growth.
  • EBIT margins will creep up as new stores mature.
  • Maintain BUY with a target price at S$1.30 based on 25x forward PER.


  • SHENG SIONG GROUP LTD (SGX:OV8) is the third largest supermarket chain in Singapore. It provides daily essentials to mass-market consumers through its no-frills approach.
  • As of 30 Sep-18, Sheng Siong Group has 51 outlets located in Singapore’s heartlands spanning over 430,500 sft.

Investment Merits/Outlook

Sales growth of 10% in 1Q19.

  • The major store expansion of 10 new stores in 2018 and at least another 3 in 2019 will raise store footprint by 40%. The expansion will support revenue growth in FY19/20e. We expect upside in store openings because closed bids with lower accompanying rents are becoming more frequent.
  • New stores typically experience the sharpest growth in the initial 3 to 4 years of opening. Another support for growth will be store productivity or revenue per sft. It has been rising between 3-4% p.a. Sheng Siong Group's sales growth of 10% was against an industry contracting 1.1% in 1Q19.

Gross margins will still creep up.

  • Gross margins for Sheng Siong Group has been expanding every year for the past 6 years. The expansion has been driven by higher contribution from the 35% GP margin fresh food product segment (vs 19% non-fresh).
  • Since listing, Sheng Siong Group has pushed up fresh food mix from 30% to 45% of sales. In fresh food, the underlying trend is to grab market share from traditional wet markets through better convenience, prices and quality.
  • Other contributing factors to margins are the establishment of central warehouses and strong bargaining power due to the size and concentration of supermarket chains in Singapore.

Operating expenses will pressure earnings in the near-term.

  • The downside of new stores will be the elevated operating cost in the initial years. It can take 6 to 24 months for a new store to break-even. New stores will require a significant fixed cost regardless of sales such as a basic crew of 20-25 staff per store, utilities and rent.

Threat from e-commerce contained.

  • The impact from e-Commerce has been on bulky items (such as beer and diapers) and the more premium supermarkets in Singapore. Sheng Siong Group targets customers that are the most price sensitive. Customers are still worried about purchasing fresh products online. Sheng Siong Group has its own e-commerce business. It is profitable but contributes to a very tiny part of the business at the moment (~1% of sales).

Attractive metrics.

  • Sheng Siong Group offers attractive investment metrics with ROE of 25% and a net cash balance sheet of S$87mn. It also pays a dividend yield of 3%.

China still a work-in-progress.

  • Sheng Siong Group has only 1 store operating in China. The company is still looking for the right model in China. It is looking to expand another store in Kunming in 2H19.


  • Maintain BUY with a target price at S$1.30 based on 25x forward PE multiple. Growth will come from a
    1. 40% rise in number of stores over the next two years;
    2. higher contribution of fresh products to overall margins;
    3. increasing productivity or revenue per sft for the stores.

Paul Chew Phillip Securities Research | https://www.stocksbnb.com/ 2019-07-12
SGX Stock Analyst Report BUY MAINTAIN BUY 1.300 SAME 1.300