Sheng Siong Group

[CityFarmer]

Let's come back on the property venture. I will take it as separate business segment of SS. The funding of the venture is either by internal fund or debt. Let me take your number as reference. A 20% growth of GFA, means 60K sq ft, will need capital of 30 mil (assume 2k per sq ft, which is on high side, IMO). A LTV of 60% means cash outlay of 12 mil. So the 100 mil cash reserve is able to support more years, after factoring in the rental cash flow from the properties acquired.

Sheng Siong intends to use those properties acquired for its supermarket operations. So you would not have "rental cash flow" per-se, but the new stores acquired on these basis would see greater cash generation net costs which now excludes the rental component. If the property can be justified on the rental, then the venture is in a way self-funding with a supermarket ops on top of the property - a bit of a call option on the future value of the underlying property itself.

However this will come at the cost of a higher asset base and ROE / ROA will show a decline over time if they roll out significant number of stores based on this approach. There will be revenue and earnings expansion, but the market may read the decline in ROE / ROA and devalue the multiple accordingly.

This does give them better control over the fate of the stores and the margins from the business, of which rental is now a large component.

It is a real cash flow, instead of a non-cash accounting entry. It can be accounted as retail or rental income. It doesn't matter, as long as the money stay in the company.

I will seperate the property and retail business, even the company will not separate them. It is to avoid distortion on analysis. For illustration purpose, assuming all retail spaces are owned, the NPM will be 3% higher. It is because rental is approx 3% of revenue, base on my estimation. The NPM will give a distorted view on SS margin versus NTUC's.

Yes, the overall ROA/ROE will decline, thus might give a distorted view. That is another reason why the businesses are separated in my analysis.

(vested)

[specuvestor]

^^ IMHO the property is part of the business; it should not be separated. Indeed ROE and ROA will decline in exchange for "rental lock ins" and strategic certainty. As we discussed in the property thread we can construe it as pre-paid rentals and amortise over the years. As discussed previously, as an "investor" I will be concerned on the change in business strategy, but as a "business owner" I can understand where they are coming from.

Man NTUC is such an amazing company, wish they could go public listed like sheng siong and dairy farm.

No wonder investors values this industry at such high PE multiples.

Be careful of what you wish for. NTUC was set up with good intentions - a social service to the public and to keep cost of living down. In a way, they were given ample resources and advantages to grow into a major player to have the ability to compete and influence prices.

Over the years they have changed (or strayed) somewhat - but you hope they do not lose their minds and IPO the company. We have plenty of examples in Singapore on how this market-based approach has worked...

Public transport co (SMRT, SBS)
Taxi companies
Divestment of JTC industrial properties

Totally agree... as a matter of fact I doubt their numbers will be so good outside of Singapore. Reason why I am positive on SS operating expertise is that it can go head to head with a quasi-govt entity with implicit subsidies.

[weijian]

I had negative view on the recent change of strategy by the company i.e. to own, instead of rent its retail shop. But after a more detail review, I have changed my mind, and decided to take advantage of the recent "adjustment" of the company share price below 60 cents.

One reference of mine was the McDonald's strategy on leveraging its brand, to secure substantial real estate interest for the land/building owned. Of course, SS is no way to compare with McDonald, either in size, brand name etc, but the concept is similar.

The existent of McDonald, changes the value of a real estate, either in rental or value. The same will apply to SS shop. By a simple survey, you will find people are visiting SS, even it means longer walking distance, and/or extra bus trip. It is undeniable that the SS show plays an important role on the "desire".

Hi CityFarmer,
Once again, great courage for sharing about your purchases here (and potentially open yourself to future criticism or jabs). For me, i have yet to gain that sort of courage.

IMHO, i do NOT think there was any change in strategy in the first place. It is a simple case of milking your golden goose.

Before IPO, 10 properties were sold to E Land Properties (pg 131), this comprises of ~30% of the total stores (AR12 reveals there is total of 33 stores and no new stores opened in 2013). So make no mistake, the Lim Brothers are landlords, just that before IPO, they decided to 'keep' the properties under their own names (hey! everyone knows properties appreciate in the long run!). The reason given was 'they view their supermarket, food court and property divisions are seperate lines of businesses.' Since they were viewed as seperate entites in 2009, what has changed now to make them use SS market as the business entity to make property purchases? Of course, many of us here know the reason/s, ie. OPM and it is much easier to leverage up with a listed entity (similiar themes have been discussed in the FCL's thread)

Are TOWKAY Lims' interests aligned with the minority shareholder?

