Amazon Prime in Singapore: A Game Changer?

This column is written by @j_chou from InvestingNote.com.

@J_chou has an interest in global macro trends, financial markets and equity research and enjoys applying a combination of the three in his investments. His eventual investing goal is to manage a risk parity portfolio and achieve true financial freedom.

-@J_Chou is vested in $BABA

Singapore and Southeast Asia’s growing E-commerce industry

According to a 2015 report done by Google and Temasek Holdings South-east Asia’s Internet economy is expected to surge to US$200 billion by 2025, driven by a growing middle class and greater accessibility to the Internet. For Singapore, the e-commerce market is projected to grow at 32% CAGR to be worth US$5.4billion in 2025. The Prime Now launch reaffirmed the importance of South-east Asia for digital commerce, with Singapore chosen as a testbed likely due to its tech-savvy, affluent citizens and accessibility to the rest of the region.

Amazon Prime

The launch of Prime in Singapore, Amazon’s express delivery services, signals Amazon’s entry into the Southeast Asian market. Prime will allow Singaporeans to place orders on groceries and retail items and have them delivered as fast as within 2 hours of confirming an order.

There are several delivery options given: For orders below 40 dollars, users pay a S$5.99 delivery fee; orders above S$40 are delivered free in a two-hour delivery window. For those wanting to get their goods within an hour, they pay up to S$9.99 per order.

The reason why Amazon is able to deliver so quickly is due to their superior automation and supply chain management. Using a series of complex algorithms and data the company is able to enhance productivity in middle and last mile logistics. The level of automation that is employed by Amazon is simply impressive: https://www.youtube.com/watch?v=UtBa9yVZBJM.

Unfortunately, as the Singapore market is still in its infancy the warehouse at Jurong East are mostly dependent on humans. Nevertheless, there are still some form of technologies used by the Singapore facility such as artificial intelligence and concepts such as random stow systems. This involves using spatial design and algorithms to locate items across the warehouse based on order frequency. More details of the Singapore warehouse operations could be found at http://www.channelnewsasia.com/news/singap....



Amazon is also employing third-party logistic providers such as Ninja Van to provide last mile delivery instead of utilizing its own as it seeks to establish market presence first before importing its extensive network of logistic services.

Besides their advantage in technology, being the largest online retailer in the world gives Amazon the ability and the economies of scale to offer premium brands at a discount that local retailers are unable to compete with.

Amazon’s impact on SGX stocks

There is a good reason why many herald Amazon as “the most disruptive force in retail and technology”, and its ability to force retail titans such as Walmart and Best Buy to adapt is a stark reminder of its influence. Many are also predicting the death of retail in the US: Bank of America Merrill Lynch estimates that US retail floorspace is down 10 per cent since 2010, while department store sales are down 18 per cent. In 2017, the retail industry has lost an average of 9,000 jobs per month, despite the US labour market reporting positive growth.



US Retail Statistics: Online Retail vs. Department Stores

It is indeed hard to imagine a world where traditional retail will be able to compete with the low cost and convenience provided by online retail in the future, assuming that proper infrastructure is in place. Hence, it is my view that Amazon’s entry heralds the decline for traditional retail stocks, such as $DairyFarm USD(D01.SI), $Sheng Siong(OV8.SI). So any optimistic outlook of future growth for retail stocks should be treated with caution, especially if the company has not given any signals that they are looking to adapt to the online platform.

Retail REITs such as $BHG Retail Reit(BMGU.SI), $CapitaMall Trust(C38U.SI), $Frasers Cpt Tr(J69U.SI) , $Mapletree Com Tr(N2IU.SI) and $Suntec Reit(T82U.SI) may also be hit. URA figures show that the retail vacancy was at a relatively high 7.7 per cent at the end of the first quarter of 2017, despite softening rentals. As in the case in other mature economies such as the US, several high-profile brick-and-mortar players have closed shop in recent years, including department stores John Little and Marks & Spencer, lifestyle and furnishing stores IWannagohome and FrancFranc as well as fashion outlets Parco and Raoul. As e-commerce increases its market share, retail vacancies could climb even as rentals continue falling.

I have noticed that some IN members are doubtful of the impact that Amazon will have on the local retail scene, with a handful already expecting Amazon to fail to consistently deliver on its promise of 2-hour deliveries. Some also opined that online shopping cannot deliver the same kind of quality assurance as offline shopping.

