cfa equity research challenge 2011_team 9

Sheng Siong Group Ltd

Compounders ResearchThis report is published for educational purposes only by students

competing in the CFA Institute Research Challenge

Retailing

Singapore

CMP: S$ 0.4212 – month TP: S$ 0.67Market Cap: S$581 mnBloomberg Ticker: SSG SPReuters Code: SHEN.SIFree Float (%) 28.4%Daily Avg. Volume 65.94mnPrice Range (since IPO) S$ 0.31 – 0.57

Shareholding structure

20 October 2011 1

New giant warehouse at Mandai Link to improve future margins: Theone-stop facility, used concurrently with its computerized systems, shouldallow SSG to control and replenish inventory at its various outlets in a timelyand efficient manner. Increased operating efficiency and benefits fromintegration will allow it to enjoy economies of scale in terms of rebatesthrough bulk purchasing manpower, transportation and fuel costs.

HDB projects to open new areas for growth: SSG is expected toaggressively expand their retail outlet network from their current 23 stores toover 40 stores. SSG will be able to target the new target markets developedby an implementation of upcoming HDB projects ( more than a 100,000 HDBunits to be built in the next five years) to expand their retailing network anddrive profitability growth.

46% of Singapore residents do not have SSG outlet nearby-Untappedmarket: Sheng Siong Group (“SSG”) does not have a presence in 18 zones inSingapore, some of which are densely populated areas. This provides SSG anopportunity to expand their retailing network in these high potential areas soas to drive profitability growth.

Focus on house brands to help margin improvements: SSG plans to focuson leveraging its established brand to launch its own brands in various fooditem categories. These own brands have higher margins due to lowermarketing costs and lesser number of intermediaries in the supply chain.House brands are expected to contribute 10% to total revenue (2010: 5%) byCY15.

A large debt free piggy bank: As of 31st December 2010, Sheng Siong hadS$ 85 million in cash and during CY11 was able to raise another S$ 79.5million, providing it with ample cash to pay back its long term debtobligations, pay healthy dividends and aggressively expand their retailingnetwork.

For God, Country and Retailing – BUY!

Attractive valuation and dividend yield: SSG had a very successfully IPOwith 1.3x oversubscription. The stock reached highs of S$0.57 but has sincethen cooled down and according to us currently trades at 8.39x EV/EBITDAon FY 2012 basis which is attractive given its growth prospects which lookbright. Management’s commitment to a 90% dividend payout will ensure thedivided yield to remain above 5-6% levels in the coming 5 years at least

SSG vs. STI (rebased to hundred)

19 October 2011

Stores added vs. New HDB units

Company Filings, Compounders estimates

Figure. 2

Figure. 1

Figure. 3

Y/E Dec 31 FY09A FY10A FY11E FY12F FY13F FY14F FY15FRevenue 625.3 628.4 644.0 692.4 812.3 877.5 944.0 EBIT 39.9 49.0 35.4 47.9 57.7 59.5 61.7 PAT 33.9 43.0 26.4 36.2 43.5 44.9 46.6 EPS (Cents) 2.45 3.11 1.91 2.62 3.14 3.25 3.37 Growth (%) N/A 27.0% -38.6% 37.2% 20.1% 3.3% 3.8%PER (x) 16.96 13.36 21.75 15.86 13.20 12.78 12.32 EV / EBITDA N/A N/A 11.71 8.39 7.09 6.81 6.53 ROE (%) 37.2% 48.0% 25.1% 24.4% 28.5% 28.6% 28.9%Dividend yield (%) N/A N/A 4.14% 5.68% 6.82% 7.04% 7.31%Source: Company, Compounder Research

S$ mn

20 October 2011 2

Sheng Siong Group Ltd. Compounders Research

Table of contents

Section A Economic overview 3

Section B Industry overview 4

Section C Company analysis 6

Section D Financial overview 10

Section E SWOT analysis 11

Section F Appendix 12

Page

20 October 2011 3

Sheng Siong Group Ltd. Compounders Research

CAGR 8.9%

CAGR 2.7%

208.8

319.5

0

100

200

300

400

2005 2010

Singapore GDP (S$ bn) Economic Overview

The retailing industry worldwide depends to large extent on the consumer spending,economy size and per capita income. Singapore has shown stellar performance inthe last few years both in terms of GDP growth and per capital income growth.Singapore showed great resilience through the 2007-08 recession and the retailindustry witnessed stable growth through the toughest times., thus this industry canbe considered to be virtually recession proof in the short run.

