Sheng Siong Group In a sweet spot

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2 Sheng Siong Group In a sweet spot SINGAPORE CONSUMER RESULTS New stores propelled revenue, mature stores turned around. Results are in line with our expectation. May seek debt to fund higher CAPEX. Maintain Accumulate rating with higher TP at S$1.10 (previously S$0.97). Figure 1: Results at a glance (SGD mn) 2Q16 2Q15 y-y (%) Comments Revenue % New stores +6.0%, SSSG +2.2%, temporary closure of Loyang store -2.7% Gross profit % Higher margin on lower input prices EBITDA % Net profit % Higher other income arising from government grant Source: Company, Phillip Securities Research Pte Ltd estimates Drags from McNair and Woodlands stores alleviated, SSSG recovers. McNair store was closed for a month in 2Q15 for total refurbishment. Excluding McNair store s contribution, SSSG (comparable same store sales growth) would have been 1.3%. Meanwhile, Woodlands store rebounded as effects from weaker ringgit and restriction on the sale of liquor (which took effect in 2Q15) diminished. Overall, we think that SSSG have turnaround. The ongoing rejuvenation of old stores should support SSSG and offset the effect from Loyang store s temporary closure somewhat. Unsuccessful application for change of use and slight delay in Yishun Junction 9 opening. Three new stores opened and the temporary closure of Loyang Point brought store count to 41 and total retail area of 434,800 sqft. as at 30 June Yishun Junction 9 is currently undergoing renovation and should open in August The nine new stores (5 in 2015, 3 in 2Q16 and 1 in 3Q16) should underpin topline growth. Highest gross margin recorded since listing, but expects to average to ~25% for FY16. Gross margin hit record high at 26.1% due to (i) suppliers rebates; and (ii) reduction in input costs derived mainly from bulk handling. Against a lackluster retail environment, the Group should continue to benefit from lower input prices in a buyers market. However, competitive pricing in the 3Q16 arising from the Hungry Ghost Festival should compress gross margin, bringing it to a more sustainable level at c.25% for the year. Catalyst for higher margin will be an improvement of product mix, i.e. more fresh products compared to groceries (current ratio at 41: 59). Cost is less of a worry now, but may resort to borrowing in view of higher CAPEX The Group enjoys a net savings of S$2mn from the recently purchased Bedok store (c.s$3mn annual rental will be converted to depreciation costs of c.s$0.7mn). With Singapore s tight labour market easing slightly, softer rental reversion, and subdued inflation outlook, we expect operating cost pressures to remain contained. Administrative expenses were 16.8% of 2Q16 revenue vs 16.4% in FY15. However, payments for two big ticket items have slashed the Group s net cash position by more than half. After the purchase of Bedok store and progress payments for Yishun Junction 9 totaling S$74.4m, as well as other renovation and maintenance CAPEX totaling S$6.9mn, its war chest stood at S$50.8mn as at 30 June Notwithstanding its continuous effort to open new stores and rejuvenate old stores, with the additional construction cost for the new building at its central warehouse (estimated to be c.s$20mn), the Group may need to resort to debt in order to fund its 28 July 2016 Accumulate (Maintain) CLOSING PRICE FORECAST DIV TARGET PRICE TOTAL RETURN COMPANY DATA O/S SHARES (M N) : 1,504 M ARKET CAP (USD mn / SGD mn) : 1096 / WK HI/LO (SGD) : 0.99 / M Average Daily T/O (mn) : 1.63 MAJOR SHAREHOLDERS (%) SS HOLDINGS 29.85% LIM HOCK CHEE 11.33% LIM HOCK LENG 11.33% LIM HOCK ENG PRICE PERFORMANCE (%) 11.33% 1M T H 3 M T H 1Y R COM PANY STI RETURN (7.89) PRICE VS. STI Jul-15 Oct-15 Jan-16 Apr-16 SSG SP EQUITY FSSTI index Source: Bloomberg, PSR KEY FINANCIALS SGD M N F Y 14 F Y 15 F Y 16 F F Y 17F Revenue EBITDA NPAT (adj.) EPS (adj.) PER, x (adj.) P/BV, x DPS (SGD) Div Yield, % 4.3% 4.2% 3.9% 4.4% ROE, % 24.7% 23.6% 25.6% 28.3% Source: Company Data, PSR est. Valuation Method P/E 23x Soh Lin Sin ( ) sohls@phillip.com.sg SGD 0.99 SGD 0.04 SGD % Page 1 PHILLIP SECURITIES RESEARCH (SINGAPORE) MCI (P) 118/10/2015 Ref. No.: SG2016_0154