I would thus like to share my personal experience: I was also quite averse to online shopping and have never done so before I went to study abroad in the UK this year. In the UK where shopping online is quite prevalent, I was encouraged by my British friends, who mostly use online delivery to shop, to make use of the service for my grocery shopping. This was despite the fact that there were supermarkets within walking distance from our campus. I was decidedly blown away by how cheap and fast the service was. The delivery fee came to only 2 pounds (which was cheaper than travelling by bus to the supermarket) and I never had any issues with food quality. I never did my grocery shopping in supermarkets since, only visiting for the occasional one-off perishable goods. I have also used Amazon Prime for online shopping. If you purchase an item stocked in the local warehouse the order can be processed really quickly. Another example of how insanely efficient Prime service is, was when I ordered a cake from a bakery located in London and it was able to deliver it to me 10 hours later at a location that was 2.5 hours away by train! I have no doubt that once Amazon has adapted to the local market it will be able to consistently deliver on its 2-hour delivery promise.

Hence, my contention is that due to the poor logistics infrastructure here, Singaporeans have not had the comprehensive experience of shopping online as compared to our overseas counterparts from USA and China as of yet. But once the likes of Amazon and Lazada have fully integrated into the Singapore markets the negative impact of its technology prowess on traditional retail will be swift.

The Singapore logistics industry will also likely be affected if Amazon was to build a strong customer base in Southeast Asia. Notably $SingPost(S08.SI) who is working closely with Alibaba. Amazon has a “unhealthy” habit of eventually internalizing all phases of its supply chain management, with rumours that the company is aiming to replace the likes of DHL, UPS or FedEx to create a global supply chain. Hence current third-party logistic providers such as Ninja Van may find themselves becoming obsolete in the long run. Leveraging logistic technology has always been Amazon’s expertise, thus unless the logistics companies can keep pace with the technological innovation that Amazon is likely to deploy, Amazon may unseat existing freight services within the next decade.

Amazon vs. Alibaba

I thought it will be interesting to do a comparison of the two biggest e-commerce giants given that the competitive dynamics between the two will have a material impact on the direction of Southeast Asia’s e-commerce market and its economy.

Though the two companies are often seen as comparable, they operate on very different business models.

Alibaba's core business model is more B2B and resembles that of eBay. Alibaba acts as a middleman and facilitates the sale of goods between the two parties through its extensive network of websites. The largest site, Taobao, operates as a fee-free C2C marketplace where neither sellers nor buyers are assessed a fee for completing transactions. Hence, Alibaba simply facilitates trade and does not interfere in any part of the transaction. Alibaba’s services are thus popular for small to medium businesses as it gives them the ability to sell their goods to anyone on the globe for a very low cost.

Amazon are more customer-centric and place more focus on a B2C model, selling goods directly to consumers. Amazon purchase the goods directly from producers and sells them on their platform with the inventory being kept in the company's large network of warehouses. This allows Amazon to compress cost and their turnover high. In addition to direct sales, Amazon also provides a platform for other retailers to sell products to buyers. Products sold through Amazon's partner retailers are often less common items or those with a higher purchase price, allowing Amazon to avoid holding slow-moving inventory that could dilute profit. But, as recent acquisitions such as the purchase of Whole Foods has shown Amazon’s eventual aim is to internalize all services to maximize efficiency of its supply chain management. Currently, to secure market dominance Amazon’s is aggressively pushing for top-line growth with an apparent disregard for their bottom-line.

At first glance, you can see that Alibaba’s model is more favorable for businesses but Amazon’s model is more favorable for consumers. I personally prefer Alibaba’s model as I believe that small and medium enterprises are the backbone of any economy, and a model that is favorable for businesses will be beneficial for both producers and consumers in the long run. Small retailers simply cannot compete with Amazon given the growing dependency on online retail and the fact that Amazon can always sell at a lower price given its economies of scale.
Their approach to establishing presence in Southeast Asia is also different. The regional market is very fragmented, but with Amazon’s entry consolidation is expected to come soon.

