Sheng Siong Group

[ForeverAlone]

this should be positive, if cannot make extra money they wouldn't go 24 hours one

[specuvestor]

looks like a change in strategy - expansion via renting is no longer feasible. While there's a decent cash hoard on the books, i do wonder how long they will keep to their dividend payout now that they will look to purchase land for store expansions.

A brief of the deal below

The Board of Directors of Sheng Siong Group Ltd. (the “Company” and together with its subsidiaries, the “Group”) wishes to announce that Sheng Siong Supermarket Pte Ltd (the “Purchaser”), a wholly-owned subsidiary of the Company, has entered into various sale and purchase agreements dated 25 October 2013 (the “Agreements”) with CEL–Yishun (Commercial) Pte Ltd (the “Vendor”) of the first part, and CEL-Yishun (Residential) Pte Ltd of the second part ( pursuant to which the Purchaser has agreed to purchase a total of 6 units of properties (each a “Property” and collectively, the “Properties”) at 18 Yishun Avenue 9, Singapore (the “Proposed Acquisitions”) for an aggregate consideration of S$54.9 million (“Consideration”).

http://infopub.sgx.com/FileOpen/SSG-Purc...eID=261220

I have been positive on Sheng Siong since the day of its IPO.

People ask when do fundamentals change and assessment should change since we don't generally do cut losses or technicals? Ans: When strategies change.

I would consider this as a strategy change. Investors should reassess.

[opmi]

I dont think it is a change in strategy. they are going to change the property use to "Supermarket"

Because of the asset inflation, businesses (Sheng Siong) need to own some comm properties to 'hedge' against
rising rentals. One Indian sport shoes retailer in SG said they did the right thing by owning their shops from the start,
even if they borrow to buy it initially. If not, end up working for landlords.

Following completion of the Proposed Acquisitions, the Group intends to apply for the
approval of the relevant authorities for the change of use of the Properties, save for the
#02-06 Property, to operation of a supermarket.


My suggestion, SG govt, the biggest landlord (supposedly not-for-profit) in SG should tag the rental conditions to Sheng Siong like
capping the prices of daily essential goods sold. E.g. NParks made GRUB at Bishan to cap the prices on their menu as one of the rental conditions.

[specuvestor]

From a corporate strategy point of view, it may be positive to own the asset rather than rent.

However from a ROIC point of view, the impact should be significant. And of course not forgetting their ill timed equity purchases prior to their IPO.

[CityFarmer]

From a corporate strategy point of view, it may be positive to own the asset rather than rent.

However from a ROIC point of view, the impact should be significant. And of course not forgetting their ill timed equity purchases prior to their IPO.

It is quite a different long term strategies between rent vs own for SS. I am not sure this acquisition is one-off or a long term one.

If it is long term, it will limit its growth. For retail, one of the advantages is low working capital or low start-up capital for new shops.

(not vested)

[NTL]

If they are unable to rent, and have to buy shop space to expand, then likely there will be more acquisition coming in the future.

What I don't understand is why are they buying a brand new property that only be ready in 2017? Based on an average psf of close to $3000, will it consider as a right price to pay?

Furthermore, they already have 2 outlets in Yishun, both quite near to the 2 MRT stations.

[AlphaQuant]

the key attraction of ShengSiong (to me, at least) is the ability to generate cash - bloke is churning cash @ a pretty decent pace which makes its 5-6% margin biz acceptable given the good cash conversion cycle.

Changing its strategy into from renting to buying entails much higher risks - you can't just decide to sell a building after 3mths upon finding dismal sales; under the current rental model, it's much easier to just fold the cards and move on.

Can the biz, with its razor thing margins withstand a series of bad land choices and acqusitions?

[Dividend Warrior]

Changing its strategy into from renting to buying entails much higher risks - you can't just decide to sell a building after 3mths upon finding dismal sales; under the current rental model, it's much easier to just fold the cards and move on.

Maybe they did some kind of market survey/research before buying the new property?

[AlphaQuant]

Maybe they did some kind of market survey/research before buying the new property?

I am sure any savvy property buyer will do some sort of research before actually purchasing.

But whether a location is a hit or miss is perhaps not as easy to tell before Day 1. The 2012 AR says ShengSiong has 33 outlets - in 2013 there are 25. So there is a net closure of 8 outlets - there's no mention of why but i will probably think that they were unprofitable. In a way it makes sense, since a location proven to be successful will probably already have a NTUC/Dairyfarm there, hence it does not make sense to open another one to compete; a location which does not have them is untested and only time will tell. The fact that there were 8/33==24% unsuccessful locations prob shows SS does not have perfect knowledge in location choices (which is perfectly acceptable).

ShengSiong (as with most retail stores) had a decent model - u rent an outlet, pay the rent, make sure u have a good cash conversion cycle and then u churn as much as possible off small margins. If the location sucks, fold and move on. Now that the model is violated - I'm not sure the margins is enough for any error off property valuations.

[Dividend Warrior]

Maybe they did some kind of market survey/research before buying the new property?

I am sure any savvy property buyer will do some sort of research before actually purchasing.

But whether a location is a hit or miss is perhaps not as easy to tell before Day 1. The 2012 AR says ShengSiong has 33 outlets - in 2013 there is 25. So there is a net closure of 8 outlets - there's no mention of why but i will probably think that they were unprofitable. In a way it makes sense, since a location proven to be successful will probably already have a NTUC/Dairyfarm there; a location which does not have them is untested and only time will tell. The fact that there were 8/33==24% unsuccessful locations prob shows SS does not have perfect knowledge in location choices (which is perfectly acceptable).

ShengSiong (as with most retail stores) had a decent model - u rent an outlet, pay the rent, make sure u have a good cash conversion cycle and then u churn as much as possible off small margins. If the location sucks, fold and move on. Now that the model is violated - I'm not sure the margins is enough for any error off property valuations.

Thanks for the insightful explanation, AlphaQuant.
Much appreciated.