4.29

5.10

3.5

4.0

4.5

5.0

5.5

2005 2010

Population mm

Singapore – A beacon for stability & growth

28.18

32.24

26

28

30

32

34

2005 2010

Disposable Incomeper Capita (S$) '000

CAGR 3.5%

Burgeoning consumer sectorRelatively stable labor market with low unemployment level and improvingtourism scene fuels long term optimism in the consumption level of consumer goods.Nonetheless, increasing conservatism in spending triggered by below par economicclimate might hurt above average growth levels.

Inflation DynamicsSingapore’s CPI inflation has elevated in recent times reaching all-time high of

5.67% in August 2011. However, MAS core inflation has hovered around one third ofCPI Inflation, which primarily has been stipulated by surging accommodation andprivate transport costs.

High-Octane Wage hikes

With service industry proliferating at exceptional levels attracting top-notch MNCsand business graduates around the globe, nominal average earnings have been fastincreasing, thereby providing immense legroom for the retail sector to grow. With payhikes overshadowing the effect of inflation, purchasing power is expected to rise.

Impact of Eurozone debt crisis

With public finance and budget deficits in a much healthier state compared to theEurozone and the majority of debt is issued in local currency to domestic investors,due to which the impact on the cost of issuing new sovereign debt is expected to beminimal. The resulting crowding out effect on private players due to benchmarking ofyields is expected to be minimal on the same line. However, trade related activitiesfollowing supply disruption after Japanese Tsunami and weakened demand fromadvanced economies (With US and euro zone accounting for one third of exports) willhave a significant impact on the growth of the economy.

Company Filings, Compounders estimatesMonitory Authority of Singapore, Compounders estimates

Figure. 4

Figure. 6

Figure. 5

Figure. 7

20 October 2011 4

Sheng Siong Group Ltd.

Top 3 grocery retail chains and their formats

Grocery retailing in Singapore The different grocery retailing formats in Singapore include hypermarkets, supermarkets, convenience stores, wet markets and other specialty stores.

We focus on what is known as the grocery retail chains..• Use various combinations of different grocery retailing formats ranging from

hypermarkets to convenience stores• Developed rapidly in recent years, a total of 800 operated in 2010• Accounted for an increasing proportion of grocery retail revenue since 2005

Third largest & Fast catching up with the top 2 players with a 13.1% revenue CAGR since 2006

Ranking Name Format types

1 NTUC Fair Price Hypermarkets, supermarkets and convenience stores

2 Dairy Farm Hypermarkets, supermarkets and convenience stores

3 Sheng Siong Group

Hypermarket, Supermarkets, wet markets and grocery stores

Top 3 grocery retail chains by revenue for 2010 (S$ mm)

Source: Company Filings, Frost & Sullivan

Estimated Market Share by revenue

Singapore’s Grocery Retail – Trends & Forecasts

Conquered a healthy market share of 5% over the last 5 years

It is almost completely dominated by supermarket and hypermarket formats. Thegrowth in revenues of their stores is a function of a few key variables such asincreased purchasing power, economic improvement, increasing popularity ofsupermarkets, and inflation.

20.5

24.5

15

20

25

2005 2010

Store based retailing revenue (S$ bn) Industry Overview

Compounders Research


Figure. 8

Figure. 9

Figure. 10

20 October 2011 5


Historical and forecasted revenues for Singapore (S$ bn)

Singapore’s supermarkets and hypermarkets are expected to experience approximately 4-5% growth in revenues between 2011 and 2012, and between 1.5% and 2.5% growth during 2014 and 2015.

Future growth up for grabs..

Source: Company Filings, Frost & Sullivan

Business CycleSince this industry caters to the domestic market in Singapore, it is not dependent onany export markets such as US or EU. Thus it’s relatively decoupled from the globaleconomic turmoil at the moment. To add to that, FCMG retailing does not changemuch with changes in stock markets or economic sentiments as people consume basicessentials like food items and basic utilities in any case irrespective of pricemovements.

