Sheng Siong Group

[specuvestor]

@Big Toe good pun on Red Mart hope it doesn't happen to Red Dot

Groceries delivery makes a lot of sense for big countries that does once a week bulk shopping. There's volume that covers delivery cost. Once upon a time there were talks of smart refrigerators that does on the fly inventory so if your eggs running low it will automatically send a request to online grocers to deliver eggs. Really... sending a pack of eggs... that's what I call a bad business model 字上谈兵. But for small places like Singapore not much except for bulky items like rice and drinks makes sense.

End of day the model has to be sustainable after initial red ink. If Uber didn't call it a day I'm not sure if Grab can survive until now and IPO. Amazon model is simple and yet seems like people keep missing it: It targets zero profitability (at least in first 20 years) You can have zero profit for 20 years but you can't sustain a loss making enterprise. Simple maths

In another thread I have voiced my skeptism on bicycle rentals cause there's no ownership. But the big idea for Ali Baba or Tencent or Meituan (ATM) is not the bicycle rental. It is to push digital and handphone payment. So while the investors in these bicycle orgies licked their wounds, the purpose of the trio ATM is achieved and it's just marketing expense to them well spent. Strategy is important

[karlmarx]

Ten years of low interest rate and ever-growing piles of investment dollars continues to fuel many tech and non-tech start-ups.

The general impact that the increased tech and non- tech competition has on incumbent businesses is undoubtedly negative. Though some of the less sexy businesses were lucky that they had no new competition (e.g. Gardenia).

Sheng Siong and FairPrice has done very well even as Red Mart and other forms of online shopping become more popular. Even traditional entrants like Hao Mart will unlikely become a threat to SS. Cold Storage and Giant does not seem to be regaining its lost market share.

SS has come a long way since its listing, and if it continues to remain competitive, it can still grow plenty by taking more market share from its competitors. There is enough to do in SG to keep them busy for the next 10 years; no need to venture overseas.

In the local F&B space, Burger King, Popeyes, Swensens, Bali Thai (and So Pho), KFC, and Breadtalk (not TB) has done poorly and looks to continue that way for the foreseeable future. Astons, Collins, Swee Heng, and White Beehoon are the rising stars. Guzman Y Gomez will probably be gone in the years to come.

[Choon]

I thought Guzman is often very crowded.

[weii]

The article below provides an analysis on the community group buying (CGB) trend in China.
https://thechinaguys.com/chinas-tech-gia...up-buying/

Main points are:
1) In particular, the market value of community group buying more than doubled in 2020 to US$11.5 billion, as digitally-inclined consumers were quick to embrace the conveniences offered by the online grocery retail model during lockdown.
2) The role of the community leader within CGB fundamentally changes the economics. As it is the leader who is incentivized to acquire customers and maintain them through their social network, the marketing costs for tech companies associated with these tasks is significantly reduced. . The community leader is a critical piece of the CGB model as they act as the sole intermediary between the e-commerce platforms and community buyers. Community leaders are responsible for creating the group chat, gathering customers, placing and picking up the order, and distributing the items to the community. They typically receive a 10% commission on the value of each order—occasionally more—as tech companies subsidize community leaders’ services to build loyalty toward their platform. Customer conversion rates via Wechat community groups are also higher, reaching up to 10% compared to 2-3% on dedicated e-commerce platforms.
3) Furthermore, the delivery of a single bulk order and distribution handled by the community leader significantly shortens logistical chains while allowing for wider margins. The promising unicorn start-up, Xingsheng Youxuan, reported that costs for home delivery grocery models runs from CN￥7 to 10 (US$1.08 to US$1.55) per order, while CGB greatly reduces the logistics cost to an average of approximately CN￥1.5 (US$0.15).
4) So far, CBG has been a big win for all those involved: customers can conveniently purchase groceries at a bargain through contact-free channels, online platforms reap wider margins with shorter logistics chains, and community leaders pick up a profitable side gig to supplement income.

[weijian]

SSG has been a great beneficiary of covid19 with a 29% increase in SSS (same store sales) in 2020. Since then, SSS is regressing back to the mean but SSG made it up with better GPMs (SGD strength tailwind?). While GPM expansion continues, but the impact of inflation to its operating costs have creeped up as well. I am skeptical that new stores will provide the immediate ballast against the rising operating costs since it takes time for the new stores (Mgt had mentioned it typically takes ~2years).

Multiple forces against them (SSS regression and rising operating costs) but SSG will eventually turn out fine.

Sheng Siong’s Share Price Has Tumbled to a 52-Week Low: Should Investors Get Worried?

Investors may be concerned about rising costs, but Sheng Siong continues to soldier on by opening new stores.

The diagram above shows the steadily rising store count for the group as it ended 1H 2023 with 68 stores with around 613,100 square feet of retail area.

A quick check also showed that Sheng Siong had five stores in China as of 30 June 2023, one more than the same period last year.

In terms of revenue contribution, new stores registered a positive 3.3% increase in revenue for the five new stores opened between 1H 2022 and 1H 2023.

Singapore’s comparable store sales for existing stores saw a slight 1% year-on-year dip in revenue as sales normalised after a sharp surge back in early 2022.

https://thesmartinvestor.com.sg/sheng-si...t-worried/

[CY09]

Personally, I find Sheng Siong as a good subsitute to CPF OA. It gives 4% and is in a defensive sector.

