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Sheng Siong Stores Are Thriving In Q3 FY2025 · Investor Exchange

• 0:02
  Time for another Investor Exchange podcast. Here are your hosts, Matt and Sally.
• 0:07
  Welcome back to the Deep Dive. Okay, today we've got a stack of sources on Shengshan
• 0:13
  Group SSG, you know, the big Singapore supermarket chain.
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  We're diving straight into their 3Q and 9-month results for FY 2025.
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  That's right. And our mission today really is precision. We need to get behind
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  the numbers, figure out exactly what's driving SSG's performance,
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  not just what the results are, but why?
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  Especially when you think about the costs and, well, their big expansion plans.
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  Yeah. And the headlines, I mean, they really jump out. Q3 revenue up a huge 14.4% year on year.
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  That's $415.5 million.
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  And substantial growth. And net profits up to 12.0%, hitting S43.8 million dollars.
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  So on the surface, it looks like really strong operations, good strategy execution.
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  Right. But here's the thing we need to dig into.
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  Those are great growth figures, sure. But we know the retail sector is grappling
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  with some serious cost pressures.
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  So where's SSG actually getting the fuel for this top line success?
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  Well, if you zoom out to the nine-month picture, the story holds.
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  S1.2 billion dollars in total revenue. That's a 9.5 percent increase.
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  The sources actually break it down pretty clearly where that extra S100 million
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  dollars or so in revenue came from. Okay, let's get into that.
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  The engine of growth. It seems like, well, two main things happening,
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  but the bigger one was definitely just building more stores,
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  right? Physical expansion. Absolutely.
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  The sources show new stores and comparable new stores drove 10.1 percent of
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  the revenue growth just in the third quarter.
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  That's a lion's share. 10.1% just from new locations. That's pure market share
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  graph. It is, and it shows a real commitment to scale. You have to picture it.
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  They went from 79 stores to 90 stores in just one year. Wow.
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  Adding 11 physical supermarkets in 12 months in a market like Singapore,
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  that's an aggressive pace. Think about the investment needed.
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  Leases, staff, stock for all those places. Huge. So that's the main driver.
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  But what I found interesting, too, was the resilience of the existing stores.
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  Comparable same-store sales.
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  That tells you how the established shops are doing. Yeah, that's a key metric.
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  They still grew a pretty healthy 4.4% in Q3 and 1.5% over the nine months.
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  So it means the new stores are adding growth, but the older ones aren't really
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  suffering because of it. Right.
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  No cannibalization, it seems. And this is where you connect SSG's numbers to the broader economy.
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  That same store strength, it really speaks to this sort of pivot to value you're
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  seeing from consumers. The sources mention the Singapore Retail Sales Index
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  for supermarkets and hypermarkets was up 8.7% in August.
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  Now, why is that? People are being maybe a bit more cautious about spending
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  big elsewhere, eating out less, perhaps, even with government help. Exactly.
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  You see that boost partly supported by things like the CDC vouchers, the SG60 vouchers.
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  That's cash going into people's pockets, often aimed at daily needs.
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  Right. And when consumers get those kinds of vouchers, where do they often spend them?
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  Groceries necessities maybe less on higher margin stuff like dining out and
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  ssg being a strong value player is just perfectly placed to capture that spend
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  that makes a lot of sense so strategy wise.
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  Grow the total pie through expansion, and also grab a bigger slice of that cautious
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  consumer spending with their existing stores.
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  That seems to be the picture. But success usually comes with costs.
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  And this is where we need to look at the profitability side.
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  Because all that revenue growth didn't exactly translate one-for-one to the bottom line, did it?
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  No, and this is, you know, the central tension in these results.
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  What's really interesting, though, is their gross profit margin,
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  what's left after the cost of goods sold, that actually improved a bit.
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  Hit 31.5% in Q3, up 0.2 percentage points.
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  Okay, that's definitely a win operationally. How'd they manage that with all
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  the talk about supply chain costs?
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  The sources point to ongoing improvements in their sales mix.
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  So basically getting smarter about what they stock and sell,
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  maybe pushing higher margin items, maybe those house brands you mentioned.
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  Right, house brands usually have better margins. Exactly, they often do.
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  So focusing on those, being efficient in procurement, it helps them fight off
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  some of those rising costs before they even hit the main expense lines.
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  It shows good operational discipline. Okay, good management there.
