Sheng Siong

By Lim Siyi 

For 2HCY13, we expect consumer-related companies under the FTSE Straits Times Consumer Services Index (FSTCS Index) to experience lower-than-expected revenue growth as sentiment turns bearish both domestically and abroad. With weaker economic data points (e.g. Indonesia?s GDP and China?s slowdown) re-affirming lingering economic uncertainty, consumer companies are likely to face challenges as consumers shift away from discretionary spending. As we expect sell-offs of the sector to continue in light of these headwinds, we maintain our UNDERWEIGHT rating on the sector. Within the sector, we favour counters with defensive qualities such as Sheng Siong [BUY FV: S$0.82] over counters with high exposure to emerging Asia consumer demand like Petra Foods [HOLD FV: S$3.95] and counters with wafer-thin operating margins like BreadTalk [SELL FV: S$0.77].

2Q earnings: revenue below expectations 
According to Bloomberg, consumer-related companies under the FSTCS Index reported lower-than-expected top-line figures for 2QCY13 (below estimates by 6.6%). Fortunately, a favourable cost environment during the quarter helped to improve EPS, which fared better at +11.5% over forecasts.

What does this mean? A weaker 2HCY13
Despite the decent bottom-line performance, we are likely to see a continuation of lower-than-expected revenue growth in 2HCY13 as consumer demand face headwinds in the respective domestic and overseas markets. The favourable cost environment is also likely to reverse in light of rising fuel costs and inflation concerns, which pose potential challenges to operating margins and hinder the ability of companies to pass on price increases to consumers. 

Muted domestic outlook
Domestically, SG retail sales are still remain tepid and uninspiring, in our view. Inflation and economic uncertainty remains the top two concerns for consumers, who have indicated in a series of surveys conducted that they intend to cut back on discretionary spending. Given this sentiment, we expect domestic spending to taper off in most categories except supermarkets, where we anticipate a continued shift in spending patterns towards dining-in. On a positive note, tourist spending could help to cushion the drop-off, especially with the upcoming F1 event in Sep.

EM Asia data points turning bearish
Looking abroad, the recent economic data points such as the reduction of Indonesia?s GDP forecast, falling consumer confidence, possible slowdown in China etc have suggested that the regional retail outlook is also turning a tad bearish. Coupled with the weakening regional currencies against the US and Singapore dollar, consumer companies with regional exposure could face greater headwinds in the coming months. 

Maintain UNDERWEIGHT favour defensives
We maintain our  UNDERWEIGHT  on the sector in light of the overhang of macro-uncertainty, and the sector to continue de-rating with investors locking-in profits from before. Within the sector, we favour counters with defensive qualities such as  Sheng Siong  [BUY   FV:  S$0.80] over counters with high exposure to emerging Asia consumer demand like  Petra Foods  [HOLD   FV:  S$3.95] and with thin margins like  BreadTalk  [SELL   FV:S$0.77]. 


 

The Cost Leader Who Forgets About His Cost

The reason that Sheng Shiong (SS)  has such large scale of  operation right now is that it  managed to find and exploit the  gap between NTUC and One-Dollar shops. Throughout the years, SS had been mindful of its cost and was able to transfer the cost saving to its customers. The cost saving capability thus becomes SS's competitive advantage that enable it to rout stronger competitors like Shop N Save. However, in recent SS appeared to have lost sight of the engine it depends on to  propell its growth. In this report, I will attempt to explain what  SS should not have and should have done, which might threaten its fundmental.

Should Not Have Done

1. 24 Hours Operation: In the bid to remain " competitive" , SS followed NTUC's strategy of operating 24hours stores. However, this would prove to be a deadly mistake. With the little passenger traffic, low products' contribution margin,  high overhead cost (due to SS large store front) and high labor cost (SS is a labor intensive firm), the cost of operating in the  night  can hardly justify the  revenue.  The only reason why 7 Eleven could run such 24 hours operation is due to its much smaller store, high contribution margin (The same  products cost a lot more in 7 Eleven), and low labor cost (store manned by one staff). Moving back to SS, the losses from night operation has got much deeper implication. The huge  losses from serving small amount of  customers in the night will now be transferred to the majority of customers who do not make use of the  night service through higher product prices. This reduced SS's competitiveness. SS would be better off by  giving NTUC the night market which is loss making.
2. E-Grocery: E-Grocery has been pretty successful  in large countries like US where population is scatter across the land. The story is quite different for  Singapore which has  uniquely small landscape and numerous high rise flats, nearly every family has access to a supermarket which is just a stone throw away from their block. This makes E-Grocery hardly necessary. Furthermore, the higher products' price in E-Grocery is targeted at a  higher end  customers  who are  very different from SS's current penny pinching customers.
   However, do note that I am not trying to imply that SS should not go into E-Grocery at all. It is just that the time isn't ripe. SS could have better  invest its capital on fine tuning many parts of its operation- which will be discussed in the SHOULD HAVE DONE part. The result of fine tuning would have  increase SS efficient and enable it to better compete with the first movers-e.g. red marts. Simply put, the strategy is to let NTUC engage in a costly competition with the first movers first, meanwhile SS focus on  improving its  physical  distribution  and go in later. Afterall, the first mover has the advantage of doing away their overhead cost.
3. Mandai Link Distribution Centre: SS invested 65millions in this warehouse will lead to higher fixed cost and higher break even point. SS could have first rent a warehouse while continue to  explore the option of cross-docking. This will remove the need  of purchase expensive  property  on Singapore scarced land, and reduce its manpower which is another expensive resources in Singapore.

