Sheng Siong Group

[weijian]

Valid point. Business have not changed but investor's expectations have changed.
But look at it from another perspective.
Part of sheng shiong's free cash is paid out as dividends
Part of it is retained, part of it is used to fund future expansion and eventually profit growth.
The risk premium even at previous levels is still quite fair.
Others may beg to differ but I dont see selling out as a wise choice.

hi Big Toe,

The retained earnings mechanism you just described is applicable for every equity, isn't it? As per Buffett, it is the reason why equities will outperform fixed income as an asset class in general.

Risk premium at previous levels "might be fair". But with risk free getting more attractive now, surely risk premium at previous levels will be "less fair" comparatively?

Not trying to judge who's right, who's wrong. But just observing how the market reacts and try to learn along the way. This is especially so, as it's been a long time since rates came this high (and expected to stay this way for "some time). End of the day, Mr Market's judgement will determine our returns, not our own judgement or expectations.

[Big Toe]

Yes the retained mech is applicable for every equity "in theory". But not all equities are made equal and that is the crux of it all. Even as I comment, I care very little on how the market reacts or judge. It is how well the business does that determines its value. Just imagine there is no stock market and prices flashing every other minute, you need to know how much to pay for it. You cannot keep a good business down for a prolonged period. Cash horde at the company grows(and will earn returns too), earnings grow, dividends grow, value of the business grows. It is a pre determined, slow path up (save for unforeseen cicumstances), any deviation is just noise. Unless of course there is a big fundamental shift/business is being disrupted.

For SSG, I was expecting elevated earnings to normalize after the covid surge. I was somewhat wrong, it just stayed elevated. Inflation and surge in interest may have a part to play in this.

[gzbkel]

I am new to this company, would like some advice on how to interpret their cashflow.
Looking at their last 5 years of statements, depreciation averages 50m per year, while capex (quite lumpy) averages 24m, slightly less than half of depreciation.

Does anyone have any insight on why this is so?
Do they need to need increase capex significantly at some point in future to make up for the shortfall?

Thanks!

[weijian]

I am new to this company, would like some advice on how to interpret their cashflow.
Looking at their last 5 years of statements, depreciation averages 50m per year, while capex (quite lumpy) averages 24m, slightly less than half of depreciation.

Does anyone have any insight on why this is so?
Do they need to need increase capex significantly at some point in future to make up for the shortfall?

Thanks!

hi gzbkel,
On behalf of SSG fanboy club chairman VB Big Toe, I welcome you to the club

Jokes aside. The "Payment of lease liabilities" under Financing activities should not be counted as CAPEX. They actually cancel itself off at "Payment of lease liabilities" under "Financing activities". These new rules came in 3-4years ago.

So after accounting for above, you should see that CAPEX<<depreciation, which is a good thing  In their accounting standards, their renovations are depreciated over 5 years but I don't remember seeing entirely new renovations happening at their stores every 5 years. This probably explains why CAPEX<<depreciation consistently, in the absence of any property purchase (compared to leasing)

[gzbkel]

Hi weijian, thanks for pointing that out!
Indeed since they are paying off the lease liabilities every year, I should not include the depreciation of right-of-use assets when considering capex.

Just considering depreciation of PPE, average is around 20m, which is not that far off from the average capex.

[weijian]

hi gzbkel,

Averages might be off the mark when we look at CAPEX vs depreciation - Sometimes we have to look forward and backwards. Of course, that is definitely many times harder for OPMIs (and more so, if one is more of a generalist and not in the industry)

But what is there not to like of ShengSiong? I will put the comparison in FY23 vs FY19:

GPM (FY23: 30%, FY19: 26.9%)
- Margins have been expanding steadily over the decade since they listed. While many local companies are experiencing both real/paper losses from their FX due to overseas ops, ShengSiong is probably well benefiting from the strong SGD as they import most of their goods to sell in SGD. Wonder why MSW durians are getting cheaper over the years? (maybe they didn't get cheaper in MYR, they only got cheaper in SGD).

Net working capital "defined as inventory/receivables - payables" (FY23: -80mil, FY23: -40mil)
- In FY19, sales was 991mil and in FY23, sales was 1367mil (or +376mil or +38%). In other words, increasing sales by +1% would reduce net working capital by 1mil. A lot of companies have to borrow or retain their earnings (resulting in lower ROE) to pump up their inventories/receivables in order to scale up. But not ShengSiong.
- Out of FY23's 324mil cash, 199mil (payables) belong to supplier and that is perpetual float (like insurance). Perpetual float wasn't very attractive back then, but it is currently giving ~3% rates and that is a lot of free money (~10-11mil annually) funded by suppliers. Now we understand why they are able to give 100x to lucky winners every Saturday night!

