Was I Wrong About Sheng Siong...?
Readers who have been with me since the start of my blogging journey can probably recall this statement I made about Sheng Siong in my PSC Corporation Fundamental Analysis post, which goes as follows:
"You're telling me that Sheng Siong can blow past its COVID-19 highs during an economic recession, with spending greater than that of the mass panic buying experienced during that time? I find it hard to believe."
With that statement, I implied that I wouldn't really consider investing in Sheng Siong. But I must say that my perspective has ever so slightly changed, considering that I've reflected and consequently amended my investing strategy in my Dividend Growth vs High Yield post. I must confess that I've lost hours of sleep just thinking about Sheng Siong, so I've decided to write this article today to see whether my gut feeling was correct or not.
I'm confident Sheng Siong has no need for an introduction. It's a brand that most Singaporeans will most definitely be familiar with, being the supermarket retail giant that it is. In fact, Eight year old me always chanted along the 2012 Sheng Siong ad with that familiar "Sheng Siong all for you..." jingle. Not to mention, ask any uncle, auntie, or any Singaporean adult on the street if they know or watch the Sheng Siong gameshow and I'll bet that 99% of them say yes.
Just to recap though, here's what Sheng Siong actually does, according to their corporate website.
"From our humble roots starting as a small provision shop in Ang Mo Kio, Sheng Siong has grown to become one of Singapore’s top retailers, with over 60 stores island-wide today. Sheng Siong is also listed on the Mainboard of the Singapore Exchange since 2011.
Our retail stores are primarily located in the heartlands of Singapore. They are designed to provide our customers with both “wet and dry” shopping options. These include a wide assortment of live, fresh and chilled produce, such as seafood, meat, fruits and vegetables, in addition to processed, packaged and preserved food products as well as general merchandise such as toiletries and essential household products."
It would be wise to pay close attention to the highlighted parts, which are what made Sheng Siong the success that it is today. Many Singaporeans live in the heartlands, and it's certainly convenient to be able to fulfill your weekly grocery run just a few minutes walk away from your house. This is also precisely why Singaporeans have associated the Sheng Siong brand with value, as opposed to a chain like Cold Storage; Being located in the heartlands means less overhead from rent, which would naturally pass the cost savings back to the consumer... right? Well, yes, but this is why I also highlighted the second part of the company story, which I'll get into in a bit.
Firstly, let's take a look at Sheng Siong's financials and see if it has a robust balance sheet.
At a glance, Sheng Siong's performance has been extremely commendable. Revenue has been on an increasing trendline, although one should note that the stellar revenue achieved in FY2020 was attributed to the high amount of panic buying due to COVID lockdowns, leading to the hoarding of items such as toilet paper. Despite the normalisation of revenue, it seems like there has been a sustained increase in grocery purchases, which bodes well for the group. Furthermore, NAV and Gross Profit Margin have also been climbing, thanks to the increased sales of fresh produce which Sheng Siong is renowned for. Another plus is also the stable dividends paid out by the company, which have almost doubled in the five-year time frame.
So, what are Sheng Siong's growth prospects?
It is no secret that Singapore has been dealing with the issue of limited land space. A consumer staples retail business like Sheng Siong counts on population growth to drive its revenue higher. With 72 stores, it may be easy to conclude that Sheng Siong has already grown to its fullest potential. However, with upcoming BTO launches like Tengah Estate along with more projects to come as Singapore develops pockets of undeveloped land, we may see higher store counts and naturally higher revenue for the company.
Additionally, who says Sheng Siong is limited to only Singapore? China may be the panacea to the company's growth prospect woes. In fact, Sheng Siong already has five stores located in the economic giant.
It goes without saying, however, that one should remain cautiously optimistic about Sheng Siong's growth prospects. China is a whole other beast of a market that contains corporate behemoths in the grocery retail business such as CR Vanguard and RT-Mart. It is no guarantee that Sheng Siong's China outlets can be profitable in the long term, given that they were loss-making in the past. Additionally, further expanding against such giant headwinds as high levels of competition may significantly depress margins.
