Small but nimble. Since the beginning of the year, Sheng Siong has done well. Its stock has outperformed the market by 36%, and despite rising competition and domestic labour constraints, core profits have jumped 30+%, driven by aggressive store expansion. We view Sheng Siong as a prime beneficiary of strong domestic consumption and a rerating amongst ASEAN supermarket plays. We raise our earnings forecasts by 6-8% for FY13-15F on a higher margin assumption. Maintain BUY with a TP of SGD0.80 (raised from SGD0.70), still based on 27x current year earnings.

Stepping up to meet competition. Competition has stepped up a notch this year. For instance, Dairy Farm’s Giant outlets (now rebranded from Shop N Save), selected NTUC's Fairprice  and Cold Storage outlets are now open 24/7. Sheng Siong has kept pace with the market. To complement its aggressive store expansion last year, when it opened 8 stores (GFA +14.9% from +3.6% in 2011), Sheng Siong has also converted two of its normal outlets to 24/7 outlets.

A Giant discount this month. To mark the rebranding exercise, Giant is offering 10% off on all house brand items in April. Discounting is normal behaviour for supermarkets, and Giant’s move does not seem overly aggressive. Hence, we do not expect a significant impact on Sheng Siong’s earnings in 2Q13. In 1Q13, the three supermarket operators had already run the usual promotions to coincide with the festive season and Sheng Siong was still able to grow 1Q13 revenue by 12% and core net profit by 31%.

Efficiency levels surprised on the upside. 1Q13 gross margin was a higher-than-expected 22.5%, up from 1Q12’s 20.8%. 1Q margins are normally under pressure due to seasonally aggressive promotions during the Chinese New Year festival, when input costs would rise and selling prices are pressured by industry discounting. We understand from management that Sheng Siong was able to execute more effective cost management. As this will be sustainable, we have raised our margin assumptions for the full year to 22.5%, and raised our FY13-15 forecasts by 6-8%.

Same store sales flat but not a concern. Same store sales (SSG) fell 2.3% YoY to SGD448.5 sales per sq ft, following the closure of the Teban outlet in March for renovation while a car park near its Bedok Central outlet was also closed for construction works. These two outlets account for almost 10% of GFA. Excluding the two stores, SSG was flat in 1Q13. We are sanguine on this. The Teban outlet has reopened, and while construction work in Bedok will continue for the next two years, we expect its 8 new stores to drive sales higher.

Source: Maybank Kim Eng Research - 30 Apr 2013