Since IPO in 2011, Sheng Siong (SGX:OV8) shares returned more than 200%.
And at one point, it hit an all-time high of S$1.75 per share.
My last article write-up was here.
Source: ShareInvestor Webpro
Can Sheng Siong shares continue to grow?
Consider this: the grocery retail business is intense.
Grocers deal with high rental and labour costs.
And e-commerce is a major disruption to grocers.
That’s why grocery retailer have razor thin profit margins.
Leaving only the two biggest Singapore supermarkets — NTUC FairPrice and DairyFarm International to dominate the grocery industry.
Yet, Sheng Siong has grown to become the third largest grocery retailer in Singapore.
Today, Sheng Siong has a market capitalization of S$2.3 billion, with 63 outlets in Singapore.
What’s different about Sheng Siong
You see, Sheng Siong cannot compete head-on NTUC FairPrice and DairyFarm.
Both competitors have huge financial backers.
The Singapore government owns NTUC FairPrice.
And the Jardine Group, a rich family conglomerate that owns DairyFarm.
These big operators can be anchor tenants in shopping malls. And they occupy far bigger shop spaces.
But what I like about Sheng Siong’s business is it knows its customers well.
Sheng Siong figured out early they want to serve people who are budget conscious and time-strapped.
Unlike NTUC FairPrice that serves everyone.
And DairyFarm’s supermarkets (Cold Storage and Jason’s) serving affluent customers.
First, Sheng Siong sells lower quality daily essentials people don’t mind paying for. Because it’s cheaper.
Next, Sheng Siong’s 63 outlets are easily accessible.
You’ll realize Sheng Siong supermarkets are not in neighbourhood shopping malls.
Or downtown regions.
In fact, Sheng Siong’s supermarkets are located close to HDB estates.
And many of their supermarkets open 24 hours daily.
This makes it accessible for anyone who wants to shop for affordable products at anytime.
In other words, Sheng Siong avoids competing against NTUC and DairyFarm for location and customers.
That’s how Sheng Siong can grow profitably.
It’s also why Sheng Siong is such a capital-efficient business. Its ROE (return on equity) has averaged 26% over the last six years.
And during the COVID pandemic last year when everyone was trapped at home, the company’s ROE soared to 37%.
ROE measures the amount of profits a company makes for every dollar its shareholders put in.
Source: Dividend Titan
Is Sheng Siong a growth or dividend stock?
Sheng Siong is stuck in a highly competitive industry.
And the only way to see future growth is to go overseas.
So far, Sheng Siong is taking one slow step at a time. It only opened its second store in 2019.
Management knows China’s grocery retail industry is even more cutthroat:
“Our business in China is still in its nascent stage. Both of our stores in Kunming are still growing and remained profitable in FY2020.
We will continue to put in effort in building out ‘Sheng Siong’ brand in Kunming and look for suitable opprotunities to open new stores once COVID restrictions are lifted.”
It’s going to take much longer for Sheng Siong to find its footing in the 1.3 billion Chinese market.
This is because grocery retail is a localized business.
Grocery retail sounds simple, but it’s not.
Companies like Sheng Siong needs to know customer’s shopping habits well.
That’s why many grocers who expanded overseas failed — Walmart in China, Carrefour in Singapore.
What I like about Sheng Siong is it has also been rewarding shareholders with abundance.
It grew dividends from 3.5 cents in 2015 to 6.5 cents in 2020.
Over the last 12 months from Jun 2021, Sheng Siong paid out 6.1 cents per share dividends. That’s a 3.9% dividend yield.
But here’s the thing.
Sheng Siong has returned more of its earnings to its shareholders as dividends.
It paid out 77% on average of its earnings as dividends to shareholders.
Source: Dividend Titan
Will I see new highs for Sheng Siong’s shares?
It’s hard to say.
Sheng Siong’s growth is stuck in Singapore.
There’s not a lot of risk with Sheng Siong, but there isn’t much upside going forward.
It hasn’t seen massive success in its China business.
While it’s hard to overtake the two biggest competitors in Singapore, Sheng Siong is comfortable with a niche on its own.
If you ask me, Sheng Siong is more a dividend stock than a growth stock.
I probably expect its business growth to ease off. But dividends will continue to pay steadily.
If you ask me, I like Sheng Siong more for its dividend pay out than its potential growth.
Sometimes, investing can be simple.
Always here for you,
Willie Keng, CFA
Founder, Dividend Titan
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