Sheng Siong Group - Wage credits were the icing on the cake

Growth primarily driven by maturing of new stores 
1Q16 revenue (+5.1% yoy) reflected the gradual gestation of new stores opened in 2015 (+5.6%), offset by a 0.5% contraction in SSSG. Over 2015, Sheng Siong added five stores (Punggol, Tampines, Dawson, Bukit Panjang, Pasir Ris) of which among the five, Dawson and Pasir Ris still have some distance to reach optimum sales level. Guidance of 5-6% sales growth in 2016, propelled by new stores, remained unchanged.     

Weak environment shows up in flat same-store-sales growth… 
1Q and 3Q are traditional festive periods that have an element of discretionary spending. Weak SSSG was reflective of a pullback in discretionary consumption trends during Chinese New Year. The effects of a weak economy first showed up in 3Q15. Other store-specific factors were: Loyang (ongoing renovation), Woodlands (weak RM) and Geylang (lower liquor sales), but the weak economy seems to be the main factor. 

… but also in muted bidding for new stores by competitors 
On the bright side, weak retail spending and labour cost pressures helped Sheng Siong sustain its recent trailblazing pace of store growth. Four more stores (Junction 9, Circuit Road, Upper Boon Keng, Fernvale) have been added YTD. This adds ~25k sq ft of retail space. The ability to get stores is due to the subdued presence of NTUC and Giant in bids. Our assumptions (~32-34k sq ft new GFA/year) are now 74% achieved for FY16.   

Margins were broadly maintained, down qoq on sales mix 
1Q gross margins were 24.5%, up 0.1% pt yoy and down 0.5% pt qoq. Gross margins were lower qoq because CNY festivities usually bring about a higher mix of grocery sales; these have lower margins vs. fresh food. With productivity initiatives still in the works, margins are expected to be maintained at 25%, and gradually peak at 26%.   

Results beat primarily from government grants 
1Q16 beat expectations primarily due to other income (S$3.8m vs. our expectations of S$2.2m). Sheng Siong does provide for government productivity incentives but realised it underprovided S$1m for 2015 when actual wage credits came in. Management raised guidance for productivity incentive contributions, as gradual expiry of wage credits will be replaced by productivity and innovation credits. Our EPS is raised 2-4% on this.     

Maintain Add, starting China in a cautious manner 
Our higher estimates spur our target price slightly higher. In our opinion, its premium valuations reflect stable earnings in tough times. Sheng Siong has started a store in Kunming, but this is not expected to exert meaningful contributions in FY16-17.