I won’t say Sheng Siong is cheap by any of the traditional ways today.Â
And given the fact it’s biggest market is tiny island Singapore, I don’t think shares look cheap unlike what many analysts are projecting.Â
Having said that, I find Sheng Siong possesses a safe, “low-risk” business qualities.Â
But does is it mean it’s a buy at today’s price?
Well, let’s find out.
Why Sheng Siong punches above its weight
There are many problems Singapore companies face – lack of a large market, intense competition and especially, rising operating costs. These are top issues supermarket chains face.Â
But what I’m looking at is companies focusing on a particular niche that big players big players are unwilling to thread – a niche.Â
And that’s where Sheng Siong stands out.
The thing is, Sheng Siong financial numbers are surprisingly good. It’s not because it’s in a well-protected, highly profitable industry. In fact, the opposite is true. Sheng Siong is right in the middle of an intense grocery market.Â
To its left, there’s NTUC FairPrice that dominates every corner of Singapore.Â
To its right, there’s Cold Storage. Sheng Siong simply cannot compete head-on with these big players.Â
And both players have big financial backers — the government owns NTUC FairPrice. While the Jardine Group, a rich family that owns DairyFarm’s Cold Storage.Â
These giant operators are often anchor tenants in shopping malls. And occupy far larger shop spaces.
What’s more, e-commerce is also the annoying disruptor that tries to steal
market share from supermarkets like Sheng Siong.
But here’s what I found fascinating about Sheng Siong. What it lacks in size is its laser-focus on competing in a niche – attracting “time-strapped”, budget-conscious buyers.
You wouldn’t find a Sheng Siong outlet in a shopping mall.Â
Yet, if you dive deeper, the 38-year-old supermarket chain is found almost in all HDB estates. Management doesn’t bother to fight with NTUC or Cold Storage.Â
Sheng Siong defies the “laws of capitalism”
Instead, it competes on convenience and cost.Â
Instead, Sheng Siong is taking market share from the nearby mini-marts and convenience shops.Â
In my opinion, that’s Sheng Siong true competitive advantage. And that’s also how Sheng Siong defies the law of capitalism. I’ll explain.Â
As profit margins grow, a highly profitable company attracts new entrants, which drive down profit margins.Â
And companies end up pouring more capital to maintain their profits.Â
In other words, competition lowers margins.Â
But not Sheng Siong.
So far, this S$1 billion market cap grocer has excellent capital-efficiency. Sheng Siong produces excess returns with the need for excess capital.Â
In fact, over the last few years, Sheng Siong’s return on equity (ROE) averaged at least 26%.Â
Last year, it produced S$1.3 billion revenues, S$133 million net profits and an ROE of 29%. And historically, its revenues continue to grow steadily.
But what I like most about Sheng Siong isn’t this.
Here’s what I like — Sheng Siong’s clean-cut balance sheet
The thing is, Sheng Siong is actually its management. Sheng Siong grew from a humble provision shop in Ang Mo Kio and worked its way to one of the biggest supermarket chains in Singapore – with at least a 21% market share today.Â
And you can tell from the balance sheet. Sheng Siong’s balance sheet makes life easy for any investment analyst – it’s clean, clear and not filled with a bunch of “hard-to-understand numbers”.Â
This reflects management’s approach to running a business.Â
Sheng Siong carries no debt, has plenty of cash – S$274 million and continues to produce a free cash flow of over S$100 million.Â
Why Sheng Siong is a cash flow machine because because it can quickly buys products from suppliers, stock up on their outlets and sell them in just a month.
That’s how fast Sheng Siong’s inventories move.
And it collects cash up front, this makes Sheng Siong have a negative cash conversion cycle.
This turns your inventories into an explosive rocket fuel for the business – highly cash generative.
Source: ShareInvestor Webpro, Dividend Titan
Actually, I last saw a company like this was BreadTalk — one of the best cash conversion cycles. Both companies not only sell their products fast, they squeeze their suppliers by delaying payments to them.Â
This allows Sheng Siong to quickly use its cash to buy more inventories to sell.
This is what I’m truly concerned
While Sheng Siong produces strong cash flow, I don’t agree with the market that Sheng Siong is a growth stock. Over the last few years shares have soared more than double.Â
Last year, shares have grown about 8% since last year. Which I think the market is projecting a slowing business.