3 SHENG SIONG GROUP RESULTS CAPEX. And the low interest rate environment would be favourable time now. Another speed bump for its China maiden store. The Group shared that it now expects construction to start in Aug 2016 instead of July. In view of the Chinese bureaucracy, the expected date of opening may be delayed into 2017 instead of 4Q16. Maintain Accumulate rating with higher TP at S$1.10, pegged to an upgraded estimated 4.79 cents FY17 EPS and unchanged 23x PE multiple. We upgraded FY17F EPS by c.2% after amending our FY16-17 expectations to account for delayed closure of Tampines Central (to 1Q17 instead of 4Q16) and higher CAPEX but moderate cost pressures. The nine new stores (including the upcoming Yishun Junction 9) should drive growth in FY The recovery of mature stores should partially mitigate the impact of downtime of its two big stores (Loyang Point and Tampines Central). Meanwhile, the Group is seeking new stores to replace the loss of 41,500 sqft Woodlands store (to be closed in June 2017). Figure 2: 2Q16 Actual Results vs PSR FY16E (SGD mn) Actual vs PSR est. % of PSR est. Revenue % Gross profit % EBITDA % Net profit % Source: Company, Phillip Securities Research Pte Ltd estimate Table 1: Changes in Retail Space/ Business Area Targeted / Effective Location Date A. One New Store in 3Q16 Total Gross Floor Area Remarks 1. Yishun Junction 9 August 16 15,500 sqft Slight delay, currently undergoing renovation. B. Maiden Store Outside Singapore 2. Basement of a shopping mall in Kunming, China Appeal to the URA and HDB for change of use for 3,600 sqft was rejected. However, managed to negotiate for a slightly larger area for supermarket use (initially 15,000 sqft). The remaining 3,400 sqft would be leased to a third party food court operator. 4Q16 or ,400 sqft Expects construction to start in August 2016 instead of July. C. Interim Closure for A&E and to be Re-opened with Larger Retail Area 3. Loyang Point 15 Apr 2016 (closed) 1Q17 (re-open) 6,000 sqft (Old) 8,000 sqft (New) The expected date of opening may be delayed due to Chinese bureaucracy. Closed for renovation work by HDB and will be re-located to another new unit in the building with additional 2,000 sqft. 4. Second Blk 506 Tampines Central D. Close Mar 2017 (close) May 2017 (re-open) 9,800 sqft (Old) 25,000 sqft (New) Closed for A&E works to the building. 5. Woodlands Blk 6A June 2017 (close) 41,500 sqft HDB redeveloping the area. E. Other 6. Land adjacent to central warehouse To be completed by end of 2017 Previously target to close in 4Q16 and to re-open in Jan Delay to avoid closure during Chinese New Year period. Key store contributing between 5% and 10% to total revenue. 1,800 sqm New lease expiring in 2039, contemporaneous with the lease of the central warehouse, with an option to renew for another 30 years. Lease for the whole term amounting to S$0.8mn will be paid in advance in 3Q16. Linking up with the existing structure will provide additional floor space of c. 4,200 sqm. Construction costs is estimated to be c.s$20mn and expected to commence next year. Page 2 PHILLIP SECURITIES RESEARCH (SINGAPORE)

4 SHENG SIONG GROUP RESULTS Source: Company, PSR Figure 3: Peers comparison Bloomberg Mkt Cap EV EV/EBITDA EV/EBITDA EV/EBITDA P/E P/E P/E Net D/E ROA ROE P/B Company Ticker (SGD mn) (SGD mn) TTM FY1 FY2 FY1 FY2 (%) (%) (%) Sheng Siong Group SSG SP 1, , Net Cash Singapore Dairy Farm Intl Hldgs Ltd DFI SP 12, , Hong Kong Lianhua Supermarket Holdings Co Ltd 980 HK N/A N/A N/A N/A N/A Net Cash China Resources Enterprise 291 HK 8, , Average Indonesia Matahari Putra Prima Tbk PT MPPA IJ 1, , N/A Hero Supermarket Tbk Pt HERO IJ N/A N/A N/A N/A N/A Net Cash Ramayana Lestari Sentosa Tbk PT RALS IJ Net Cash Average N/A Malaysia 7-Eleven Malaysia Holdings Bhd SEM MK N/A Net Cash N/A N/A 14.6 Parkson Holdings PKS MK N/A Net Cash Average N/A Thailand Big C Supercenter Pcl BIGC TB 6, , CP All Pcl CPALL TB 18, , Robinson Department Store Pcl ROBINS TB 2, , Siam Makro Pcl MAKRO TB 6, , Average Philippines Robinsons Retail Holdings Inc RRHI PM 3, , Net Cash Puregold Price Club PGOLD PM 3, , Net Cash Average N/A Simple Average (Excl. SSG) Source: Bloomberg, Phillip Securities Research (Singapore) Estimates Figure 4: 3-Yr Historical PER std. dev. 3-Yr Avg PE std. dev. 18 PE_RATIO 16 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Source: Bloomberg, Phillip Securities Research (Singapore) estimates Page 3 PHILLIP SECURITIES RESEARCH (SINGAPORE)