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  But then we look further down the income statement, and the net profit margin
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  actually dipped slightly down 0.3 percentage points in Q3 to 10.5%. Correct.
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  So if they did well on gross margin, where did the money go?
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  What ate into the net profit?
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  It's almost entirely down to operating expenses, selling and distribution costs
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  specifically. They saw a pretty big jump there, up 17.3% in Q3 and 15.1% across the nine months.
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  That increase is basically the financial reflection of their growth in scale.
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  Okay, let's unpack those rising expenses. What's under the hood?
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  Well, first off, staff costs, it's kind of a double whammy. One,
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  they obviously had to hire more people for those 11 new stores.
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  That pushes the payroll up naturally.
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  But two, because the company actually did well financially, they paid out higher
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  variable bonuses. So they're paying for success, literally. necessarily.
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  Add to that the ongoing tight labor market in Singapore and the progressive
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  wage model, the PWM, phasing in for retail.
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  Yeah, that PWM is putting upward pressure on wages across the sector. It is.
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  So manpower costs are just structurally higher right now.
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  It really sounds like they're making a strategic tradeoff here,
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  sacrificing a bit of margin now for faster market share growth,
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  betting that the long-term scale will pay off despite these higher labor costs.
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  I think that's a fair assessment.
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  And the second big cost driver is, a bit more technical but really important, depreciation.
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  Specifically, higher depreciation of right-of-use assets.
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  Ah, the leases for the new stores. Exactly. That hit $33.2 million over the nine months.
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  Now, this isn't cash walking out the door today, but it's the accounting recognition
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  of the cost of those long-term leases they sign for all the new locations.
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  It's like prepaying for future growth on the balance sheet. That really highlights
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  the cost of extension, doesn't it?
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  Every new store boosts revenue immediately, but it also locks in these long-term
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  operational costs and depreciation charges that squeeze the net margin right away. Precisely.
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  And just quickly, two other non-operational items affected the bottom line.
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  Negatively, other income was down because they got less in government grants,
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  specifically the Progressive Wage Credit Scheme, PWCS.
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  So less government support flowing through means they need to rely more on their
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  own efficiency. Correct.
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  But on the plus side, they did get a one-off boost, a S2.2 million dollar gain on lease modification.
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  This was tied to shortening the lease on their Mandai Link property. Okay.
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  Which is necessary because they're planning that big move to the new Sungai
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  Kadoot facility eventually.
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  Ah, the Sungai Kadoot plan. We'll definitely come back to that.
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  So that S2.2 million dollar gain is kind of a neat link to their future strategy.
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  Okay, let's pivot to the balance sheet. Because despite these cost pressures,
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  the sources make it clear SSG is financially, well, pretty solid.
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  Very solid. They're liquid, stable, and importantly, operating debt-free.
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  They ended Q3 FY 2025 with $393.7 million in cash and cash equivalents.
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  In an environment where interest rates have been rising, having zero borrowings
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  is a huge advantage, gives them a lot of flexibility. And the cash generation
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  itself was, well, quite dramatic in Q3.
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  Cash from operating activities jumped 50.6% to $889.0 million. That's a big leap.
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  The sources say it's mostly due to working capital changes. What does that mean in practical terms?
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  Yeah, it's mainly about timing, especially around inventory.
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  It's actually quite important for you to understand this cycle.
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  SSG typically builds up a lot of inventory, a lot of stock, in December ahead
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  of the lunar new year rush. Right, stocking up for the festive season. Exactly.
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  Then in the following quarters, like Q1 and Q2, they sell down that stock.
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  When they sell it, that inventory turns back into cash. So you often see a big
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  surge of cash inflow from operations after that peak buying period.
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  So that Q3 jump wasn't necessarily just from stronger sales in Q3,
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  but more from effectively selling off the stock they'd bought earlier.
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  Good inventory management. That's a big part of it. We also saw a rise in their
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  payables, money they owe suppliers.
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  That makes sense, too, because they had to buy more goods to stock those 11 new supermarkets.
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  So basically, they managed their buying and selling cycle well,
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  turning stock into cash efficiently.
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  Got it. And one final metric showing their financial health.
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  Net asset value per share went up nicely too, from about $0.356 at the end of
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  last year to nearly $0.369 by September 2025.
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  Okay, so financially sound, but facing these operational cost challenges.
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  Which leads us neatly into the outlook, the looking forward section.
