Sheng Siong is Expanding in China: Why You Should Add This Retailer to Your Watchlist

·4-min read
Sheng Siong is Expanding in China: Why You Should Add This Retailer to Your Watchlist

It’s an interesting time for Sheng Siong Group Ltd (SGX: OV8).

The supermarket chain, which has 63 outlets in Singapore, saw a huge surge in revenue and net profit last year as the pandemic drove people to shop for necessities such as groceries and sundry items.

Boasting a huge assortment of products that run the gamut from live produce and vegetables to toiletries and essential household items, Sheng Siong enjoyed a huge surge as heartlanders thronged its stores.

The main reason for this was the need to stock up as more people were telecommuting and studying from home.

As a result, revenue for 2020 jumped by 40.6% year on year to S$1.4 billion while net profit surged 83.7% year on year to S$139.1 million.

For its fiscal 2021 first quarter (1Q2021), growth was more muted as revenue inched up 2.7% year on year due to a high comparison base in the prior year.

Net profit still managed to eke out a 6.5% year on year increase to S$30.9 million.

However, the retailer is not done with its growth plans and has just announced the opening of a third store in Kunming, China.

Here are some reasons why Sheng Siong should be on your watchlist.

Improving margins

Sheng Siong has done an admirable job in increasing its gross margin over the years.

Back in FY2012, the gross margin was just 22.1% but it has improved over eight years to 27.4%.

Operating profit margin has also climbed in tandem with its gross margin, rising from 7.8% to 11.9% over the same period.

For 1Q2021, gross margin hit 27.6%, a testament to the retailer’s pricing power.

These improvements show the group’s commitment to continually reduce costs and look for cheaper methods of sourcing for inventory.

Growing store count

The retailer also has a great track record of increasing its store footprint.

Despite Singapore’s size, Sheng Siong has managed to increase its store count from 33 in FY2012 to 63 in 1Q2021.

This nearly doubling in its total number of stores was helping to drive higher revenue for the group, while an improvement in comparable store sales also provided a further boost.

Total store area has also increased in tandem with the number of stores, up from 400,000 square feet in FY2012 to 575,000 square feet in 1Q2021.

Revenue per square foot, a measure of sales efficiency, increased from S$1,727 to S$2,348 over the same period.

Sheng Siong did not, however, open any new stores in 1Q2021 as construction activities have not fully resumed due to the pandemic.

More new tenders will be made available towards end-2021 and in 2022 when HDB clears its backlog.

Historically, the group has opened an average of around three to four new stores per year.

Assuming Sheng Siong continues to open new stores at this average rate, revenue, net profits and dividends should resume their upward climb.

Employees well-rewarded

Management has been generous in sharing the company’s good performance with its staff.

It was reported that employees of the group were paid bonuses ranging from 4.6 months to 15.7 months depending on their grade for FY2020’s stellar financial performance.

Eligible staff members are entitled to 20% of the company’s profit before tax as a variable bonus.

However, this move is not a one-off gesture by management.

Bonuses ranging from 3.3 months to 10.4 months were also paid out in 2019 before the pandemic broke out.

Well-rewarded employees are a boon for Sheng Siong as they will have stronger loyalty and better morale.

In turn, these positive feelings will translate to better service quality and higher productivity for the group.

Get Smart: China could contribute more in future

Currently, revenue for the two stores in Kunming, China make up just 2% of total group revenue.

The good news is that both Chinese stores are profitable.

The opening of the third store in China, slated for the third quarter of 2021, shows management’s commitment to growing its China footprint.

In time to come, China could start to contribute more to Sheng Siong’s total revenue and net profit.

Investors have good reasons to be optimistic about what’s to come for the retailer.

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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.

The post Sheng Siong is Expanding in China: Why You Should Add This Retailer to Your Watchlist appeared first on The Smart Investor.

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