Alibaba has already enjoyed the first mover advantage by focusing on inorganic acquisitions: investing an 83% stake in Lazada (who also owns RedMart), Southeast Asia’s largest ecommerce platform and a majority shareholding in Singpost, Singapore’s premier logistics provider. The fact that both Lazada and Singpost are based here has already given Alibaba presence in the region, which Amazon may find hard to overcome. However, when it comes to consumer trust I may be underestimating the effect of Amazon’s branding, given Singapore consumers preference for US companies over their Chinese counterparts and its existing base of loyal customers. But given that both companies have already established a certain level of consumer trust, in my opinion the advantage will eventually come down to cost. The company that is able to present itself as the cheaper option for consumers will establish market dominance. This will be determined by how quickly both companies will be able to develop new disruptive technology, such as in the field of artificial intelligence and drone delivery, which could significantly reduce cost and improve delivery time. Ultimately consumers will stand to benefit the most from the price reductions as both companies seek to prioritise growth over profits, and I can foresee this scenario being played out for the next few years.

Uber vs. Grab vs. Taxis

The battle amongst Uber, Grab and taxis shows how disruptive technology can be. Initially many found the idea of ride sharing unfathomable, but within 2 years of its introduction Uber and Grab has already crippled the taxi industry. Uber and Grab are able to keep pricing competitive due to its geolocation and data technology, which the traditional taxi industry are unable to compete with. Hence, the taxi industry is forced to adapt and innovate or risk being forgotten. Though some may view the artificial pricing as temporary, it must be noted that these companies are still constantly innovating in the meantime to drive down cost and improve margins. For Uber and Grab, the race is on to see which company is able to develop a system of self-driving cars first, as this will eliminate their biggest expense (the drivers) and hence enjoy dominance in pricing.

I see many parallels in the online vs traditional retail battle. There may be resistance initially, but once the convenience of online shopping catches on, especially in Singapore where technology adoption rate is high, the effect will be felt quickly. Amazon and Alibaba will compete to have more promotions and artificially drive down pricing to make online delivery attractive. The sheer size of the companies will allow them to do so for many years. Once market share has been established, the advancement in technology by then will allow prices to remain equally low as operational efficiency and margin improves. Hence, as seen in the case of Walmart in the US, traditional retail will be forced to move to the online platform or risk losing its customer base to existent online counterparts.

Conclusion

It will be folly to underestimate the impact of ecommerce on traditional retail. The online experience is vastly superior to traditional shopping and the growing dominance of online retail over brick and mortar in countries with established ecommerce presence is proof of that. At the end of the day, online retail will always be the better alternative: providing the same quality of goods at a lower cost and greater convenience than traditional retail could never achieve. Even if one may argue that online shopping will never replace the tangible experience of going to a physical shop and inspecting the goods, what is stopping consumers from simply visiting and then making their purchase online if it is cheaper? Hence, anyone who views traditional retail companies as stable and resilient based on the past should look to the taxi industry as a prime example of why nostalgia and tradition simply will not last. In the age of technology, companies must innovate or die.

Disclaimer:
All research reports are of the analysts’ personal opinions and do not in any way reflect InvestingNote’s official opinion. InvestingNote does not issue a buy or sell recommendation on any security, and any research paper published by The Signal Blog is purely for informative purposes. This research is based on current public information, but we do not represent it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual InvestingNote users. InvestingNote users should consider whether the information in this research is reliable, and suitable for their particular circumstances and, if appropriate, seek professional advice. The price and value of investments referred to in this research and the investment income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.

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JOCELYN87

thanks for sharing .

evelow

thanks for sharing your insight. i have no questions. 1) when you went to the UK mart, did you observe the customers' profiles? If so, can share?

2) You went once for perishable food. Is this for self-cooking? Do students there cook often?

hk1super

Reply to @J_Chou : in some areas Tesco closes at 4pm and only at 7pm on crtain weekdays

