I won’t say Sheng Siong is cheap byany of the traditional ways today.
And given the fact it’s biggest market istiny island Singapore, I don’t think shares look cheap unlike what manyanalysts are projecting.
Having said that, I find Sheng Siong possesses a safe,“low-risk” business qualities.
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 companiesface – lack of a large market, intense competition and especially, risingoperating costs.These are top issues supermarket chains face.
But what I’mlooking at is companies focusing on a particular niche that big players bigplayers are unwilling to thread – a niche.
And that’s where Sheng Siong stands out.
The thing is, Sheng Siong financial numbersare surprisingly good. It’s not because it’s in a well-protected, highlyprofitable industry. In fact, the opposite is true. Sheng Siong is rightin the middle of an intense grocery market.
To its left, there’s NTUC FairPrice thatdominates every corner of Singapore.
To its right, there’s Cold Storage. ShengSiong simply cannot compete head-on with these big players.
And both players havebig financial backers — the government owns NTUC FairPrice. While the JardineGroup, a rich family that owns DairyFarm’s Cold Storage.
These giant operators areoften 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 fascinatingabout Sheng Siong.What it lacks in size is its laser-focus on competing in aniche – attracting “time-strapped”, budget-conscious buyers.
You wouldn’t find a Sheng Siongoutlet in a shopping mall.
Yet, if you dive deeper, the 38-year-old supermarketchain is found almost in all HDB estates. Management doesn’t bother to fightwith NTUC or Cold Storage.
Sheng Siong defies the “laws of capitalism”
Instead, it competes on convenience and cost.
Instead,Sheng Siong is taking market share from the nearby mini-marts and convenience shops.
In my opinion, that’s Sheng Siong true competitive advantage.And that’s also how Sheng Siongdefies the law of capitalism. I’ll explain.
As profit margins grow, a highlyprofitable company attracts new entrants, which drive down profit margins.
And companies end up pouring more capital to maintain their profits.
In otherwords, competition lowers margins.
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.
In fact, over the last few years, Sheng Siong’s return on equity (ROE) averaged at least 26%.
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 ShengSiong isn’t this.
Here’s what I like — Sheng Siong’s clean-cut balance sheet
The thing is, Sheng Siong isactually its management. Sheng Siong grew from a humble provision shop in AngMo Kio and worked its way to one of the biggest supermarket chains in Singapore– with at least a 21% market share today.
And you can tell from the balance sheet. ShengSiong’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”.
Thisreflects management’s approach to running a business.
Sheng Siong carries no debt, hasplenty of cash – S$274 million and continues to produce a free cash flow ofover S$100 million.
Why Sheng Siong is a cash flow machine because because it can quicklybuys products from suppliers, stock up on their outlets and sell them in just amonth.
That’s how fast Sheng Siong’s inventories move.
And it collects cash upfront, this makes Sheng Siong have a negative cash conversion cycle.
This turnsyour inventories into an explosive rocket fuel for the business – highly cash generative.
Source: ShareInvestor Webpro, Dividend Titan
Actually, I last saw a company likethis was BreadTalk — one of the best cash conversion cycles. Both companiesnot only sell their products fast, they squeeze their suppliers by delaying paymentsto them.
This allows Sheng Siong to quickly use its cash to buy moreinventories to sell.
This is what I’m truly concerned
While Sheng Siong produces strongcash flow, I don’t agree with the market that Sheng Siong is a growth stock. Overthe last few years shares have soared more than double.
Last year, shares havegrown about 8% since last year. Which I think the market is projecting a slowing business.
In itslatest financial results, revenues fell by 2.2%, while net profits grew only0.4% as more the economy “normalizes” to its pre-COVID levels.
Singapore isstill a small market. And the company has struggled to grow more than four storesin China. It’s hard to expand overseas. I’ll tell you why – grocerybusiness, like properties, are a “localized” business.
Management needs to fullyunderstand local consumer buying patterns. Simple things like bringing theright products to sell is important.
That’s why I find it hard to believe ShengSiong 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, overthe last ten years, Sheng Siong grew its dividends from 2.6 cents to 6.22 centsin 2022. That’s a 10% annual compounded growth rate.
I’m not sure about you butthat’s impressive.
Final thoughts — is Sheng Siong a Good Buy?
Supermarket operators are all aboutconvenience — and understanding customers buying patterns.
Sheng Siong positions itsstores, offers massive convenience to local residences and has alaser-focus on targeting budget conscious customers. What’s more importantit it’s a homegrown brand.
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 beworth a buy.
While it pays a 3.5%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 growthplay. Your thoughts?
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
Once again, this article is a guest post and was originally posted on Willie‘s profile on InvestingNote.
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