SeasonalityRevenue during festive periods such as Chinese New Year, Hari Raya Puasa andDeepavali tends to be higher as compared to the revenue in non-festive periods. Allretailers hold promotions in conjunctions with such festive seasons.

Competitive Landscape – 3 Main Players The retailing industry has three main players which are NTUC, SSG and DairyFarm. SSG has shown the highest growth in sales across the three players, with a 4year CAGR of 9.6%. Strong brand positioning, roll out of store outlets andintroduction of house brands have allowed for this strong growth in sales.


Figure. 11

Figure. 12Industry Reports, Compounders estimates

20 October 2011 6


About Sheng Siong Group:

SSG currently operates 1 hypermarket, 22 supermarkets and 3 wet market stallsacross the island.

Current Locations

The company raised net proceeds of S$79.5 million from its recent IPO of whichabout 30% will be allocated to the expansion of the store network.

On an average, it costs the company S$1.5 million for every 10,000 sq ft of storeexpansion. This translates to a potential addition of 125,200 sq ft (+37%) fromcurrent operational area. The management targets to increase the number of stores to~40 by 2015, which it feels the market can absorb, especially given the fact that thereare several highly populated areas that still do not have an SSG outlet.

Expansion Plans


Sheng Siong Group (SSG) is the third-largest retailer and the fastest-growinggrocery retailer in Singapore, with 2.6% market share of the retail market and 17.5%of super-market sales in Singapore (Frost & Sullivan). SSG operates 23supermarkets, 1 hypermarket and 3 wet-market stalls across Singapore. During2006-10, it gained market share vs. its larger rivals NTUC and Dairy Farm, with13% sales CAGR vs. 9% CAGR for NTUC and 5% CAGR for Dairy Farm. SSG’smarket share in super-market sales rose from 13% in 2006 to 17.5% in 2010

SSG’s stores are mainly located in ‘HDB’ heartland of Singapore. The stores aredesigned to provide customers with both “wet and dry” shopping options, includinga wide assortment of live, fresh and chilled produce, such as seafood, meat andvegetables. In addition, they also provides processed, packaged and/or preservedfood products as well as general merchandise such as toiletries and essentialhousehold products

Sales Mix (2010)

Costs Breakdown – FY10 operating expenses

Revenue growth – CAGR 13.08%

Total sq. feet area of stores

Company Filings, Compounders estimates Figure. 13

Figure. 14Company Filings, Compounders estimates

20 October 2011 7


Business Model for Sheng Siong


Supplier Procurement Warehouse / Distribution Retail

SupplierMandaiFacility Retail

Shorter Supply Chain to Reduce Costs and Improve Margins

Area Region # of Residents NTUC SSG

Bishan C 91,298 3Bukit Merah C 1,57,122 5Bukit Panjang W 1,28,734 2Bukit Timah C 70,314 3Downtown Core C 3,722 3Geylang C 1,20,690 6Hougang NE 2,16,697 5Jurong East W 88,188 3Kallang C 99,559 4Marine Parade C 47,318 3Newton C 6,242 0Novena C 46,640 5River Valley C 8,206 1Sembawang N 72,732 3Sengkang NE 1,67,054 4Tampines E 2,61,743 9Tanglin C 17,293 0Tao Payoh C 1,24,653 4

Potential Areas

Untapped markets

Singapore Retail Food Sector Report, Compounders estimates

20 October 2011 8


Revenues in FY2009 per sq.m. (S$ per sq.m.)

11,924

8,456

17,085

0

5,000

10,000

15,000

20,000

NTUC Dairy Farm Sheng Siong

Differentiating Factors

S$491 mn99%

S$491 mn98.79% S$483mn

98.37%98%

98%

99%

99%

100%

100%

2008 2009 2010

Direct Material Cost Other Costs

Rebates on Bulk Breaking

With its new warehouse at Mandai Link, the company is now able tonegotiate greater volume of bulk breaking for its suppliers whichenables the company to receive a 3.5-5% rebate on those goods.