A beneficary of Singapore immigration policy which has been brining in a percentage of low wage workers, Sheng Siong positions itself on the low-price spectrum on supermarket branding, thus avoiding Fairprice Finest or Jason (part of Dairy Farm Group). As a demand derived business, with each growth in population, a higher level of demand results for Sheng Siong's supermarket.

In addition, like most supermarkets, the cash conversion cycle of Sheng Siong is low (it has a negative cash conversion cycle). This shows the business model does not need a lot of money to operate and Sheng Siong itself is lowly geared with virtually no debt. Hence it has a 70% payout ratio which is sustainable.

Sheng Siong is a good stock to own under the CPF Investment Scheme where individuals can use their CPF OA money to buy stocks. A 4% dividend company like Sheng Siong is definitely better than keeping money in CPF OA.

The tradeoff for the premieum over CPF OA rates is that Sheng Siong business will decline but i beliver investors would be nimble enough should it happen as SS's decline is unlikely to happen overnight

[ghchua]

Hi CY09,

I beg to disagree with you. Personally, if I want to invest in stocks using CPF OA funds, my hurdle rate should be at least 6%pa total returns. Dividends is only part of the equation. Aiming for 4% is definitely too low for me.

The reason being if one is intending to use their CPF OA funds for investment, it should be for long term investment and not trying to switch around stocks. This is because there is CPF agent bank fees for transactions on top of the usual brokerage charges. And if one do intend to invest for long term, just aiming for 1.5%pa above risk free CPF OA rate cannot justify the risk of taking on equity.

No doubt that Sheng Siong is a good company. But is it trading at a good price to justify putting your CPF OA monies into it for long term?

[weijian]

I tend to agree with ghchua. Investing using CPFOA is equivalent to a perpetual "effective interest" bullet loan, where the full principal is repaid when the investment is sold.

Since the full principal has to be eventually repaid, using the "loan" to invest in equities where the future principal return is "probabilistic in nature" is not exactly a good way to exploit the yield spread (4% dividend yield VS 2.5% interest from loan). This is regardless of how defensive the equity's underlying business is.

And as ghchua mentioned, rather than focusing on the yield spread (4% dividend yield from your equity VS 2.5% interest costs), the focus of the yield spread should be TSR (dividends + capital gains) vs 2.5% interest costs. If one makes this comparison the focus, then it is not about how defensive the company is, OR how much dividend yield the company gives. Rather, the focus is on TSR and then it becomes clear that to be able to exploit the yield spread (TSR vs 2.5% interest costs), it is about capital gains. Capital gains means you either buy the business at a good price OR the business is growing to sustain/grow the dividend.

[weijian]

Many cash rich companies are showing decent returns from cash (eg. your fav ShengSiong's increasing labor costs have been negated by the returns from its suppliers-funded cash hoard). Mgt of these companies don't need additional expertise to get risk free returns for their cash. Asset/gearing heavy-cash poor REITs are suffering but could they look forward to MAS as the savior like relaxing those gearing rules? After all, rules are set (and then broken) by humans.

The higher for longer rates will put the conservatively managed businesses with a sizable cash hoard at an advantage. I get the feeling that investors are slightly on edge now and negating this fact. Ie the sell-off of sheng shiong is irrational, cash hoard is growing, business is growing and staying above the $130M level(nett profit). Bearing in mind it was in the 70+M range pre pandemic.

Moving the specific ShengShiong's discussion into SSG's thread.

If we were to compare with all the companies that gotten a covid19 boost - eg. semiconductor driven, end consumption-driven etc, SSG's covid19 tailwind has been incredibly sticky as SSS reversion has been slow and may even have stopped. Contrast this with most of the other companies that gotten a business (and share price) boom due to covid.

Nonetheless, is the "sell-off of Sheng Shiong" really irrational? While SSG's business is relatively unscathed to date (or even is benefitting from all the GST vouchers dispensed by the PAP gov), but investors' return expectations have changed. As you have rightly pointed out, fixed income/risk free assets look to be attractive these days and hence they are a good competition to lets say, invest in SSG.

Simplistically speaking, SSG has been trading at >20 P/E and so that translates to a 4-5% earnings yield. With SG's 10year treasuries hovering at ~3.4% for the last month, and it was just doing at ~3% just 3-4 months ago. So let's say an investor who was "ok" with a SSG's 4% earnings yield 3-4months ago, they now may adjust their expectations and require a 4.4% (let's assume the same differential increase for risk free and equity here) - The 0.4% increase in expectation will lead to a 9% reduction to SSG's share price. Something similar is also happening at cash cow-stable business-VB fav VICOM, where investors have been repricing VICOM accordingly, even though the vehicular/non vehicular testing business has not changed (although VICOM investors also have to deal with a change in "structure" from the dividend payout ratio reduction).

[Big Toe]

Valid point. Business have not changed but investor's expectations have changed.
But look at it from another perspective.
Part of sheng shiong's free cash is paid out as dividends
Part of it is retained, part of it is used to fund future expansion and eventually profit growth.
The risk premium even at previous levels is still quite fair.
Others may beg to differ but I dont see selling out as a wise choice.

Vicom on the other hand, while still a very stable and good business with good margins, doesnt offer any growth and much of it is dictated by vehicular policies. A stable but static company. I prefer companies who can show some growth and less confined. SSG is still confined by physical stores within SIngapore and population growth but they are trying their hand in China, which is a tough nut to crack. I hope they can gain some traction there but I would not get my hopes too high, especially in the near term.