Should Have Done

If you are thinking about Walmart now, you are right. The history of Walmart provide  many important  learning points and guidelines for SS in its quest toward dominance of Singapore market.

1. Invest In Better IT System: SS lack of good IT support is especially evident in its outlet stockpile. It is not rare to: pick up expired products, hear employees complaining about overordering goods that are not selling and not ordering goods that are lacking. Just look up ontop of SS's shelves, the large number of boxes stacked on the shelves are the amount of goods that the employees overordered. All these point to the fact that SS is lacking an IT system that keep track of its goods and is therefore unable to make informed decision. A good item system that  is able predict demand and make informed  ordering should help  SS to reduce unnecessary  inventory level (wastage), and free up space  in the store which will replace the need of a warehouse. 
2. Setting Up Self Service Cashiers: These would reduce SS reliance on its massive manpower. Currently, much of the staff in SS stores are Malaysian workers.This is expected to increasing eat into SS profit  as government continues to increase foreign levy.  Just a little sidetrack, if you ever see a SS's staff standing infront of the store exit, he is not ideling- he is there to make sure there is no shoplifting going on. Assuming that the pay of that SS staff is $7 per hour, it would only make sense if SS starts losing a 5kg pack of rice (worth around $7) to shoplifting  per hour.  During peak hours, you can ever see  more than one of these " security guards" . Reliance on security camera would  make much more economic sense. Anyway, instead of reining in its staff cost, SS is still continuing its aggressive employment policy- overstaffing is what might follow.
3. Change In Management (I might be wrong about this point):  Members of the management team in SS are mostly made up of the founding father's family members. This gave rise to some kind of nepotism where the decision makers might not be the best and most capable. At least, the founding  father, Lim Hock Chee remain to occupy the most  powerful and important position in the firm.  One need to understand that the founding father not necessary has the skills and experience  require to manage the now much larger and complex  company, and take it to greater height. This is  true for many startups, though painful, it is a  delimma between CASH AND KING  Thus  for SS,  the resulting poor management decision making can be seen from cases such as buying 5 wet markets that can't be converted into supermarket, and the poor strategic decision to operate 24hours. It is advisable that SS start bringing in professional managers to its top management office. Otherwise more costly  problems would be expected to set in as the business grow more complicated and goes outside the expertise of the current management.

In a nutshell, instead of engaging in costly battle for new markets, SS should focus on streamlining it current distribution network and aim to replace NTUC as Singapore top retailer. However, should SS continue its current stratgey that stray away from its original customer group, it will soon loses it competitive advantage. The resulting sign of SS failing would then be expected to surface in 2 years time, when economy growth is strong and consumers are turning away from basic products sold by SS.

Based on the above forecast and the expectation that management would not made much changes from its current strategy, I have assigned SS a TP of 58cents.

Just sharing my view here, email me rosesyrup123@yahoo.com if you have something to share with me. Thanks.

Author: Rosesyrup

Disclaimer:

• The  following analysis is purely my personal opinion. I urge you to do your own assessment and calculation for any relevant decision making purposes.

• The analysis is  based purely on consideration of the company's  financial and economic interest.

Sheng Siong Group, one of the largest supermarket chains in Singapore, registered a 20.8% year-on-year increase in net profit to $8.5 million for the second quarter ended 30 June 2013 (2Q2013) mainly led by higher revenue and better gross profit margin. 

Revenue increased 8.7% yoy to $159.8 million for 2Q2013, largely because of the increased contribution from new stores of $20.1 million. This was partially weighed down by a contraction in comparable same store sales of $7.3 million.

Competition, declining sales in the group’s old stores in matured HDB estates and building and renovation works affecting certain stores were the main reasons for the lower comparable same store sales.

The group’s Bedok Central and The Verge stores suffered from ongoing construction works in the vicinity while one of the stores at Ang Mo Kio was closed for about a month for major renovation. Comparable same store sales declined by 1.8%, excluding the impact of stores affected by building and renovation works.

In 2Q2013, administrative expenses increased by $2.5 million yoy to $26.3 million, as a result of additional headcount and higher store count relating to the expansion of supermarket operations. Despite the start-up of 8 new stores in 2012 and cost pressures, the group maintained administrative expenses at 16.5% of revenues for 2Q2013, representing only a 0.3 percentage point increase from 2Q2012.

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