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J_Chou

Hi @soonhongtan, thanks for your insight! Very educational for me from the data collection POV. I totally agree with your points and I don't think it contradicts with mine. Indeed I understand the difference situations between Singapore and the likes of US and China, but as in per my own experience in the UK even cities like London where every type of brick and mortar is a stone's throw away delivery is still very popular. I would hazard a guess that it is due to the increasingly fast paced lifestyle in the cities that ppl only have time on their mobiles to purchase. In fact statistics have shown shopping from mobile has outpaced desktop spending. I agree with the current issues Amazon and the others are facing, as I noted the poor logistics infrastructure here in Singapore makes it difficult but as you have mentioned it will only get better with time. If you have noticed competitors like RedMart and HonestBee have gradually been decreasing their delivery cost since their inception. Regardless as you have also noted it is all about market dominance now so loss-making is not an issue for Amazon and BABA, especially since the Singapore market is so small. Despite Amazon's market cap they are still in a high growth transitional period. Hence, just like Uber's model they can simply afford to be profitable in the US to compensate for their aggressive growth strategy in SEA. And their size means that they can do so for a very long time. Also the beautiful thing about online spending is that as it gets more popular it will only get cheaper and faster. A single delivery trip will be able to fulfill multiple orders. For instance, in my university majority of students order groceries online. So Tesco always makes just one trip down to my university to deliver to 10 different households, this spreads the delivery cost amongst ten orders and the reason why my delivery only costs 2 pounds. I can foresee the same happening in Singapore in the future, as demand becomes more predictable. Also, looking at the taxi industry (I rmbr thinking to myself when I first heard of Uber I thought it was never going to work in the mainstream) I have learnt not to underestimate the power and speed of technological prowess of such companies. We might see novel concepts like drone delivery coming to fruition within the next 2-3 years and then all concerns with traditional last mile delivery will be forgotten.

jeremyowtaip

Reply to @J_Chou : Technological advancements do offer high potential for better speed, productivity and convenience with lower cost. We are reminded of many old technologies that got replaced by newer ones.

Camera films are mostly replaced by digital photography. The internet has replaced older methods of gathering and spreading information through printed forms. Mobile phones have replaced pagers and coin operated telephones as the mode of communication. Then comes internet messaging, internet voice call and video call apps which have revolutionised the way people communicate as it is cheaper, easier and better to communicate in such newer methods than making long distance overseas calls traditionally through phones. Online ecommerce and online shopping have also affected businesses of distributors and retailers to a certain extent as consumers can buy direct from some manufacturers and producers through internet shopping and have the goods delivered to their doorstep which may even be cheaper than buying from distributors and retailers which may mark up selling prices. And now, the new wave of digital currencies is happening in the US. Will this new method of using digital currency catch on worldwide to reach a very large scale eventually and if it should, how will this new method of making payment through digital currencies impact the various existing stakeholders in the way they adapt?

I agree with Soonhongtan that it will not be an easy task for Amazon if their aim is to disrupt the local retailers here including the supermarkets and change lifestyle shopping habits. It may incur them huge costs for a long run before they see any results (assuming if they can do it successfully in the end). The local supermarkets will not sit by and do nothing if they notice their businesses affected by such disruptive forces.

However, I also agree with J_Chou that it depends on Amazon's adaptation and execution strength whether they are able to cause such disruptions. The technology platform of ecommerce and online shopping have already been accepted and used currently. As mentioned by Soonhongtan and J_Chou, Amazon would need to adapt to our transport system in Singapore and reduce the cost of transport and deliveries while ensuring the items can arrive at the customer's destination within 2 hours cheaply and all items fresh upon arrival. How they can do so on a sustainable basis will be their challenge and for them to think hard and work hard at it?

But, my thinking is that if Amazon can really do it consistently cheaper, more convenient, simple enough to input orders and make payments online, and fast enough (within 2 hours delivery time) while ensuring the items reach their consumers fresh and good, it will be a matter of time that more and more people will be drawn to using their services which include grocery shopping as well.

To what extent Amazon will be able to disrupt the other retailers, we shall see. One thing I know is that Amazon is a much larger business than any of our local supermarkets and has deep pockets to keep trying even if they made any mistakes along the way.

