• 3Q15 net profit grew 18.7% YoY
• New store to open in Nov
• Upgrade older stores for better sales

New stores continue to drive growth

Sheng Siong Group’s (SSG) 3Q15 results met our expectations, as revenue grew 7.3% YoY to ~S$200m, making up 25.9% of our FY15 forecast. Net profit also increased 18.7% to S$14.5m, constituting 26.8% of our FY15F projection. The group’s new stores contributed 6.2% to its revenue growth, while 1.1% came from old stores. Note that the latter rate of 1.1% from old stores was better than the 0.3% we saw in 2Q.

There was some seasonality effect for 3Q due to the celebration of the Lunar Seventh Month, whereby retailers would push for volume and lower selling prices. Thus gross profit margin will typically taper off on a quarterly basis (25.2% in 2Q to 24.3% in 3Q). SSG managed to keep its gpm steady vs. the 24.2% seen in 3Q14, as the group is still reaping efficiency gains from their warehouse. We expect overall margins for FY15 to be at least 24.5%.

Older stores offer room for improvement

Besides opening new stores to drive growth, SSG can improve sales by refurbishing their old stores, especially the ones which may be underperforming. Currently, a store in Clementi West Coast, Singapore is under renovation, and management has in mind to renovate a few other stores as well. Despite the downtime, management has been able to gain better sales growth with such renovation initiatives.

A stable stock

We like that another lease was signed with HDB for a new store of ~4.3k sq ft at Dawson Road, Singapore, which is expected to be operational in Nov-15. In addition, we previously mentioned that the group would continue to be partially helped by ‘other income’, such as additional rental income and government grants.

On the group’s expansion plans in China, we do not expect imminent updates given the cautious stance taken by the management. The group’s balance sheet remained healthy with net cash of S$126m. We keep our estimates largely unchanged and maintain our BUY rating with fair value estimate of S$0.95.

Source: OCBC Research - 27 Oct 2015