99 Speed Mart

[weijian]

This is probably the company that has caused the Jardines to sell off their Msian grocery ops Giant. Of course for a start, Msian grocery has never been easy. Over the past 1 decade, consumer behavior has reversed back to smaller formats. 99 Speed Mart is probably also giving Vincent Tan's 711 franchise a lot of discomfort too and the latter is putting in a lot of CAPEX to differentiate and pivot to more ready-to-eat/house brands SKUs.

The headline valuation is the 34.7 P/E ratio. With clear retail visibility since this is a B2C business, coupled with negative working capital and a hot Bursa Market, the bankers are getting paid well to deliver. We can easily benchmark 99 Speed Mart's IPO valuation to what SGX's ShengSiong Group is currently trading it and we should be able to see that it is priced at around double of SSG's P/E!

99 Speed Mart IPO: Should you subscribe?

Founded in 1987 as a small single sundry shop in Selangor, 99 Speed Mart Holdings Berhad (KLSE: 99SMART) has expanded over the years to 2,651 outlets across Malaysia.

These outlets are mainly concentrated in the Klang Valley area, which covers most of the Selangor state.

The moat value proposition of the company’s business lies in its sheer size and ubiquity – it is strategically situated near housing areas, making it convenient for customer to pick up their essential sundry goods. It offers goods at cheaper prices, and patrons usually need not subject themselves to jams and car park surcharges to grab what they need.

For Singaporeans, think of it like having a Sheng Siong just downstairs of your HDB or just a mere 5-minute walk away.

https://drwealth.com/99-speed-mart-ipo-s...subscribe/

[Big Toe]

99 speed mart. If my sources are correct, 99 speed mart already have presence in SG as they took over a relatively new supermarket chain here. It was a private deal and I do not have exact details but I do know they were quite generous in their aquisition offer.

The supermarket/minimart/convenience store scene here is more than saturated. there are only smaller sub-segments uptapped/worth vying for. That is to say one cant grow very big here starting from scatch, even if one have ample resources. Unless one offers differentiated products like donki. But one has to bear in mind the size of Don Quijote to have that range of products.

This is an area where I have in depth knowledge, but it still doesnt give me much of an edge over investing in DFi or Sheng Shiong.

[weijian]

99 speed mart. If my sources are correct, 99 speed mart already have presence in SG as they took over a relatively new supermarket chain here. It was a private deal and I do not have exact details but I do know they were quite generous in their aquisition offer.

The supermarket/minimart/convenience store scene here is more than saturated. there are only smaller sub-segments uptapped/worth vying for. That is to say one cant grow very big here starting from scatch, even if one have ample resources. Unless one offers differentiated products like donki. But one has to bear in mind the size of Don Quijote to have that range of products.

This is an area where I have in depth knowledge, but it still doesnt give me much of an edge over investing in DFi or Sheng Shiong.

According to the IPO prospectus, the "99 speed mart" presence in Spore is under Founder Lee's personal holdings.

I decided to take a look at whether the "supermarket/minimart/convenience store scene here is more than saturated" claim. Comparison on FY23 numbers below:

Spore (taken from Singstats)
No. of households = 1,425,100
No. of supermarkets = 691 
Density (household per mart) = 2,062

99 SM (taken from IPO prospectus) - Central/Southern Msia only
No. of households = 3,930,000
No. of 99 SM mini-marts  = 1,699
Density (household per mart) = 2,313

- I have only taken reference from Central/Southern Msia, a grand total of 4 states and 1 federal territory (Selangor/Negri Sembilan/Melaka/Johor + KL). This is probably a better comparison because the other areas (North/East Msia excluding Penang) are "ulu kampungs" lah.

- Supermarket density for Spore is ~12% more dense than 99 SM's mini-mart - So it is denser but not by a lot. But note this is just 99 SM's density (which has only ~11% of total grocery sales in terms of revenue).

The comparison statistic is also not apple-apple as well - since we are comparing different singular formats. If we were to add in the other formats to each country - supermarkets/hypermarkets to Msia and then hypermart/mini marts to Spore - I don't have the numbers - but there is good reason to suspect that the numbers may actually tell us that Spore is not more saturated than Msia's, at least in the suburban/urban areas.

[weijian]

Thought it would be interesting to compare 99 speed mart (in RM) with ShengSiong Group (in SGD):

FY23 (,000) 99speed mart   SSG
Revenue        9,210,505          1,367,719
other income  853,862            15,917
COGS            8,369,058          957,187
GP                 1,695,309         426,449
GPM               18%                 31%
All SGA           1,134,349         271,035
All SGA%         12.3%             19.8%
PBIT               560,960           155,414
PBIT margin     6.1%               11.4%
inventory turn   49                   35
Working Capital 57,600           -79,606

- For every dollar, SSG earns 30cents while 99speed mart earns 18cents. In general the smaller or more convenient the format, the higher the GPM. But 99speed mart has done the opposite. Is that responsible for the decline of the supermarket/hypermarket formats in Msia? From the Frost & Sullivan report in the prospectus, supermarket/hypermarkets accounted for 43% of gross grocery sales in FY18 but dropped to 35% by FY23.

- As expected, SSG incurs much higher operating costs. But that is more than made up by its much higher GPM (in % terms). Therefore SSG's PBIT margin is almost twice that of 99speed mart and makes almost similar PBIT amount after currency conversion (abeit before RM's recent strength). SSG is also more efficient in terms of inventory turnover and capital mgt (it has negative working capital while 99speed mart does not).

- Someone across the Straits has demonstrated that it is entirely possible for SSG's moat to be eroded as there is "excess margin" at COGS side But that is in theory. In practice, I would assume that no one is interested in such a small market, especially with a state player as a major player (FairPrice). As they say - oligopoly is the best moat.

