Sheng Siong: 5 Considerations Before Investing

I like Sheng Siong’s stock. It pays a good dividend, it has a good brand and management team, and it has been growing over the years. But there are also concerns about how long it can continue growing at the rate it has. Here are 5 things to consider before investing in Sheng Siong:

1. Sheng Siong has been consistently growing even before the pandemic

Sheng Siong’s long pandemic queues and stellar 2020 results have caught the attention of many new investors. But the stock has been popular among SGX investors for a long time. Indeed, their share price has been on a steady climb since its IPO.

The rise in stock price is backed by growth in all its key metrics. Revenue, profit margins, and earnings per share have been growing every year for the last 5 years, even before the pandemic boost in 2020. Of course, gross profit margins cannot rise indefinitely, and the market in Singapore is already quite saturated. In order to expand its growth potential, Sheng Siong is expanding into Kunming, China.

Screenshot from Sheng Siong’s Annual Report

2. Sheng Siong is a significant owner of properties

Sheng Siong has a sizeable portfolio of properties, which are mainly used for their warehousing, distribution, as well as retail activities. By owning a sizeable portion of their properties where they operate from, Sheng Siong is less exposed to rent hikes by landlords. Sheng Siong therefore enjoys better cost stability.

To put in context, Sheng Siong owns more properties than NTUC Fairprice despite having about 1/3 of Fairprice’s supermarket sales.

3. Sheng Siong is a big beneficiary of the government’s largesse

On 26 March 2020, I was watching the Finance Minister Heng Swee Keat’s speech, looking out for what goodies my family would get. Turns out that families and individuals were not going to get anything much. But on the other hand, the government was going to dip into the reserves and send wheelbarrows of money to the coffers of businesses. The biggest of the handouts was going to be the Jobs Support Scheme, which would have the most pronounced impact on businesses who hire a lot of relatively lower wage workers. Before his speech was over, I had become a new Sheng Siong shareholder at $1.12 per share. Indeed, in 2020, Sheng Siong had received a massive $34.8m of grants from the government. (I have since sold all my shares in August 2020 at $1.78 per share because the stock became too expensive too quickly)

This is not the first time that wage subsidies have been given in Singapore. Back in 2008-2009, during the financial crisis, Singapore also had a Jobs Credit Scheme, which was similar to this Jobs Support Scheme in 2020. Such schemes will cause companies with high number of lower wage workers, and whose wage costs form the bulk of total costs. So we can imagine that the companies involved in supplying cleaning or security guard services would also enjoy huge profits. When the next crisis comes up, it will be good to remember this so that we can be quick to invest in the big beneficiaries of government policies before the rest of the market identifies them.

Just a side note here if you are a Singaporean citizen. I know it is frustrating that the government gets obsessed with means testing when it comes to giving to the people, but has no such means testing when it comes to giving to businesses. The idea is that for businesses, it makes sense to help those like Sheng Siong who are efficient, productive, hire a lot of workers, and profitable to grow more, instead of keeping those inefficient ones on life support. This will benefit the overall economy’s output and productivity. On the other hand, when it comes to individuals, they want to help those who need help more. My personal preference is that handouts to individuals should be given equally to all citizens without means testing. They can tax back from those who are doing well through higher wealth and income taxes. In any case, as ordinary people, since we have no influence in creating the rules, we will just learn to play well by it.

4. We may be nearing the saturation point in the Singapore market

There are only so much groceries one can buy. And it really doesn’t matter where be buy it from. A loaf of Gardenia bread is the same whether you buy it from Sheng Siong or NTUC.

A number of studies have been done on the competition among supermarkets in Singapore. Generally, prices and customer satisfaction do not differ greatly. When it comes to grocery shopping, the key factor in most shopper’s decision is convenience. They will go to whichever supermarket is nearest to their home. Therefore, a large part of competition is in securing the right sites at the right prices to set up new stores.

In the heartland space where Sheng Siong operates, competition can be as stiff as the malls. Giant and NTUC are strong brands with scale and financial backing. A key challenge facing Sheng Siong now is that the new areas for expansion are largely new estates with younger people. Young people who cook less at home and who may be more open to online grocery shopping (eg. redmart). Before the pandemic, the management too have recognised that new stores located in residential areas mainly occupied by younger people are growing more slowly than the historical average for its new stores. As work-from-home arrangements decrease, the challenge of growing sales may come back to the fore for Sheng Siong.

5. Sheng Siong is not big on online grocery shopping

Sheng Siong’s online presence is not strong, and the boss (rightly or wrongly) is not keen on going big on e-commerce as it is loss making.

Screenshot from mothership.sg

As I write this post, I’ve learned that their online store, called allforyou, will be rebranded to Sheng Siong Online on 25th June 2021. This is a step in the right direction. And hopefully they will have a better designed logo for the online store. The current one looks like this:

But I am not sure if this will be enough. After all, despite its many strengths, Sheng Siong is not known to be a leader in technology.

Aside from changing consumer behavior, as the cost efficiency of logistics and delivery improves, Sheng Siong could be disrupted. They are unlikely to ever die off. But Sheng Siong is at risk of becoming like Comfort cabs. On this front, we are already seeing strong new entrants like GrabMart, Shopee Supermarket, and PandaMart. When their warehousing technology gets up to JD.com’s standard and they get licenses to deliver through autonomous vehicles, even NTUC and their NTUC online may be threatened.

That said, Sheng Siong does have an established brand and an extensive logistics network themselves. They could get into the game (late) in the future, or be acquired/ do a JV with a large tech firm.

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