



Asia Pacific Equity Research		29 October 2014
Sheng Siong Group (SSG SP) 3Q14 results: Steady operational performance, slight miss on earnings due to higher wage provision		Overweight Price: S$0.64 28 Oct 2014 Price Target: S$0.82 PT End Date: 30 Jun 2015

· Operating performance remains steady: Sheng Siong reported 3Q net profit growth of 15.4% YoY, about 5% below our estimate, missing mainly due to higher provision for employee bonuses linked to financial performance of the company and higher-than-expected tax rate. Operating parameters remained steady with 4.8% YoY growth in revenues (JPM estimate of 5% YoY growth). Same-store sales growth in 3Q was 3.4%, broadly in line with our expectations. Total retail area remained steady at 400K sq.ft with no new outlets opened in 3Q.

· Gross margin expansion continues: Gross margin in 3Q expanded 100bps YoY to 24.2%, continuing the trend from the past few quarters. Better product mix (rising share of fresh food), better sourcing and higher share of private label products is driving gross margin improvement, a trend we expect to continue. 3Q EBIT grew 16.6% YoY, with EBIT margins expanding 80bps.

· New store opening in 4Q14, after a 6 quarter hiatus: Sheng Siong has signed a new store lease for 4000 sq.ft of space located in an amenity centre for foreign workers in the Penjuru area. This store is expected to be operational by November 2014 and should aid revenue growth in 4Q. However, management has noted that competition for retail space in new HDB areas remains challenging and the company is evaluating opportunities to purchase real estate.

· Cash generation remains strong: Sheng Siong has generated free cash (post interim dividend payout) of SGD79m over 9m2014 and has total cash balance of SG$179m as of end 3Q. We believe the company is on track to maintain its dividend payout at historical levels of about 90% going forward. We estimate dividend yield of 6.3% for 2015/16E, based on our estimates.

Table 1: 3Q14 Sheng Siong results summary

P&L (S$ 000, YE Sep)	1Q13		2Q13	3Q13	4Q13		2013A		1Q14	2Q14	3Q14	QoQ	YoY
Revenue
Total gross sales (S$ 000)	179,390		159,783	177,818		170,399		687,390	189,704	171,556	186,356	8.6%	4.8%
Total revenue (S$ 000)	179,390		159,783	177,818		170,399		687,390	189,704	171,556	186,356	8.6%	4.8%
QoQ	11.5%		-10.9%	11.3%		-4.2%			11.3%	-9.6%	8.6%	-190.2%	-23.6%
YoY	12.3%		8.7%	4.8%		5.9%		7.9%	5.7%	7.4%	4.8%	-34.8%	0.2%

COGS	(138,981)		(122,748)	(136,580)		(130,868)		(529,177)	(144,647)	(129,239)	(141,306)	9.3%	3.5%

Gross Profit	40,409		37,035	41,238		39,531		158,213	45,057	42,317	45,050	6.5%	9.2%
Gross margin	22.5%		23.2%	23.2%		23.2%		23.0%	23.8%	24.7%	24.2%	(0.49)	0.98

Operating Expenses
Distribution Expenses	(1,059)		(1,040)	(1,075)		(1,014)		(4,188)	(991)	(932)	(1,202)	29.0%	11.8%
Administrative Expenses	(28,033)		(26,308)	(28,345)		(28,360)		(111,046)	(30,011)	(28,514)	(30,034)	5.3%	6.0%
Other Expenses	(468)		(337)	(337)		(216)		(1,358)	(500)	(446)	(423)	-5.2%	25.5%

Total operating expenses	(29,560)		(27,685)	(29,757)		(29,590)		(116,592)	(31,502)	(29,892)	(31,659)	5.9%	6.4%