In its latest financial results, revenues fell by 2.2%, while net profits grew only 0.4% as more the economy “normalizes” to its pre-COVID levels.Â
Singapore is still a small market. And the company has struggled to grow more than four stores in China. It’s hard to expand overseas. I’ll tell you why – grocery business, like properties, are a “localized” business.Â
Management needs to fully understand local consumer buying patterns. Simple things like bringing the right products to sell is important.Â
That’s why I find it hard to believe Sheng Siong will truly take off in China. So far, it has yet to expand beyond its four operating outlets in China, Kunming.
But what’s impressive though, over the last ten years, Sheng Siong grew its dividends from 2.6 cents to 6.22 cents in 2022. That’s a 10% annual compounded growth rate.Â
I’m not sure about you but that’s impressive.
Final thoughts — is Sheng Siong a Good Buy?
Supermarket operators are all about convenience — and understanding customers buying patterns.Â
Sheng Siong positions its stores, offers massive convenience to local residences and has a laser-focus on targeting budget conscious customers. What’s more important it it’s a homegrown brand.Â
However, I would rather be cautious to pay for Sheng Siong’s shares today, because it’s not exactly cheap with a slower revenue and net profits growth.
On the other hand, if you’re looking at a high-quality business for dividends, this might be worth a buy.Â
While it pays a 3.5%Â dividend today, I find dividends can continue to grow as more people continue to buy their daily needs.
I rather look at Sheng Siong from a dividend than a growth play. Your thoughts?Â
Sometimes, investing can be simple.Â
Willie Keng, CFA
Founder, Dividend Titan
I understand big supermarkets do not pay for the goods as they are on consignment basis. The suppliers will get paid only when the goods are sold with a certain profit margins going to the supermarkets.
Hi Bill!
Yup, I think they have both products on consignment, products they buy first and also selling their own in-house products. What’s their breakdown I’m not sure. On the other hand, department stores are mostly on consignment basis 🙂
Cheers,
Willie
If its a dividend play, a 3.5% dividend doesnt seem right when FD rates “riskless” rates are close to 4%… However if we believe FD rates are going back to 1%, then it may a good play in anticipation of lower FD rates
Hi Stephen!
Yup, it’s a debate between dividend stock yield today vs FD rates. While FD rates offer higher yield, I would argue that it’s hard to tell whether this yield can be maintained over the long term. On the other hand, while a dividend stock pays 3.5% but there’s also a possibility of yield growth and capital gains, which FD doesn’t offer.
I guess it depends on the type of portfolio you have.
Cheers,
Willie
Sheng Siong’s total capital appreciation since its listing 11.5 years ago is 369% ($1.64/$0.35), roughly 14.37% effective. add on current dividend 3.77% total share holder return (TSR) roughly 18%. While this doesn’t qualify as warren buffet type of performance, name me which company in SGX can beat such stellar record & performance with linear (Y=MX+C) share price trajectory??
Many garbage blue chips (GLCs, like Singtel, SIA, Keppel, Capitaland, comfort delgro) with management and (paper general) CEOs sitting in their million dollar comfort zone became potato chips as they fail to evolve, adapt and became dinosaurs. Private (non GLCs) blue chips like City Development, UOB are generally not generous and will shortchange share holders in payouts.
Sheng Siong had 24 stores (during IPO), now 61 stores till date, ie increase 37 stores over 11.5 years, averaging 3.2 stores per year. Fair Price got roughly 230 outlets, is it reasonable to deduce Sheng Siong can expand at least another 61 outlets (in SG) to become roughly 50% of Fair Price? At current rate of expansion of 3.2 stores per year, it will take another 19 years to become 50% of fair price. Don’t think this is mission impossible as it is easier for Sheng Siong to set up stores in heart land (with many BTO’s down the pipe line) than fair price setting up in shopping malls as key tenants. You don’t build mega malls as fast as HDBs after all.
For simplicity, assume the Sheng Siong’s expansion in SG has plateaued and on aggregate all Sheng Siong stores are equal in size and profitability, at current rate of 3.2 stores per year, expect bottom line to at least increase at least another 5.25% (3.2/61) for the next 19 years. Technically should be more than 5.25% because more stores translate into better efficiency and bigger economies of scale. Coupled with current dividend 3.77% dividend payout, conservatively expect Sheng Siong to generate TSR of 9% for the next 20 years or so. Nothing spectacular, but definitely better than your meagre 4% CPF SA to hedge against inflation. Property investment definitely don’t generate such returns nowadays (high interest rates, ABSD etc)
Fair Price (Chia Kian Peng) obviously isn’t doing a good job, otherwise no reason for Sheng Siong to exist or prevail.
Just my 2 cents worth of thots as I am not an investment guru.