• Sheng Siong (SGX:OV8) announced its 3Q20 business update yesterday evening. 3Q20 revenue grew by a strong 29% y-o-y on higher home consumption demand, as a result of COVID-19. This, together with improved operating leverage and government grants, brought 3Q20 PATMI to SGD31.8m (+54% y-o-y).
• Sheng Siong's 9M20 PATMI of SGD107m met 85% of our full-year estimate, exceeding our and Street expectations.

Sheng Siong Opened 10 New Stores in the Past Two Years

• These new stores contributed 9.5ppt to Sheng Siong’s 3Q20 y-o-y revenue growth of 29%. Of these, five stores were opened this year.
• As the elevated demand from home consumption moderates with the reopening of economic activities and easing of restrictions, we believe sales will continue to be supported by the maturing of these new stores, which should contribute positively to FY21F revenue growth.
• Although no new shops were released for tender by the Housing Development Board (HDB) this quarter – since construction was delayed due to the pandemic – management expects a slew of new shops to be released for tender, once the backlog is cleared. According to HDB, there will be seven new sites for supermarkets released from now until the end of 2021. As such, the prospects for new store openings remain positive.

Gross Margin Remains Stable

• Sheng Siong's 3Q20 gross margin reverted to the norm of 27%, from a high of 28.1% in 2Q20 as sales and promotions in the industry recovered back to pre-pandemic levels.
• We expect Sheng Siong's FY21-22 GPM to remain fairly stable, with a slight uplift from 3Q20 levels arising from an improved sales mix.

Huge Cash Stash - Sheng Siong Has Amassed Net Cash of SGD180m as at 30 Sep

• As a result of the strong revenue growth this year, Sheng Siong has amassed net cash of SGD180m as at 30 Sep. This is more than double the SGD76.4m it had as of 31 Dec 2019.
• Given that Sheng Siong is a strong net cash generator even in a normal year, we believe this big cash stash means possibilities for potential M&As, a new distribution centre to enhance operational efficiency, or a special dividend to reward shareholders in the near future.
• Key downside risks include: Price war from competitors to maintain sales volumes as demand stemming from people staying at home moderates, and the company being unable to secure new stores.

Source: RHB Invest Research - 30 Oct 2020