Productive space use and lean supply chain

1. SSG packs more items per isle as compared to its peers2. SSG maximizes the amount of floor space to display product

items by eliminating the traditional on-site storage areas in its outlets3. To eliminate potential stock depletion, problems, the goods are replenished more

than four times a day. 4. Existence and use of a real-time inventory management system provides for effective

communications between the central warehouse and respective stores thus optimising the value of delivery trips.

Benefits realised

1. Maximisation of Revenue per foot-highest in the industry as shown below2. Efficiently able to meet satisfy consumer demand for rapidly turned over products3. Ensuring freshness and quality for its fresh food products

Unique product positioning within stores

Bulk breaking


Revenues per square meterare highest


Figure. 15

Figure. 16

20 October 2011 9


:

.

Can sustain price war in Industry

Sheng Siong focuses its advertising and promotion efforts on television gameshows. The expenses for these promotion activities are largely paid for by itssuppliers. In comparison to NTUC & Cold storage, SSG receives various types ofsupport from its suppliers, including trading incentives such as distributionallowances, advertising and promotion funds, volume rebates, display charges andadvertising assistance.

Unique promotional initiatives

TV Show

“The Sheng Siong Show”, a “live” television variety show, was launched in April2007 and attracted strong viewership and has become a regular TV Show withleading TRPs. thus strengthening the brand.

Taiwan Fair 2011

In an attempt to let local consumers enjoy top-grade agricultural produce, processedfoods and other food specialties from Taiwan, SSG, launched “Taiwan Food Fair2011”. A series of Taiwan frozen delights, Taiwan fruits and vegetables# that were inseason, Taiwanese Peng Lai Rice, vinegar-based health drinks and delicious snackswere made available, totalling to more than 500 types of items.

Numerous household brands give SSG a

competitive advantageFresh food retail advantage

Fresh produce i.e. Fresh vegetables, seafood, meat and fruits account for about 30% ofthe group revenue where GP margin may be as high as 30-32%. The share of wetproducts is expected to rise to 40% in the future thus increasing theoverall gross margins.

House brands

House brands generally give 5-10% higher GP margin than the third-party brands.Currently, about 5% of the group revenue is derived from house brands. Thecompany also sees potential to step up its house brand product offerings from thecurrent 300 products to .2,000 products. The contribution from house brands isexpected to double to 10% over 2011-15.

Minimum Cannibalization

Store selection is carefully done to avoid cannibalization. The shortest distancebetween Sheng Siong stores is 1.2-1.3Km compared to NTUC’s 300-500m.

Dedicated fleet of trucks

Currently, the company uses its dedicated fleet of 34 delivery trucks to dispatchinventory to its outlets, instead of employing third party logistics providers likeits competitors. All the trucks have refrigeration facilities to support the deliveryof perishable products. The company incurs S$75-80/trip vs. S$120-150/trip ifoutsourced agents are used.

Price competitiveness

Strategic store locations

Self owned fleet reduces costs


No single voluminous supplier

No single supplier/contract supplier contributes more than 5% of SSG’stotal purchases so SSG is not at mercy of suppliers.

Not at suppliers mercy

20 October 2011 10


Source: Company Filings

Financial Overview

The company is expected to have stable margins despite rising costs as it increasesits focus on high margin house brands, reducing costs through operationalefficiencies and spreading fixed costs over a larger revenue base through theexpansion of their retailing network in high density areas of Singapore whererevenue per sq ft would be optimized.

Margins – Strength with Stability

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

-100 200 300 400 500 600 700 800 900

1,000

FY09A FY10A FY11E FY12F FY13F FY14F FY15F

Revenue (LHS) S$ mm Net Margin The company enjoys a negative cash conversion cycle as cash is received uponpurchase and suppliers have increased credit terms from 30 days to 45 days.Additionally, because of its new efficient mandai warehousing and distributionfacility, inventory days are less than three weeks.

Negative Cash Conversion Cycle

Cash Rich & Debt Free

The company has a large war-chest of cash to repay their term loans, maintain ahigh dividend pay out ratio and expand their network in different parts ofSingapore. Also, in the future, it can use its high cash flow generation businessmodel to expand regionally into Malaysia and other countries in the region.

