Sheng Siong Group - Record-high gross margins

Sales growth mostly driven by new stores 
2Q16 sales (+5.5% yoy) reflect 1) growth from new stores (+6.0%), 2) SSSG (+2.2%), but 3) mitigated by the temporary closure of Loyang (-2.7%). New store sales growth was driven mostly by the continued gestation of five stores opened in FY15, with some contribution from three new stores opened in 2Q16. We think new stores will continue to propel overall topline growth. New stores now make up c.20% of the group’s total store count, or c.8% of total GFA. 
 
SSSG (+2.2% yoy) surprised positively 
We had expected SSSG to turn around, but not by this magnitude, especially after two consecutive quarters of declines. We note that this included the McNair store which was closed for a month in 2Q15 for refurbishment, but SSSG would still have been an impressive +1.3% nonetheless. Key reasons for the turnaround include: 1) subdued ringgit impact at the Woodlands store, 2) the no-longer-relevant alcohol ban that took effect in Apr 15, and 3) completion of renovation works at some of the stores. 
 
Record-high gross margin (26.1%) 
In addition to SSSG, the other standout in this set of results was the vast improvement in 2Q16’s GPM to 26.1% (1Q16: 24.5%, 2Q15: 25.2%), driven by suppliers’ rebates, bulk handling and continued efficiency gains from its central distribution centre. Opex remained stable, as expected (2Q’s opex as a % of sales was 17.7%, similar to the 17.1% average over the past 3 years). We lift our FY17-18F EPS on higher GPM assumptions. 
 
Updates on new stores, Tampines and a new warehouse 
1) Yishun J9 (18.9k sf) will be the group’s fourth new store this year and is due to open in Aug 16. 15.5k sf of the total space will be for the group’s own supermarket use while the remaining 3.4k sf will be leased to a food court operator. 2) Alteration works at Tampines (10k sf) is now postponed to commence in Mar 17 instead of Oct 16. It will open with a bigger store area (25k sf) in May 17. 3) The group entered into a long-term lease for a land adjacent to its central warehouse. Total construction cost is c.S$20m. 
 
Interim dividend of 1.90 Scts declared (90% payout) 
We continue to like the stock’s highly cash generative business and high dividend yield (c.4%). We maintain our Add call and our target price rises to S$1.04 (still based on 22x CY17 P/E, historical mean) on higher EPS estimates. Catalysts could come from China, where renovation works are currently underway and operations are likely to commence in 4Q16. Risks include a drop in margins.