Other income	1,567		860	1,139		1,319		4,885	1,500	972	1,330	36.8%	16.8%

EBITDAR	19,817		17,567	19,861		18,674		75,918	22,810	21,228	22,191	4.5%	11.7%
QoQ	20.9%		-11.4%	13.1%		-6.0%			22.1%	-6.9%	4.5%
YoY	-23.5%		22.3%	9.8%		13.9%		1.6%	15.1%	20.8%	11.7%
EBITDAR margin (%)	11.05%		10.99%	11.17%		10.96%		11.04%	12.02%	12.37%	11.91%	(0.47)	0.74
BP change YoY	(5.16)		1.22	0.51		0.77		(0.68)	0.98	1.38	0.74

Rent	(5,018)		(4,889)	(4,693)		(4,739)		(19,338)	(5,063)	(5,172)	(4,693)	-9.3%	0.0%

EBITDA	14,799		12,678	15,168		13,935		56,580	17,747	16,056	17,498	9.0%	15.4%
QoQ	22.7%		-14.3%	19.6%		-8.1%			27.4%	-9.5%	9.0%
YoY	-32.1%		23.4%	8.4%		15.5%		-2.7%	19.9%	26.6%	15.4%
EBITDA margin (%)	8.2%		7.9%	8.5%		8.2%		8.2%	9.4%	9.4%	9.4%	0.03	0.86
BP change YoY	(5.40)		0.94	0.28		0.68		(0.89)	1.11	1.42	0.86

Depreciation	(2,383)		(2,468)	(2,548)		(2,675)		(10,074)	(2,692)	(2,659)	(2,777)	4.4%	9.0%

EBIT	12,416		10,210	12,620		11,260		46,506	15,055	13,397	14,721	9.9%	16.6%
QoQ	30.0%		-17.8%	23.6%		-10.8%			33.7%	-11.0%	9.9%
YoY	-37.7%		22.8%	5.7%		17.9%		-6.5%	21.3%	31.2%	16.6%

EBIT margin (%)	6.9%		6.4%	7.1%		6.6%		6.8%	7.9%	7.8%	7.9%	0.09	0.80
BP change YoY	(5.55)		0.73	0.06		0.67		(1.04)	1.01	1.42	0.80

Net Interest income/ (expense)	202		135	193		522		1,052	174	178	252	41.6%	30.6%

PBT	12,618		10,345	12,813		11,782		47,558	15,229	13,575	14,973	10.3%	16.9%
Tax (expense) / benefit	(2,115)		(1,843)	(2,235)		(2,458)		(8,651)	(2,697)	(2,501)	(2,769)	10.7%	23.9%
Tax rate	17%		18%	17%		21%		18%	18%	18%	18%
Net income	10,503		8,502	10,578		9,324		38,907	12,532	11,074	12,204	10.2%	15.4%
QoQ	31.5%	-19.1%		24.4%		-11.9%			34.4%	-11.6%	10.2%
YoY	-37.6%	20.8%		7.8%		16.7%		-6.6%	19.3%	30.3%	15.4%

EPS (cents)	0.76	0.61		0.76		0.67		2.81	0.91	0.80	0.86	7.1%	12.1%
QoQ	31.5%	-19.1%		24.4%		-11.9%			34.4%	-11.6%	7.1%
YoY	-37.6%	20.8%		7.8%		16.7%		-6.6%	19.3%	30.3%	12.1%

Source: J.P. Morgan estimates, Company data.

Investment Thesis

We have an Overweight rating on Sheng Siong (SSG). We believe that SSG is a defensive business, catering to the mass market segment with stores located in residential areas in the catchment of HDB complexes. Its defensiveness is proven by its steady sales growth through economic cycles in Singapore and it has expanded its market share of grocery retailing by 6% to 56% over the past 5 years. Management is aiming to increase its revenue from fresh food to 50% of total sales from current levels of 40% over the next few years. We believe this product mix change bodes well for its profitability in long term because fresh good has a gross margin of 36% vs 17% for grocery. Most importantly, it should cushion near-term wage pressure.