[thefarside]

Hi CityFarmer,
Once again, great courage for sharing about your purchases here (and potentially open yourself to future criticism or jabs). For me, i have yet to gain that sort of courage.

IMHO, i do NOT think there was any change in strategy in the first place. It is a simple case of milking your golden goose.

Before IPO, 10 properties were sold to E Land Properties (pg 131), this comprises of ~30% of the total stores (AR12 reveals there is total of 33 stores and no new stores opened in 2013). So make no mistake, the Lim Brothers are landlords, just that before IPO, they decided to 'keep' the properties under their own names (hey! everyone knows properties appreciate in the long run!). The reason given was 'they view their supermarket, food court and property divisions are seperate lines of businesses.' Since they were viewed as seperate entites in 2009, what has changed now to make them use SS market as the business entity to make property purchases? Of course, many of us here know the reason/s, ie. OPM and it is much easier to leverage up with a listed entity (similiar themes have been discussed in the FCL's thread)

Are TOWKAY Lims' interests aligned with the minority shareholder?

There are a total of 3 stores that the listco (Sheng Siong) is renting from E Land, out of the 10 that was taken out of the group prior to IPO. They are at Clementi, Ang Mo Kio and Jurong West. All three stores operate on 24-hours basis.
Total sqft - 14k
2012 - 1261k - $7.5 per psf/mth ($90 per sqft per year)
2013 - 1609k - $9.5 per psf/mth ($115 per sqft per year)
* includes utilities.

There is an increase of 25% in the cost, between 2012 and 2013, but I'm not sure if the stores went 24 hours in 2013 and hence higher cost. I can't conclude from the numbers that the founders are milking the group for an extra $400k p.a. I think it is somewhat unlikely, given that they are paid good money for their services and retain a significant portion of shares and continue to extract a huge amount through dividends, although I could well be wrong.

As for the pre-IPO behaviours, you are buying the company on an as-is basis as stated in the prospectus @ the offered price. What the owners did before that to extract value was not particularly relevant.

I don't think the management has ever committed to asset light expansions. I don't know the exact reasons why they want to buy but I can accept if they were to say it is for cost control and retain the underlying asset value upside by using a cash generative business to fund the exposure. Different mileage for different folks I suppose. Anyone remember the Shaw brothers crappy cinemas all over Asia?

As for alignment of interest - a lot has been said but I don't think we ever would have a situation where a majority owner would work to satisfy the 30% who own shares in his company. Currently the Lims are running business well and the group today is doing better than 3-4 years ago, and is paying out most of the earnings as dividends rather than retaining the cash to do some crazy levering into a mega property business. I see that as enough alignment - they did structure a comps package to have first dibs but would you rather they pay themselves options? 4 mil each? no divs?

Well, enough said I suppose.

[CityFarmer]

Hi CityFarmer,
Once again, great courage for sharing about your purchases here (and potentially open yourself to future criticism or jabs). For me, i have yet to gain that sort of courage.

A mistake is a mistake, whether it is known. If it is a true mistake, I will be delighted to know it, and "cut loss" immediately.

IMHO, i do NOT think there was any change in strategy in the first place. It is a simple case of milking your golden goose.

Before IPO, 10 properties were sold to E Land Properties (pg 131), this comprises of ~30% of the total stores (AR12 reveals there is total of 33 stores and no new stores opened in 2013). So make no mistake, the Lim Brothers are landlords, just that before IPO, they decided to 'keep' the properties under their own names (hey! everyone knows properties appreciate in the long run!). The reason given was 'they view their supermarket, food court and property divisions are seperate lines of businesses.' Since they were viewed as seperate entites in 2009, what has changed now to make them use SS market as the business entity to make property purchases? Of course, many of us here know the reason/s, ie. OPM and it is much easier to leverage up with a listed entity (similiar themes have been discussed in the FCL's thread)

Are TOWKAY Lims' interests aligned with the minority shareholder?

Yes, I agree that no official confirmation on change of strategy, but I have taken it as worse case scenario for analysis. "Downside" is always the priority for me over the upside.

I didn't dig in too much on the transactions, but I am staying alert on related parties transactions. Base on the info from 2012 AR, the related parties rental was $1.3 mil, out of more than $19 mil overall rental. Hmm... I would not conclude that as "milking from shareholder"...

