• SHENG SIONG GROUP (SGX:OV8) recently completed the acquisition of a HDB commercial property in Aljunied and has commenced operations on the first floor. The GFA of the property is much larger than that of stores opened in 2019, exceeding our 2020 supermarket operations area forecast.
• We still see opportunities for Sheng Siong Group to expand its network of outlets which is a key earnings growth driver. We lift our 2019-21 net profit estimates by 0.2-1.8%.
• Maintain HOLD with a higher target price.

What's New

Completion of property purchase.

• SHENG SIONG GROUP (SGX:OV8) recently announced the completion of the acquisition of the commercial premise located at Block 118 Aljunied Avenue 2 #01-100 for S$25.9m. The premise which has a GFA of 2,717 sqm (29,200 sf) comprises of the first and second storeys of a seven-storey HDB commercial property with a four-storey public carpark annex. The property has a leasehold tenure of 86 years commencing from 1 July 1993. The property was previously occupied by Giant.

New store has commenced operations.

• The first floor of the property has been utilised for supermarket operations and was opened at the start of January. We estimate that the first floor of the HDB unit makes up roughly 60% (c.18,000 sf) of the total GFA, significantly larger compared to Sheng Siong Group’s typical store floor area of 5,000-10,000 sf opened in 2019. Thus, we do not rule of the possibility of the second storey being partially/fully leased out, providing the group with an additional source of rental income, which we have not factored in yet.

Stock Impact

Expansion of network of outlets.

• Sheng Siong Group is also set to open a new store at Block 202 Marsiling Drive (5,300sf) in 1Q20. The combined GFA of the two new stores in 1Q20 thus far (first floors of Aljunied Avenue and Marsiling Drive) is roughly 23,000 sf, surpassing our retail space forecast of 20,000 sf for 2020.

HDB supermarket units up for tender provide opportunities for additional new stores.

• HDB has lined up 4 new supermarket properties for bidding over the next month (30 Dec 19 to 30 Jan 20) – Bidadari Park Drive, Ghim Moh Link, Tampines Street 86 and Sengkang West Avenue. The two former units were previously occupied by NTUC Fair Price. We also note that Giant and Cold Storage have not aggressively expanded and participated in HDB tenders recently. Thus, this provides better chances to other supermarket players such as Sheng Siong Group over winning HDB supermarket tenders, in our view.
• We believe that new store openings are key earnings drivers for Sheng Siong Group, given that 9M19 growth was mainly driven by new store sales (contributed to 10.8% of the revenue growth).

Full effect of store openings to provide growth in 2020.

• Management remains committed to store expansions in Singapore, especially in areas where Sheng Siong Group does not have a presence. We reckon growth in 2020 will mainly be driven by the full effect of the 10 stores openings in 2018, which would then have been operational for more than a year, as well as the five new stores opened in 2019.

Earnings Revision / Risk

• We make changes to our estimates as we increase our supermarket operation area forecast to 28,500sf for 2020, up from 20,000sf. We raise our 2019-21 net profit estimates by 0.2-1.8%.
• Risks include:
  1. price war between Amazon and RedMart which might trigger associated price reductions from brick-and-mortar players,
  2. irrational bidding for supermarket units, resulting in fewer new-store wins, and
  3. disruption to supply chain caused by trade tariffs.

Valuation / Recommendation

• Maintain HOLD with a higher PE-based target price, pegged to 2020 PE of 22.5x, Sheng Siong Group’s long-term mean PE since 2012. On a valuation basis, we look for a more favourable entry price at S$1.19.

Share Price Catalyst

• Pick-up in SSS growth.
• Higher-than-expected new-store openings.
• China expansion surprising on the upside.

Source: UOB Kay Hian Research - 13 Jan 2020