• More renovations and direct sourcing
• Cost discipline in new store opening
• Strategies beyond local physical stores

Measures to grow bottom line

During Sheng Siong Group’s (SSG) 1Q14 results briefing, management shared that three stores are slated for renovations in FY14. We view this positively as it shows SSG is constantly reviewing its operations for opportunities to improve growth.

Additionally, SSG is actively increasing the proportion of goods sold from direct sourcing, which will translate into improved GP margins that are sustainable. As total cost of goods sold (COGS) makes up the bulk of operating cost (82.1% in 1Q14), GP margin improvement will impact profits significantly. Direct sourcing makes up 55% of sales made in 1Q14 (vs 50% 1Q13), which we think there is ample room for further increment.

Maintains cost discipline with new store opening

Management guided that it is in talks for new stores, but would not hesitate to walk away if the price is deemed too high. We like the prudence and discipline displayed in running their business - despite the dearth of new stores in FY13, management has not succumbed to pressure to open new stores at the expense of profitability.

Strategies beyond physical stores in Singapore

The pilot phase in e-commerce has expanded to other areas with a larger base of customers, of which most are recurring. We think that if this is executed well it will make up for the challenges in opening new stores. However, we note that it will require a shift in local shopping habits. In addition, management mentioned they are still looking for a partner to operate in Malaysia.

Maintain BUY but investment risks lurk

We maintain BUY with S$0.68 fair value estimate on the stock. Nevertheless, we think there are two key risks to SSG’s operations. First, if price competition heats up, SSG will not be able to pass on food inflation. However, with a tight labour market that hinders hiring of new staff at current wages to handle higher volume, we think price competition is deterred. Second, structural changes in the retail property market might continue the drought of new stores opening, thus limiting future growth.

Source: OCBC Research - 28 Apr 2014