One thing to take note of is that Singapore's population growth has been taking a hit in recent years. Sheng Siong's revenue growth is inexplicably linked to Singapore's continued prosperity and attractiveness as an emigration location. Should the economy take a hit, we may see margins become slightly depressed due to fewer fresh seafood sales since they would be considered a luxury good in the economic sense, and hence have a positive income elasticity of demand.
Another thing we must note is that Sheng Siong's revenue only decreased negligibly due to the opening of 4 new locations in Singapore. Existing store sales actually dropped rather significantly to the tune of approximately 5 percent. Could this indicate that the opening of new stores is cannibalising sales from nearby locations? Or could there be a fundamental shift in consumers' lifestyles to eat out more as opposed to cooking now? Before COVID, it seems like a higher proportion of Singaporeans were eating out as opposed to cooking, which leads me to believe that with COVID restrictions being lifted, we could see decreased sales for Sheng Siong.
In terms of goods sales, Sheng Siong actually has 23 in-house brand labels. If they could further expand their range of products, then it would certainly bode well for their gross profit margin, given that in-house labels are typically more profitable. Hopefully, Sheng Siong can follow in the footsteps of Giant to introduce a flagship house brand such as Meadows.
To add on, Sheng Siong has also been making efforts to up its game in the online shopping market.
Why do I say this? Well, I recall visiting Sheng Siong's online website a while back and was simply shocked by the abhorrent user interface, to put it bluntly.
Although the UI still has some way to go before it's comparable to the likes of its peers like NTUC, it highlights the commitment of the management team to boosting its online sales.
That being said, I suppose now is the perfect time to segue to the review of Sheng Siong's management!
Sheng Siong has been under the leadership of the Chief Executive Officer, Lim Hock Eng. Here is some background information about him.
"Mr. Lim Hock Eng is our Executive Chairman and his areas of responsibility include business strategy and planning and business administration. Mr Lim also manages our day-to-day operations, including overseeing the setting-up process for our new stores, supervising the preparation and submission of our bids and tenders for new premises, as well as the renovation works and equipment purchases and installations required to fit out such premises.
Mr Lim is one of the founding shareholders of C M M Marketing Management Pte Ltd and Sheng Siong Supermarket Pte Ltd. He has been a director since Sheng Siong Supermarket Pte Ltd was incorporated in 1983, and has been instrumental in our Group’s growth. Mr Lim has more than 36 years of experience in grocery retailing. Prior to founding our Group, Mr Lim was employed in his family’s hog rearing business."
It seems like Mr Lim has been with the company since the beginning, which shows that he would be the best person to run the company, given that he would most likely be someone that knows the ins and outs of the company the most. I know this isn't exactly pertinent to investors, but he has been known to be quite generous, awarding up to a 16-month bonus to all staff in the year 2020. Personally, I think this is a huge plus. Detractors may say that these are unnecessary expenses, but such a move may attract higher-quality talent, and reduce turnover, increasing the operational efficiency of the company. Not to mention, I know a lot of people that feel especially good about patronising Sheng Siong due to the good reputation of the management.
In terms of alignment with shareholder interests, I find the company's efforts to sustain a stable, increasing dividend commendable. I think the company hoarding a bit of cash is rather reasonable, given that the company is still aggressively expanding its store count. I think the company could afford to take on a bit more debt though, given that the company's margins are rather high. However, I understand that they probably don't have many else places to expand to.
Let's cut to the chase. Would I buy Sheng Siong at current valuations?
Disclaimer: Please take everything published within this blog with a pinch of salt. Nothing I say here should be misconstrued as any form of financial advice whatsoever. In fact, I am probably the absolute last person you should approach for any sort of advice. All self-computed figures are calculated to the best of my ability, but I cannot guarantee they are 100% accurate, and I am not liable for any investment decisions made based on my content.
Thank you for reading my blog, and I hope you have learnt something, no matter how seemingly minuscule, ciao!
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