Return on Equity – Commendable ManagementThe management has shown high returns on equity in the past and are expected tomaintain 25%+ ROE in the future as new stores come online and operationalefficiencies are realized. Furthermore, rebates through bulk purchasing will also

ValuationBased on an FCFE analysis and assuming a discount rate of 7.2%, our fair marketvalue for SSG is S$ 0.67 per share. The cost of equity takes into account riskpremium related to the Singapore market as well as an additional risk related todilution through share options. Based on FY11 financials, the company may seemfairly valued, however, these were due to listing expenses (which are one time) andtwo stores closing down (which are expected to be replaced in 2012).

However, if we take a look at the 1 year forward valuation multiple (FY12) analysisof SSG vs. its peers we see that SSG is relatively cheaper based on EV/EBITDA (x)and PE(x) valuation multiples as this excludes the one time listing expense, andtakes into account the additional revenue from new outlets for which leases weresecured in FY11. Furthermore, we can see that SSG offers a high dividend yieldand is expected to offer such yields given the management commitment to highdividend payout ratios and a business model based on high generation of cashflows.


ROE 2011E

Net Profit Margin % FY 2010

Asset Turnover ratio FY 2010

M Cap Div YieldName Country US$ bn 2011E 2012E 2011E 2012E 2011E (%)Beijing Jinkelong

China 0.3 14.5x 12.6x 6.1x 5.4x 3.90

Dairy farm HK 11.2 24.9x 22.2x 15.1x 13.3x 2.60Lawson Inc Japan 5.8 18.9x 13.4x 4.4x 4.2x 4.00Lianhua Super China 1.8 15.2x 13.2x 4.4x 3.9x 2.60SSG Singapore 0.5 21.8x 15.9x 11.8x 8.4x 4.14Sun Art retail China 10.4 41.1x 30.2x 14.9x 11.7x 1.00Wumart China 2.7 36.3x 29.7x 13.1x 11.0x 1.80

EV/EBITDAP/E

20 October 2011 11


Strengths Weaknesses

Strong focus on fresh food and dedicatedInfrastructure for it. Out of 540,000 sq.ft., 100,000 sq. ft area serves need offresh food at new Mandai Linkwarehouse

Experienced Management

Management of SSG still rests in thehands of the three founding Limbrothers. They have 73 years ofcombined experience in groceryretailing. With their in-depth knowledgeof the industry in Singapore, they havebeen able to drive SSG’s remarkablegrowth over the years.

Lacking focus on Sustainableoperations

SSG can add value by improvingemployee retention/motivation throughsustainability activities by raising pricesor achieving higher market share withnew or existing sustainable products.Whole Foods Market, for instance,raised its sales by 13 percent a year from2005 to 2009.

Susceptible to rent hikes/denials of leaserenewals: Closure of two stores (TenMile Junction in Nov 2010 and TanjongKatong in Sep 2011) significantlyaffected revenues of company.

Opportunities Threats

46% of residents across 18 locations inSingapore do not have an SSG outlet inthe vicinity. While some NTUC outletsare located in the central areas, this freesup the hinterlands for SSG to enter. ThusSSG has a lot of scope for its storenetwork, and we see no issue with itsupporting and managing up to 40 stores

Increased profit margins byincreasing number of house-brands

Increase fresh product market share: Interms of its revenue mix, fresh produceis a key revenue generator, contributingroughly 30% to its revenue.Furthermore, the segment is highlyprofitable with gross profit marginsranging between 21% to as high as 30%

Highly competitive operating environment

Although SSG has built up a strongfollowing over the years, its ability togenerate future revenue growth iscertain. Its existing stores may facecompetition from new competitoroutlets; it may lose customers toaggressive promotional marketing by itscompetitors.

External factors

Economic recessions/supply disruptions/labor costs etc.


SWOT Analysis

20 October 2011 12


.


