Sheng Siong

Kim Eng on 29 June 2012

Geylang outlet to open next month. Sheng Siong is scheduled to open its new store in Geylang in July. It will be the group’s third outlet this year. The group’s efforts in opening a total of 5 stores since IPO should allay fears of saturation in the Singapore market. We believe that Sheng Siong is on track to meet its target of 40 outlets overtime. We have raised our FY13-14F earnings estimates by 3% to take into account the new 11,000-sq-ft outlet. Maintain BUY.

Free ads to boot. Following its IPO debut last August, Sheng Siong has gained publicity for itself and won the confidence of suppliers, giving it access to an additional advertising channel via newspapers. These advertisements are essentially financed by suppliers as the ad space is mainly devoted to promoting their products, but Sheng Siong gets to push its name out in the same space – for free.

Gross margin to ease up. Chinese New Year festive promotions at the start of the year were unavoidable for the group. But with the end of the first quarter and price wars petering out, we believe that its gross margin has bottomed out and should recover. Moreover, its two new outlets at New World Centre and Toa Payoh received favourable responses and have already started contributing positively to the topline.

One outlet affected by SERS. The Housing Board has selected six blocks of flats in Woodlands for the Selective En Bloc Redevelopment Scheme (SERS). One Sheng Siong outlet will be among those affected. However, it has another 4 years til 2016 when it has to vacate the premises. We believe this should give management more than enough time to find a new store location. The 44,441-sq-ft store contributed approximately 9.5% of sales in FY11.

Maintain BUY. Robust free cash flow and a net cash position of SGD149m make Sheng Siong a strong defensive play with a pure- Singapore retail exposure. Maintain BUY and target price of SGD0.52,