[Big Toe]

It is far far far too simplistic to look at COGS and assume that with lower margins, speed 99 is able to erode the fat margins of established players.

It is going to take a few hundred page analysis, will look at supermarkets first.
SG Supermarkets Vs Speed 99.

The last time I checked, Speed 99 is more of a minimart format with little to no fresh produce(hence lower margin correct me if I am wrong) Sheng Shiong thrives on fresh produce(high margin)., this is where they make their money. Even if speed 99 decides on offering similar items, they face a number of hurdles

i) Shop space. It is extremely difficult to get HDB shop space especially for supermarkets, and the requirement is now beyond just rent. Even if they bid the highest, they may still not meet the requirements and not get the space. Even if they manage to get it somehow, they will be at a disadvantage due to higher rental compared to the incumbent whom have secured long term rentals long time ago.

ii) Supplier leverage. Speedy 99 may have some leverage on certain suppliers but our supermarkets import produce from all over the world. A significant portion of vegetable/fruits/seafood and even rice do not originate from Msia and are sourced globally. Msia in generally import much less premium imported products that many of us are used to. Sg have it easy as we are connected globally extensively via air and sea links. Msia do not have this advantage.

iiI) Controlled Items. Cigarettes and alcohol. Speedy 99 will have 0 edge over SG supermarkets for controlled items and in fact will be at a disadvantage due to the smaller quantities they are able to commit for a start. They do not get bulk discount.

So the impact will be different for each product category. Ie

1. Common Biscuits - 99 win
2. Common Soft drinks - 99 win
3.. Alochol - Local players win
4. Sri Lankan Crab - Local players win
etc etc

It would be far far far easier for 99 to establish itself as a minimart format rather to take head on with supermarkets
99 is just not ready...yet. Too early and market is far too dynamic to make any assumptions at the moment.

[weijian]

hi BigToe,

I am glad that my simplistic post has managed to attract a non-simplistic answer to allow us to have a better understanding of grocery dynamics in terms of margin and operations.

99 Speed Mart is basically a sub-set of SSG and does not sell fresh produce. IIRC, the closest sort of produce 99 Speed Mart sells are eggs and onions. This probably helps to explain why SSG has intrinsically better inventory turnover days (and hence negative working capital) than 99 Speed Mart, which does not have negative working capital.

IIRC, Brother Lims of SSG once talked about entering the Msian grocery market. To date, they haven't and that looked like a very wise choice.

[Big Toe]

Much like how hard it is to predict how successful 99 will be in Singapore, it is hard to know how successful SSG will be in msia. My very best guess is that both will be somewhat successful. Both bosses worked their way to the top and is very hands on and knows exactly what is going on the ground. (SSG pioneered the live fish in tanks concept to ensure you get the freshest seafood) As SG and Msia culture is somewhat similar, the management will just need to make a few field trips and have a feel of what they can and cannot do.

What 99 will do for sure is to bring in Msia products to have an edge over SG in terms of pricing. Lets take Coke for example. Coke in SG is all made in Msia but is coke msia going to supply 99's Sg branches from Msia? Coke is limited by country boundaries and coke msia cannot sell direct to SG. But there is no law prohibiting speed 99 to buy coke in msia and then ship it to SG(like what value dollar did). And this is only 1 supplier.

So as you can see, it is a very very complicated affair. 99 will have an edge at bringing in cheaper msian products should they choose to do so. SS may have an edge over certain product categories that are imported to SG and currently very hard to find in Msia. If I have to really have to pick, 99 opening here success rate(as a minimart) probably will be slightly higher than SS(as a supermarket) going over to msia.

[weijian]

hi Big Toe,

Would a basket of products determines the final value/user experience for the customer more than let's say individual categories? I mean, you could be selling slightly more expensive beer but if you are getting your bread/milk/biscuits/eggs at the same place, you probably get your beer pack too as long as the beer isn't obscenely expensive (like in convenience stalls who sell by the can)

99speed mart seemed to have gotten its basket of products right based on the way the Msian grocery market and infrastructure works. It became a mini-market with scale - taking customers who value convenience from the 711s and price-conscious customers from the supermarkets/hypermarkets. As for fresh produce, there is plenty of choice for Msian consumers with the usual pasar malams/wet markets still in existence.

So yes, it is really complicated. Not going to hypothesize too much about who will win in whose market. But if I had to bet, I would put my wager on 99 boss. After all, I asked ChatGPT to provide me names of billionaires who are handicapped before they became one and it didn't give me a satisfactory reply.

P.S. ChatGPT mentioned a couple of them had dyslexia. I do acknowledge it is a handicap but the ingenuity of mankind has created extremely successful outliers of them

[Big Toe]

In the minimart/supermarket space. The variety/price of goods would determine how much sales a shop would get daily. And it is fairly consistent, the variance is quite low. On weekends and festive periods it would trend higher but on normal days it is quite stable.

In 99 case in msia, it took market share away from convenience stores and supermarkets by virtue of their location and pricing. They are everywhere and more convenient than super markets, and very much cheaper than the likes of 7-11. Also Giant being gaint, is not the most well-managed, it worked well for a while but were too slow to react to more nimble competitors, much like how they operationally lost out in SG to SS/NTUC.

There are also many opportunities for a supermarket to uplift their margins. In fact I would like to think Shopee is the online version of how brick and motar supermarkets are run. The main business of groceries is not going to give much margin going forward. And in the case of Shopee, the finance arm/ advertising / other tie ups will be much more lucrative.
Both have the same challenge of keeping customer traffic at a high level.