Year ending 31 DecCY08AFY09A FY10A FY11E FY12F

Revenue 625.3 628.4 644.0 692.4 Cost of Goods Sold (497.0) (491.7) (503.1) (538.3) Gross Profit 128.4 136.8 140.9 154.0 Gross Profit Margin 20.5% 21.8% 21.9% 22.2%

Other Income 12.9 16.0 8.2 8.7 Distribution Expense (4.3) (4.4) (3.8) (7.6) Admin Expense (96.3) (98.3) (108.5) (105.8) Other Expenses (1.0) (1.3) (1.3) (1.4) Operating Income 39.9 49.0 35.4 47.9 Operating Margin 6.4% 7.8% 5.5% 6.9%

Interest Income 0.2 0.03 0.5 0.5 Listing Expenses - - (3.9) - Invitation Expenses - - - Financial Expenses (0.0) - (0.21) - Profit Before Tax 40.1 49.1 31.8 48.5 Sharing Scheme - - - (4.8)

Profit After Sharing Before Tax - - 31.8 43.6 Income Tax Expense (6.3) (6.1) (5.4) (7.4) Profit After Tax 33.9 43.0 26.4 36.2 Net Margin 5.4% 6.8% 4.1% 5.2%EPS (Cents) 2.45 3.11 1.91 2.62

All Figures in S$ Millions

Income Statement Year ending 31 Dec CY08AFY09A FY10A FY11E FY12F

PP&E 24.4 58.3 87.1 90.4 Investment Properties - - - - Non Current Assets 24.4 58.3 87.1 90.4

Inventories 24.9 26.4 23.4 25.1 Trade and other Receivables 42.5 4.7 5.3 5.7 Other Investments 72.5 - - - Cash and Cash Equivalents 39.1 85.9 105.9 103.5 Current Assets 179.0 117.0 134.6 134.3

Total Assets 203.3 175.3 221.7 224.7

Share Capital 16.0 30.0 36.4 36.4 Share Premium 73.8 73.8 Fair Value Reserve 13.4 - - - Retained Earnings 84.4 33.9 36.5 40.1 Shareholders Equity 113.9 63.9 146.7 150.3

Financial Liabilities - 19.1 - - Deferred Tax Liabilities 0.7 0.6 0.6 0.6 Non Current Liabilities 0.7 19.7 0.6 0.6

Trade and other Payables 80.5 81.5 68.9 66.4 Financial Liabilities - 3.2 - - Current Tax Payable 8.2 7.1 5.4 7.4 Current Liabilities 88.7 91.8 74.3 73.8

Total Equity and Liabialities 203.3 175.3 221.7 224.7

All Figures in S$ Millions

Balance Sheet

Key Assumptions FY11F FY12F FY13F FY14F FY15F

Company SpecificNumber of Outlets 25 28 32 33 35 Number of Vehicles 37 41 47 49 52 Revenue per Outlet 27.7 28.0 28.3 28.5 28.8 Average Store Size (Sq Ft) 14,000 14,000 14,000 14,000 14,000 Housebrands as % of Revenue 6.0% 7.0% 8.0% 9.0% 10.0%Normal Goods GP Margin 22.0% 23.0% 22.5% 22.2% 22.2%

Valuation SpecificRisk Free Rate (S$ 20 yr bond) 2.2%Market Risk (Rm) 8.5%Beta 0.80 Cost of Equity 7.2%

Y/E Dec 31 FY09A FY10A FY11E FY12F FY13FGross Margin 20.5% 21.8% 21.9% 22.2% 21.9%EBIT Margin 6.4% 7.8% 5.5% 6.9% 7.1%Net Margin 5.4% 6.8% 4.1% 5.2% 5.4%ROE 37.2% 48.0% 25.1% 24.4% 28.5%Inventory Days 18.29 19.60 17.00 17.00 17.00Receivable Days 24.78 2.74 3.0 3.0 3.0Payable Days 49.2 50.0 50.0 45.0 45.0Cash Conversion (days) (6.1) (27.7) (30.0) (25.0) (25.0)


APPENDIX

20 October 2011 13


.

The company operates in a stiffly competitive environment and hence, the success of the new stores that the company plans to operate in future cannot be guaranteed.

Mitigant: Experienced management team with proven ability in rolling out outlets all over Singapore.

The Company imports majority of its inventory from China, Malaysia, Indonesia,Thailand and Vietnam. Any political instability in these countries or changes inSingapore’s import policies may hinder the operations of the company to a greatextent.

Mitigant: Management could utilize its new warehousing facility to build up inventory in anticipation of any supply shock

Foreign currency exposure

The company has foreign exchange exposure on account of its high volume of imports. Currently, the company follows no foreign exchange hedging policy and hence any adverse fluctuations in the movements of these currencies could adversely affect its profitability.