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  It seems like a real mix of, well, opportunities and risks.
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  It is. On the plus side, the macro environment seems to be easing a little.
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  Core inflation was down in August.
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  Local interest rates are maybe starting to decline. Both those things should,
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  in theory, help household cash flow.
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  Which could reinforce that consumer trend towards retail spending that SSG is
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  already benefiting from. Potentially, yes.
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  But those challenges, squeezing the net margin, they aren't disappearing.
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  Competition is still fierce.
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  Supermarkets, heartland shops, everyone's fighting for the same customer dollar,
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  which puts pressure on prices.
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  And the labor market. Still tight. And the PWM, the progressive wage model,
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  that's continuing to phase in, keeping those manpower costs elevated not just
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  for SSG, but for the whole retail sector. Right.
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  Structural cost pressure. And then you have the external risks,
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  geopolitical stuff, U.S.-China tensions, potential supply chain hiccups,
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  extreme weather, Singapore imports so much.
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  Any of that can cause price volatility for the goods SSG sales.
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  So their strategy has to be fighting these pressures on two fronts, value and efficiency.
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  Promoting house brands helps attract value conscious shoppers and maybe protects gross margins a bit.
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  That's the value play. But the real long game has to be efficiency, right?
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  Automation, technology. That seems
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  to be their main shield against those permanent labor cost increases.
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  And it all ties back to their commitment to scale.
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  We saw they opened nine new stores in nine months. Another one opened in October
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  and one more planned for Q4 at Leisure Park, Kalang. That pace.
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  It needs serious back-end support, which brings us back to, well,
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  the elephant in the room.
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  Yeah. That huge investment figure. Well, that's a $520 million figure.
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  Yeah, that's $520 million. That's a massive, almost generational bet for the company.
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  It really is. They're building a completely new warehouse, distribution center,
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  and headquarters out at Soongai Kadut.
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  And this isn't just replacing the old Mandai facility. The key thing is,
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  it's being designed explicitly to support at least 120 supermarkets.
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  120 stores. Wow.
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  That lines up with their long-term goal, doesn't it? Adding about three stores
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  a year for the next decade or more. Exactly.
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  They're building the infrastructure now for a company that could be almost 50%
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  larger than they are today. It's a huge forward-looking investment.
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  Okay, before we wrap up, we've talked almost entirely Singapore.
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  But the sources do mention China briefly. It's a small part of the business.
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  But how's it doing? Is it a drag?
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  It is a small part, yeah. Only about 2.5% of total revenue in the nine months.
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  And importantly, China actually recorded a net deficit in this period.
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  So losing money there currently.
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  Yes. The sources say that's mainly due to the higher operating costs of their
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  sixth store, which only opened in Q2 last year.
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  New stores often run at a loss initially while they ramp up.
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  Makes sense. So their strategy in China seems pretty cautious right now.
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  Focus on getting the existing stores running well, reaching profitability,
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  rather than chasing aggressive expansion like they are in Singapore.
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  OK, so let's try and synthesize this for you, the listener. What are the key takeaways?
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  We've got strong revenue growth, no doubt, driven by that aggressive store expansion,
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  which successfully tapped into consumer spending patterns, partly helped by macro factors. Right.
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  And they manage gross margins well, improving them slightly through smart sales mix management.
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  But the big but is the rising operational costs.
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  Labor, driven up by PWM and expansion, and depreciation from all those new store
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  leases. These are squeezing the net profit margin.
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  And it looks like SSG is consciously accepting this margin pressure for now.
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  They're playing the long game, betting that future efficiency gains,
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  especially from that massive S520 million dollar Syngat Kadoot facility,
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  will eventually counteract these rising costs as they reach a much larger scale.
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  And that leads us straight to our final thought, something for you to chew on.
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  That huge Syngat Kadoot investment.
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  It signals a commitment to potentially supporting over 120 stores.
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  But given how tight the labor market is and these rising PWM compliance costs.
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  How much can automation and efficiency from that new center really offset the
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  margin pressure as they keep growing?
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  Can technology truly win against persistent labor cost inflation at that scale?
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  That's the multi-million dollar question, isn't it? How effective will that
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  automation be in practice?
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  That balance point is really the key to SSG's long-term profitability story.
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  That's what you'll need to watch in the coming years. A great question to consider.
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  Thanks for diving in with us today. We'll catch you on the next deep dive.