A week ago, I initiated a stake in local supermarket retailer Sheng Siong Group (SSG) for my SRS equity portfolio. I have been lazy to pen down my reasoning for this investment, but here it is at last. This post summarizes my thoughts about investing in this company.
Pros for investing:
One of top three Singapore supermarket retailers
Sheng Siong Group is one of Singapore's top three supermarket retailers, according to a 2018 report (link) by the USDA (yes, the United States Department of Agriculture). The other two are NTUC Fairprice Co-operative and Dairy Farm International Holdings, who owns Cold Storage, Giant and Market Place. According to a chart by Maybank Kim Eng (link), Sheng Siong Group is the one of two retailers - the other being NTUC Fairprice - who has been consistently growing their market share over the past five years, from 16.9% in 2012 to 18.9% in 2017. From a humble store in 1985, Sheng Siong Group now owns 54 stores across the Singapore heartland, with a retail space of nearly 500,000 square feet in 2018.
Operational discipline
Of course, aggressive growth without operational discipline is unsustainable over the long run. This does not seem reflective for Sheng Siong Group. In 2018, the company opened ten new stores, but saw two store closures as the buildings occupied were taken back by its owners for redevelopment. SSG management is mindful to segregate new store sales versus same store sales, so that they can track each revenue growth carefully. In its FY2018 report, SSG management astutely observed, "since the beginning of 2019, six HDB shops which were won by the competitors via online bidding in 2017 and 2018 are now vacant and have been released for re-tender." Learning from your competitors' missteps is telltale sign of a sound management team. SSG management is also focused on growing their fresh produce sales mix, which commands higher margins. (That gets another score from me.)
Zero debt, stable equity base
For a company that operates a brick and mortar business, this company has ZERO DEBT. Not even an auto loan for its delivery trucks. Would you believe it? Moreover, the shareholding base has been stable for the past few years. No hanky panky stock options for management, no complex convertible instruments and definitely no need to reach out to its owners for more money now.
Healthy company fundamentals
Increasing market share (positive YoY revenue growth over past five years)
Healthy gross margin (26.8% in FY2018)
Zero debt (I can't emphasize it more)
Stable shareholding base (ditto)
Cons against investing:
Competitive retail landscape
When one is grabbing market share, you can be sure the peers will not be resting idle either. There have been young upstarts (U Stars) and the rise of niche organic grocers, catering to health conscious Singaporean shoppers. Moreover, traditional brick and mortar retailers face a perennial challenge from online retailers (RedMart, Honestbee). Even market leader NTUC Fairprice Co-operative had recently revamped its e-commerce platform (Fairprice On) to fend off the challengers. I have not seen SSG management take a serious stab at growing grocery sales on the web. Perhaps the threat is not that serious...yet.
Price premium
Sheng Siong Group is covered by a few sellside brokers and is well researched by the market. At the current price of $1.04, you will be paying a hefty 500% premium over NAV (19.30 cents). This is not your typical hidden gem, but a polished jewel at the store front. Per Buffett speak, would you be willing to pay a fair price for a good company?
China foray
Many local companies seem fixated with China as the ultimate sales nirvana, and Sheng Siong Group is no exception. In November 2017, SSG opened its first overseas store in Kunming. It recorded a loss of $0.7 million in FY2018. In January this year, SSG entered into a lease agreement for a second store, expecting it to be operational in 3Q2019. The road to China supermarket supremacy is laden with battle wounded foreign retailers (Wal-Mart, Carrefour, Tesco), and even dead carcass (Lotte Mart). Hope SSG management has been copiously taking notes to avoid the pitfalls and potholes. Understanding and localizing the sales mix will be key to survive - let alone thrive - on this land.
Final Thoughts
In May 2018, a value fund manager Mondrian Investment Partners bought 99,000,000 shares from Sheng Siong Group founders at $1.01 per share (link). I have been watching the stock tussle at $1.08 for some time. When it came within striking distance of my ideal price, I pulled the trigger. I will surely load up if the stock price falls further to the dollar mark. Now I have another reason to shop more at my neighbourhood Sheng Siong supermarket.
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