[pianist]

hi gzbkel,

Averages might be off the mark when we look at CAPEX vs depreciation - Sometimes we have to look forward and backwards. Of course, that is definitely many times harder for OPMIs (and more so, if one is more of a generalist and not in the industry)

But what is there not to like of ShengSiong? I will put the comparison in FY23 vs FY19:

GPM (FY23: 30%, FY19: 26.9%)
- Margins have been expanding steadily over the decade since they listed. While many local companies are experiencing both real/paper losses from their FX due to overseas ops, ShengSiong is probably well benefiting from the strong SGD as they import most of their goods to sell in SGD. Wonder why MSW durians are getting cheaper over the years? (maybe they didn't get cheaper in MYR, they only got cheaper in SGD).

Net working capital "defined as inventory/receivables - payables" (FY23: -80mil, FY23: -40mil)
- In FY19, sales was 991mil and in FY23, sales was 1367mil (or +376mil or +38%). In other words, increasing sales by +1% would reduce net working capital by 1mil. A lot of companies have to borrow or retain their earnings (resulting in lower ROE) to pump up their inventories/receivables in order to scale up. But not ShengSiong.
- Out of FY23's 324mil cash, 199mil (payables) belong to supplier and that is perpetual float (like insurance). Perpetual float wasn't very attractive back then, but it is currently giving ~3% rates and that is a lot of free money (~10-11mil annually) funded by suppliers. Now we understand why they are able to give 100x to lucky winners every Saturday night!

Never tio before, is it that they will call u to verify, what if missed the call? In any case I like their strong cashflow and reasonable pricing to their grocery. Any idea which credit card has most punch to it's outlet spending

[CY09]

hi gzbkel,

Averages might be off the mark when we look at CAPEX vs depreciation - Sometimes we have to look forward and backwards. Of course, that is definitely many times harder for OPMIs (and more so, if one is more of a generalist and not in the industry)

But what is there not to like of ShengSiong? I will put the comparison in FY23 vs FY19:

GPM (FY23: 30%, FY19: 26.9%)
- Margins have been expanding steadily over the decade since they listed. While many local companies are experiencing both real/paper losses from their FX due to overseas ops, ShengSiong is probably well benefiting from the strong SGD as they import most of their goods to sell in SGD. Wonder why MSW durians are getting cheaper over the years? (maybe they didn't get cheaper in MYR, they only got cheaper in SGD).

Net working capital "defined as inventory/receivables - payables" (FY23: -80mil, FY23: -40mil)
- In FY19, sales was 991mil and in FY23, sales was 1367mil (or +376mil or +38%). In other words, increasing sales by +1% would reduce net working capital by 1mil. A lot of companies have to borrow or retain their earnings (resulting in lower ROE) to pump up their inventories/receivables in order to scale up. But not ShengSiong.
- Out of FY23's 324mil cash, 199mil (payables) belong to supplier and that is perpetual float (like insurance). Perpetual float wasn't very attractive back then, but it is currently giving ~3% rates and that is a lot of free money (~10-11mil annually) funded by suppliers. Now we understand why they are able to give 100x to lucky winners every Saturday night!

Never tio before, is it that they will call u to verify, what if missed the call? In any case I like their strong cashflow and reasonable pricing to their grocery. Any idea which credit card has most punch to it's outlet spending

BOC sheng Shiong card, 6% rebate for no min spend.

[Choon]

When you see ROU Assets and ROU Liabilities on the balance sheet, do you interpret it as: these are rental payment obligations over the next many years, capitalized to today? I.e. the Company has not invested a large lump-sum of $ to acquire that asset?


On pg90 of SS' 2023 annual report, it is noted that 6 Mandai Link (30-year tenure) is classified as a ROU asset. So Sheng Shiong has not invested a lump-sum for this property but is paying rent on an annual basis?

Grateful if anyone can explain.

[weijian]

hi Choon,

Just sharing my non-accountant understanding (and would appreciate account-trained VBs to chip in/correct me):

(1) ROU asset/liabilities are generally matched, meaning their equity value is roughly zero. So yes, they did not "invest a large sum to acquire it". But this does not include building/improvement costs (where the latter is classified under PPE). For example, the Lims have mentioned that every leased space takes ~1mil to renovate before it can start ops.

This is where I figured out ROU understanding (including the portion of lease/interest which was confusing to me for a long time): https://www.youtube.com/watch?v=F4tR1s0ojD0

(2) Pg90 shows that 6 Mandai Link is under 4(a) and not 4(b). So 6 Mandai Link is classified under PPE. My personal notes didn't record much information on it but SSG spent 17mil to own a couple of leasehold units below (pg11 of AR21) and they should be quite self explanatory:

In October 2021, the Group completed the acquisition of a  commercial premise situated at 1 Jalan Berseh #B1-02 to #B1 22 New World Centre S209037, with floor area of approximately 19,267 sq. ft for a consideration of S$17.25 million.

--------------------------------

In summary, I think we could imagine ourself deciding between whether to rent OR purchase a strata lot at Shine@TuasSouth (21years lease remaining) from HockLianSeng:

(A) If we decide to rent it for a year at 3k/month --> we record 36k each of ROU asset and ROU liability.
(B) If we decide to buy it from Chairman Chua at 1mil --> we record 1mil as PPE and then depreciate this 1mil over 21years.