Mitigant: The company largely holds its cash in USD and other currencies,therefore with expenses in S$, an appreciation of the USD would help to improvemargins.

Rising Costs

Labour costs and lease rentals are expected to rise and these constitute a material portion of the company’s operating costs. An increase in these would hence, lead to an increase in the overall operating costs and reduce profitability.

Mitigant: The company largely holds its cash in USD and other currencies,therefore with expenses in S$, an appreciation of the USD would help to improvemargins.

Risk factors

Failure to open stores

High Risk No Risk

Heavy dependence on imports


20 October 2011 14


:

-Threat of Substitutes

Fresh food is now core strength of SSG

SSG is able to provide food items atdiscounted prices because of increasing scaleof economies. SSG is able to create productdifferentiation, hence lowering the threat ofsubstitutes.

Threat of New Competitors

The threat of entry of new competitors into the retail industry is low.

Major brands have already captured the retailmarket in Singapore. Therefore, new entrantshave to produce something at an exceptionallylow price and/or high quality to establish theirmarket value.

Resources such as supplier base, warehouses &land are required to establish newsupermarkets and this is therefore aconsiderable barrier to new entrants.

Buyers bargaining Power

Bargaining power of buyers is fairly high in the Retail Industry.

Using Fresh food as its strength & increasingscale of economies, SSG is able to createproduct differentiation. This will not letcustomers switch easily, hence loweringbuyer’s power.

Sellers bargaining Power

The bargaining power of suppliers is fairly low in retail industry.

It should be noted that the single suppliercontribution is around 5-10% of total purchaseby Supermarkets. Hence, the position of theSupermarkets such as SSG is furtherstrengthened and negotiations are positive inorder to get the lowest possible price from thesuppliers.

Intensity of Competitive Rivalry

The intensity of competitive rivalryin the retail industry is extremelyhigh because of a lesser degree ofproduct differentiation, high exitbarriers, and high fixed costs. ButSSG is increasing its home-brandsand focusing on wet market thatwill provide significant productdifferentiation. This leads to stableoperations despite of highcompetitive rivalry. It should benoted that from 2005-10 marketshare of SSG increased from12.2% to 17%. Others’ shareremained unchanged, clearlyshowing the strength of SSG incompetitive environment.

Porter’s Five Forces Analysis

1 7.5% 8.0% 8.5% 9.0%

1.50 0.97 0.88 0.81 0.75

1.75 0.80 0.73 0.67 0.62

2.50 0.67 0.61 0.56 0.52

Market Risk

Sto

re C

ost

1 7.5% 8.0% 8.5% 9.0%

10% 0.84 0.77 0.71 0.65

15% 0.80 0.73 0.67 0.62

18% 0.77 0.70 0.64 0.59

Market Risk

Ren

tal I

ncre

ase

0.67 7.5% 8.0% 8.5% 9.0%

68% 0.82 0.75 0.68 0.63

69% 0.81 0.74 0.68 0.62

70% 0.80 0.73 0.67 0.62

74% 0.76 0.69 0.63 0.58

76% 0.74 0.67 0.61 0.57

78% 0.71 0.65 0.60 0.55

Market Risk

Hou

sebr

and

CO

GS

% o

f Se

lllin

g Pr

ice

Sensitivity Analysis


20 October 2011 15


Disclosures:

Ownership and material conflicts of interest:The author(s), or a member of their household, of this report [holds/does not hold] a financial interest in the securities of this company. The author(s), or a member of their household, of this report [knows/does not know] of the existence of any conflicts of interest that might bias the content or publication of this report. [Receipt of compensation:Compensation of the author(s) of this report is not based on investment banking revenue.Position as a officer or director:The author(s), or a member of their household, does [not] serves as an officer, director or advisory board member of the subject company.Market making:The author(s) does [not] act as a market maker in the subject company’s securities.

Ratings guide:Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater over the next twelve month period, and recommends that investors take a position above the security’s weight in the S&P 500, or any other relevant index. A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months.

Disclaimer:The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with [Society Name], CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.


cfa equity research challenge 2011_team 9

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