Valuation

Our Jun-15 PT is S$0.82 based on 20x Jun-16E P/E and is supported by our DCF-based valuation methodology. Our target multiple is based on SSG's average forward P/E since its listing, and at 10% discount to its ASEAN retail peer group average. We base our PT on historical multiples as we do not expect any meaningful change in SSG's growth and RoE profile over the course of our forecasts. We note that our target multiple is at a 10% discount to the ASEAN peer group, which we believe is justified given SSG's relatively lower earnings growth compared to peers and the relative maturity of the Singapore market, which drives lower growth opportunity relative to other ASEAN markets.

Risks to Rating and Price Target

Key risks to our OW rating and price target are: SSG's inability to execute on expansion plans driving delays in store openings, and sustained tightness in the labor market impacting margins.

ASEAN Telecom and Consumer

Princy Singh ^AC

(65) 6882-2746

princy.singh@jpmorgan.com

Bloomberg JPMA SINGH <GO>

J.P. Morgan Securities Singapore Private Limited

Utkarsh Mehrotra

(91-22) 6157-3369

utkarsh.mehrotra@jpmorgan.com

J.P. Morgan India Private Limited

Lonnie Yu, CFA

(62-21) 5291 8583

lonnie.yu@jpmorgan.com

PT J.P. Morgan Securities Indonesia

Ebru Sener Kurumlu

(852) 2800-8521

ebru.sener@jpmorgan.com

J.P. Morgan Securities (Asia Pacific) Limited

www.jpmorganmarkets.com

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Important Disclosures

· Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Sheng Siong Group within the past 12 months.

· Beneficial Ownership (1% or more): J.P. Morgan beneficially owns 1% or more of a class of common equity securities of Sheng Siong Group.

· Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Sheng Siong Group.

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Date	Rating	Share Price (S$)	Price Target (S$)
27-Apr-14	OW	0.62	0.76
24-Jul-14	OW	0.70	0.82

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period.
J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated

Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.jpmorganmarkets.com.

Coverage Universe: Singh, Princy: AXIATA Group Berhad (AXIA.KL), Advanced Info Services (ADVA.BK), Astro Malaysia Holdings Bhd (ASTR.KL), British American Tobacco (M) Bhd (BATO.KL), D&L Industries (DNL.PS), Digi (DSOM.KL), Emperador Inc. (EMP.PS), Erajaya Swasembada Tbk PT (ERAA.JK), Globe Telecom (GLO.PS), Indofood (INDF.JK), Indofood CBP (ICBP.JK), Jollibee Foods Corp. (JFC.PS), Kalbe Farma (KLBF.JK), M1 (MONE.SI), MNC Sky Vision tbk (MSKY.JK), Matahari Department Store (LPPF.JK), Maxis Berhad (MXSC.KL), PT Ace Hardware Indonesia, Tbk (ACES.JK), PT Global Mediacom Tbk (BMTR.JK), PT Indosat Tbk (ISAT.JK), PT Media Nusantara Citra Tbk (MNCN.JK), PT Mitra Adiperkasa, Tbk (MAPI.JK), PT Ramayana Lestari Sentosa, Tbk (RALS.JK), PT Sarana Menara Nusantara Tbk (TOWR.JK), PT Telekomunikasi Indonesia Tbk (TLKM.JK), PT Tower Bersama Infrastructure Tbk (TBIG.JK), PT XL Axiata Tbk (EXCL.JK), Philippine Long Distance Telephone Company (TEL.PS), Puregold Price Club (PGOLD.PS), Robinsons Retail Holdings (RRHI.PS), Sheng Siong Group (SHEN.SI), Singapore Press Holdings (SPRM.SI), Singapore Telecom (STEL.SI), StarHub (STAR.SI), Telekom Malaysia (TLMM.KL), Thai Beverage Public Company Ltd. (TBEV.SI), Total Access Communication (DTAC.BK), Unilever Indonesia Tbk (UNVR.JK), Universal Robina Corp (URC.PS)

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"Other Disclosures" last revised October 18, 2014.