5 SHENG SIONG GROUP RESULTS Financials Income Statement Balance Sheet Y/E Dec, SGD mn FY13 FY14 FY15 FY16F FY17F Y/E Dec, SGD mn FY13 FY14 FY15 FY16F FY17F Revenue ASSETS Gross profit PPE EBITDA Others Depreciation & Amortisation Total non-current assets EBIT Accounts receivables Net Finance Inc/(Exp) Cash Profit Before Tax Inventories Taxation (9) (10) (11) (13) (15) Others Net profit, reported Total current assets Net profit, adj Total Assets LIABILITIES Accounts payables Short term loans Others Total current liabilities Long term loans Others Per share data (SGD Cents) Total non-current liabilities Y/E Dec FY13 FY14 FY15 FY16F FY17F Total Liabilities EPS, reported EPS, adj EQUITY DPS Non-controlling interests BVPS Shareholder Equity Cash Flow Valuation Ratios Y/E Dec, SGD mn FY13 FY14 FY15 FY16F FY17F Y/E Dec FY13 FY14 FY15 FY16F FY17F CFO P/E (X), adj Net Profit P/B (X) Depreciation & Amortisation EV/EBITDA (X), adj WC changes Dividend Yield (%) 4.2% 4.3% 4.2% 3.9% 4.4% Net finance inc/(exp) Growth & Margins (%) Tax paid Growth Others Revenue 7.9% 5.6% 5.3% 7.0% 6.0% Cashflow from ops EBITDA 18.9% 22.4% 11.8% 9.3% 10.4% CFI EBIT 19.7% 22.2% 17.0% 13.1% 14.7% CAPEX, net Net profit, adj. 24.7% 22.3% 19.3% 11.6% 13.6% Others Margins Cashflow from investments Gross margin 23.0% 24.2% 24.7% 25.0% 25.2% CFF EBITDA margin 7.7% 8.9% 9.5% 9.7% 10.1% Share issuance, net EBIT margin 6.8% 7.8% 8.7% 9.2% 9.9% Loans, net of repayments Net profit margin 5.7% 6.6% 7.4% 7.7% 8.3% Dividends Key Ratios Others ROE (%) 25.8% 24.7% 23.6% 25.6% 28.3% Cashflow from financing ROA (%) 15.9% 16.0% 15.9% 17.2% 19.5% Net change in cash Effects of exchange rates Net Debt/(Cash) (100) (130) (126) (62) (44) CCE, end Net Gearing (X) Net Cash Net Cash Net Cash Net Cash Net Cash Source: Company, Phillip Securities Research (Singapore) Estimates *Forward multiples & yields based on current market price; historical multiples & yields based on historical market price. Page 4 PHILLIP SECURITIES RESEARCH (SINGAPORE)

6 SHENG SIONG GROUP RESULTS Ratings History Market Price Target Price Source: Bloomberg, PSR Oct-16 Jul-16 Apr-16 Jan-16 Oct-15 Jul-15 Apr-15 Jan PSR Rating System Total Returns Recommendation Rating > +20% Buy 1 +5% to +20% Accumulate 2-5% to +5% Neutral 3-5% to -20% Reduce 4 <-20% Sell 5 Remarks We do not base our recommendations entirely on the above quantitative return bands. We consider qualitative factors like (but not limited to) a stock's risk reward profile, market sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts, and speculative undertones surrounding the stock, before making our final recommendation Page 5 PHILLIP SECURITIES RESEARCH (SINGAPORE)

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