On 5/9/14, I purchased a small stake in Sheng Siong Group at a price of $0.67. The stock has been sold off from a high of $0.73 since it announced that it was doing a placement issue for 120 million shares at $0.67. I have been monitoring Sheng Siong Group ever since it IPO-ed in 2011. I looked through its business and financials and have been impressed, but have always wondered about the growth plans of the company. During the last few years, it seemed that the company’s plans for growth was limited to the opening of new stores in the competitive local retail scene, and that caused me to think twice before investing.
Recently, however, the company has announced plans to enter the China market with a joint venture with Kunming LuChen Group. The JV intends to open supermarkets in Kunming, the capital of Yunnan first. It is not looking at competing with the larger supermarket chains in China, and are not looking at opening stores in major cities. According to a JP Morgan report, “the agreement is not definitive and decision to take the venture forward is contingent upon the ability to find secure “appropriate” retail space on rent that makes the venture economically remunerative. If management does not see rents being viable, the JV would not move ahead. The local JV partner has been entrusted with securing real estate. The JV will leverage on SSG’s store management and merchandizing expertise, while the local partner would be able to provide back end support, given that it is already a supplier to existing retailers.”
The joint venture is a $10 million outlay with Sheng Siong holding 60% (~ $6 million), Kunming LuChen with a 30% stake, and the remaining 10% being owned by Sheng Siong’s executive director, Mr Tan Ling San, who used to run the Econ minimarts in Singapore. I am not overly optimistic of this venture, as retail stalwarts like Walmart and Tesco have failed in China. However, the one thing that I am impressed from this piece of news is that it shows that the management is forward looking and sourcing for growth opportunities yet taking a conservative and measured approach to expansion. This was one of the reasons why I decided to move in from the sidelines.
Back to the placement issue, the company is intending to use the proceeds of around $80.4 million to purchase sites for its local expansion. Many people have been puzzled with this, as the company still has reserves of around $95.6 million and should be able to borrow without difficulty due its stable business and strong balance sheet. It seems like management is debt-averse or they feel that their stock is overpriced at the current moment for them to issue such a placement. My belief is more towards the former after learning more about the CEO and his frugal habits. Some have also pointed out the asset heavy strategy that Sheng Siong is undertaking may not be a good one, as it would decrease its financial ratios like its ROA while a placement issue would decrease the ROE if everything stays the same. I admit that an asset light strategy for retailers is attractive, but in this scenario, buying the premises that it operates on in land-scarce Singapore where rents will likely rise in the future, may help the company secure a more stable future. It is a direction that I feel positive on.
Now, let’s explore the company and its business. As mentioned, the company is a supermarket operator and it caters to the price-conscious in Singapore. Its goods are usually one of the lowest priced among its competitors, eg. Giant, Cold Storage (which are both owned by Dairy Farm), and Singapore’s largest supermarket operator, NTUC Fairprice. Both Dairy Farm and NTUC Fairprice have supermarkets which cater to a range of consumers, eg. Market Place and NTUC Finest which cater to the premium market and Giant and NTUC Fairprice for the more price-conscious consumer. In this regard, Sheng Siong is lacking, which I feel might be a strength due to its focused strategy. Sheng Siong’s supermarkets are quite unique in the sense that they offer customers both the “wet and dry” shopping options. One can find live seafood like fishes and crabs in the numerous fish tanks in the supermarket. The CEO has mentioned that one of the competitive advantages of the company is that it has a very fast turnover, eg. fast cashiers which help to reduce the queues at its counters. It also challenges itself to maximise profit margins by churning out higher turnover per square feet of retail space. Piqued by this, I went down to see how different its supermarkets were when compared to its peers. I realised that its supermarkets were indeed more compact than its peers. In fact, I have noticed on a number of occasions that its store was always more crowded than its competitor which was situated only a mere 3 minutes walk away, despite it having less space and an older premise. During my last visit, its competitor had moved out. Observing the cashiers, I could not feel much of a difference but I noticed that there was always one person operating the cashier while the other helps to pack during peak hours.
Looking at the financials of the company, we see in the graphs below that revenue and EPS have been rising steadily with the exception of 2010. In 2010, the high profits were boosted by one-time gains due to disposals of investments, and lack of rental derived from subletting excess space at the Ten Mile Junction Supermarket and government grants. Management did not go into detail about how much profits these brought back, but “Other income” in 2010 was $15.9 million as compared to $3.3 million in 2011 and $4.4 million in 2012 (if we deduct the the one-off gain of $10.5m from the $14.9m in other income). Thus, I believe the profits in 2010 would be around the same as those in 2011 if we were to remove the one-time gains. Gross profit and net profit margins are also increasing and was the highest at 23% and 5.7% in 2013. Management attributed this to cost savings derived from their new Mandai distribution centre. ROA and ROE for FY2013 was 15.7% and 26%.
* Info taken from Annual Reports. 2012’s net profit adjusted for one-time gains of $10.5m & 2011’s net profit adjusted for one-time IPO expenses. 2010’s net profit and margins boosted by unknown one-time gains.
As for the management, the CEO Lim Hock Chee is known for his thrift lifestyle. He strikes me as a leader who cares for his employees in the interviews that were conducted. Looking at the compensation plans in 2013, the executive directors were largely compensated through variable bonuses. Salary was around $300,000 but bonuses were almost $1.7 million each. This does seem alot considering that management receives alot in dividends through their holdings of around 57% of stock. Nevertheless, management has shown their capability in the last few years, and I hope they continue to do so in the future. Management has laid out its growth plans as increasing the number of stores it has in areas where it does not have a presence, increasing same store sales through managing its costs and renovating older stores, expanding its e-commerce program, and possible overseas ventures.
Current trailing twelve months EPS is $0.0314, and post placement, this would be around $0.0288, which gives a PE of around 23 at my purchase price. Similarly, the TTM dividend per share of $0.029 would be around $0.02668, giving me a dividend yield of around 4%. I feel that at a PE of 23, the stock presents no margin of safety. However, if you were to take a long-term approach to it, one would be buying a quality company run by solid and conservative management, which also offers decent dividends. Nevertheless, I would like to purchase it at a lower price so my investment is a small one right now.
Disclaimer: The author owns shares in the abovementioned company. The ideas expressed in this blog should not be construed as an enticement to buy or sell the securities, commodities or assets mentioned. The accuracy or completeness of the information provided cannot be guaranteed. Readers should carry out independent verification of information provided. No warranty whatsoever is given and no liability whatsoever is accepted for any loss howsoever arising whether directly or indirectly as a result of actions taken based on ideas and information found in this blog.