• Maintain BUY on Sheng Siong Group (SGX:OV8) with Target Price of SGD1.32, representing 16% upside and 4% FY20F yield.
• Post-results briefing, we remain optimistic on Sheng Siong Group’s near-term outlook.
• Moving into FY20, we believe earnings growth will continue to be driven by maturing of existing stores and new stores openings. We also see an opportunity for some gross margin expansion as the group aims to launch its distribution centre extension by the end of this year.
• Sheng Siong Group remains one of our top picks for the Singapore consumer sector.

No Lack of Opportunities for New Store Openings

• Based on the data released by the Housing Development Board (HDB), there are 22 new supermarket-designated commercial units scheduled for tender from now until 3Q23. We also note that Dairy Farm International (SGX:D01); is rationalising its supermarket portfolio, giving rise to potential available space in the private leasing market. As a result, we think there are adequate opportunities for Sheng Siong Group to open at least three new stores in FY20.
• Moreover, we note that HDB has moved from open to closed biddings for supermarket sites this year. We believe this would create a more conducive environment for Sheng Siong Group to expand as retail players tend to be more rational in the rental bids when it is a closed tender.

China Operations Are Still Small But Profitable

• The first Sheng Siong Group supermarket which opened in Kunming, China, at end-2017 broke even in 1Q19, and has remained profitable since. The second outlet in Kunming was opened in June 2019. We expect the breakeven period for the second store to come within a year, given its smaller size and Sheng Siong Group’s experience in operating the first store.
• Management believes China operations are still in the trial phase, as the group needs to open 3-4 stores in Kunming before it can generate economies of scale.

Distribution Centre Extension to be Ready by End of Year

• The completion of the distribution centre extension has been delayed. The group now expects to receive a temporary occupation permit for the distribution extension before end-2019. We anticipate the distribution centre to commence operations before the Lunar New Year in Jan 2020.
• With the extension coming onstream, the group shoud be able to do more bulk handling and expand its gross margin.

Source: RHB Invest Research - 31 Oct 2019