FCL is different from SS. In Peter Lynch terminology, FCL is asset play, which milking from it is THE game plan. SS is the fast grower, which sustainable growth is a must.

Yes, I am convinced Towkay Lims interest are aligned with mine.

(vested)

[CityFarmer]

As for the pre-IPO behaviours, you are buying the company on an as-is basis as stated in the prospectus @ the offered price. What the owners did before that to extract value was not particularly relevant.

I was asked a question. Why taking risk as founding investors, when passive investors (i.e. the OPMIs) bear much lesser risks? Well, founders normally will and should enjoy out-sized reward, over the OPMI for the success of the business, with a prerequisite of full disclosure. In this case, I suppose we have full disclosure.

As for alignment of interest - a lot has been said but I don't think we ever would have a situation where a majority owner would work to satisfy the 30% who own shares in his company. Currently the Lims are running business well and the group today is doing better than 3-4 years ago, and is paying out most of the earnings as dividends rather than retaining the cash to do some crazy levering into a mega property business. I see that as enough alignment - they did structure a comps package to have first dibs but would you rather they pay themselves options? 4 mil each? no divs?

I agree with your view. Is the reward justified with the contribution from the top 4 of the company? Well, I am convinced it is worth the money, with the company performance so far.

(vested)

[valuebuddies]

Hi CityFarmer, I have been sourcing for some defensive play lately and Sheng Siong is one of the company that came to my mind. Firstly, I would like to ask your view on SS in comparison to Parkson. To me, Parkson seems more attractive in P/E or PB or its margin even though paying lesser in dividend. Secondly, the first negative impression I have for SS is about the Sheng Siong shows on Channel 8, much shareholders' monies were burned every week, yet I, being a loyal NTUC goer, don't find it an attractive marketing strategy. Thanks in advance.

[CityFarmer]

Hi CityFarmer, I have been sourcing for some defensive play lately and Sheng Siong is one of the company that came to my mind. Firstly, I would like to ask your view on SS in comparison to Parkson. To me, Parkson seems more attractive in P/E or PB or its margin even though paying lesser in dividend. Secondly, the first negative impression I have for SS is about the Sheng Siong shows on Channel 8, much shareholders' monies were burned every week, yet I, being a loyal NTUC goer, don't find it an attractive marketing strategy. Thanks in advance.

First of all, I don't know much about Parkson. I will do a preliminary comparison with basic fundamentals of Parkson.

Let's start with margin. In retail business, margin isn't the only indicator for profitability. The asset turnover is also one of the key indicator.

Parkson asset turnover is approx 1, but SS is close to 3. SS's margin is about 5%, while Parkson is 9%, but the profitability of SS is higher than Parkson by ROA/ROE. SS's ROA/ROE is 16%/26%, while Parkson is 9%/16%.

Next is the marketing cost on Sheng Siong Show. In fact, it is a good use of the marketing money, IMO. The expense is not isolated in the AR, so I assume it is not significant, comparing with the sale volume of SS.

(vested)

[maniac]

The prize money in the SS show is sponsored by the suppliers. The show improves SS sales by 10-20%(video 1)

I like the part the boss talked about his wife in the 2nd video.


http://video.xin.msn.com/watch/video/epi.../2ef0xogc4

http://video.xin.msn.com/watch/video/epi.../2effdriub

[valuebuddies]

First of all, I don't know much about Parkson. I will do a preliminary comparison with basic fundamentals of Parkson.

Let's start with margin. In retail business, margin isn't the only indicator for profitability. The asset turnover is also one of the key indicator.

Parkson asset turnover is approx 1, but SS is close to 3. SS's margin is about 5%, while Parkson is 9%, but the profitability of SS is higher than Parkson by ROA/ROE. SS's ROA/ROE is 16%/26%, while Parkson is 9%/16%.

Next is the marketing cost on Sheng Siong Show. In fact, it is a good use of the marketing money, IMO. The expense is not isolated in the AR, so I assume it is not significant, comparing with the sale volume of SS.

(vested)

With a mere 5% profit margin and 4% dividend payout, how can we still categorise it as a "fast growth" company with only 1% left? With PE of 21 and PB of nearly 6, i think somehow it has been overpriced, moreover it operates in a very competitive business where currently being dominated by FairPrice and Giant. I would prefer a lower PB and PE before considering to invest.