In-line with expectations, downgrade to HOLD. 1H13 revenue of SGD339.2m (10.6% YoY), and core net profit of SGD19m (26.7% YoY) comes in-line with ours and consensus’s expectations. An interim dividend of SGD1.2cts was announced (87% of 1H payout), up by 0.2cts from last year’s interim dividend. We downgrade the counter on the grounds of valuations appearing toppish.

SSS slow down. The 10.6% 1H13 sales growth is largely driven by bumper stores openings from last year of SGD42.8m, but this was offset by a contraction in the older stores. SSG declined by 1.0% due to higher competition, and decline in sales from the older stores. Bedok Central and Verge stores were highlighted for its ongoing construction work disruption in the vicinity. More stores are expected to go for renovation due to declining same store sales.

Signs of margin pressure ahead. Gross margin continue to show signs of improvement on the back of improved sales mix, lower input costs, and lack of price wars with competition. This was offset by higher depreciation costs from the fitting out of new retail stores and Mandai centre. While staff costs increase was in-line with store growth, Sheng Siong caution on cost pressures from difficulties to hire and higher foreign levy, with the recent hike in service sector by 9% on 1st of July.

Balance sheet remains strong. Inventory levels were lowered in 2Q as expected from the stock-up for Chinese New Year in 1st quarter. Sheng Siong remains cash rich with net cash position at SGD117.6m, with 51% of its IPO proceeds still unutilised.

Risk of market share lost, cut to HOLD. While Sheng Siong commands strong historical margins and ROEs against its regional supermarket peers, we are concerned on competition overrunning and possible risk of Sheng Siong losing market share. We downgrade the counter to a HOLD, with TP unchanged at SGD0.74, pegged to 25.8x FY13F P/E.

Source: Maybank Kim Eng Research - 24 Jul 2013