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soonhongtan

First of all, I agree with most of the findings but selling groceries is different from selling standard things like books and boardgames among others. It is hard to compare Sg to places like China or USA which is huge. Because of malls and convenient stores are not found near to residential areas for USA and potential China, such shopping habits can be understandable. I remembered studying in US for a period and staying at the suburbs, buying anything (including food) means the need to travel 6 to 8 miles just to have a meal. As such, we often resort to order food (not online, but through the phone) and the delivery will be within an hour (reasonably nearby places to the restaurant only).
So in order for Amazon to compete. the logistic part has to be optimised. First, in order to sell so many things and deliver them to the people, automation is going to be required. If anyone going to order small amount ($20 or less), the hustle of finding the items quickly and sorted out into a package and to find a driver and to have it delivered on time (within an hour or two hours) while selling them at cut throat price (plus giving temporary discount to disrupt retails). Do not forget that SG has ERP, so if you stay in the town area, how many ERP gantries are you going to pass (delivery will not be $2 or 2 pounds if you will). I remembered a friend a florist and delivery charges for her goods used to be $10 per trip regardless, until ERP is introduced - $15/trip is the end result. Vehicles are expensive, ERPs, high petrol costs...etc. Even if a grab cab trip costs you only $6 for a short journey, ERP is excluded.
So unless I can see more than 5 distribution centres in sg (which will eventually be the case for Amazon), and more AUTOMATED (similar to those automated medicine dispenser you see in some medical centres or hospital - yes, you entered what you need in the computer (done by the user by the way) and everything is going to be packed nicely in a bag for pickup (what about eggs and fish which needs a freezer??).
Then again, even with a reduction of downtime, there is still the transport issue to tackle (though improved by number of distribution centres (eventually)).
As I see it, Amazon wants to beat Alibaba in this e-commerce business and hence, quickly established a foothold here. Phase I will be focussing on marketing and life-style changing...so temporary you are not going to see sudden increase of centres everywhere. Amazon is still learning to cope...need data to analyse (experts). So data collection needs at least 2 to 3 months (raw data - collected over time), and then you have the experts to analyse and provide suggestions and insights based on number crunching. Clearly feasibility studies have not been carried out as you can see the number of cropped up Amazon is facing. However, Amazon expected that and Phase I is not about excellent service...it is about disruption to retails, changing people lifestyle and get a presence quickly.
Phase 2? Expansion. More distribution centres and streamlined operations, while keeping costs low.
Phase 3? Automation. Automation can be achieved only if operations are already predictable (data, data and more data) and an equilibrium has been achieved.
So all these will not be cheap and it will be very safe to assume this period, all the way to phase 3 (if phase 3 really possible LOL) will be bleeding from phase to phase. Yes retails will be disrupted but my guess is "free delivery in 2h" may have to go eventually - more like a fixed charges of couple of dollars to cut costs for Amazon.
Lastly, not to contradict what was already mentioned on top or to discredit what the author had mentioned, i merely wanted to provide an alternate view to the situation and for all you know, I may be wrong. Cheers, guys !

sUp3rb0s

Reply to @soonhongtan : I think people tend to overestimate the effects in the short term, and underestimate in the long term haha.

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cy888

Good analysis. However, given the high COE, fuel and labor costs in Singapore, I am wondering how Amazon Go can commit 2-hour delivery at profit? They must have done their P&L analysis.... I guess their initiative is purely for market share purpose....

J_Chou

Reply to @cy888 : Yes given how small the Singapore market is relative to Amazon's overall sales I think generating profit here is not much of a concern. Aggressive growth at all cost should be their focus for the next few years. Forgot to mention in the article but Amazon's entry into India is a good case study of their business strategy in new markets!

richardlokevo

Amazing sharing, worth reading

mj0101

Nice one - thanks!

wellhandy

Good one Jay chou.

As early as 2011, I noticed many of the more 'suburban' malls in capital cities in the states are empty as can be.


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$SingPost(S08.SI) : From snail mail to eCommerce.

This column is written by @j_chou.
Jay has an interest in global macro trends, financial markets and equity research and enjoys applying a combination of the three in his investments. His eventual investing goal is to manage a risk parity portfolio and achieve true financial freedom.

Company Overview

Singapore Post Limited is the national postal service provider in Singapore. Besides providing domestic and international postal and courier services, the company also offers end-to-end e-commerce logistics solutions.

Key Highlights

-Decline in 4Q17 logistics revenue

Logistics revenue of S$154.7m in 4Q17 was down 7% quarter to quarter after enjoying continued growth seen in previous quarters. Operating margin in the logistics segment decreased from 6.2% in FY16 to 3.7% in FY17. This could be likely due to Quantium Holdings and Famous Holdings being affected by depressed freight rates and volumes across the freight forwarding industry.

-Strong topline growth in ecommerce segment at the expense of operating losses

SP eCommerce experienced positive revenue growth across segments, especially in the eCommerce segment where it experienced 171% increase year on year. The growth could be attributed to opening of ecommerce logistics hub with clients such as Adidas and Zalora and acquisition of US subsidiary Jagged Peak and TradeGlobal. Jagged Peak saw good growth in revenue and operating profit, exceeding targets for the year and winning several new major customers. However, whilst Jagged Peak and SP eCommerce performed well, TradeGlobal’s underperformance led the eCommerce division into a net operating loss of S$33.8 million.

-Impairment of TradeGlobal

The principal issue is that TradeGlobal has significantly underperformed the business case which supported the investment. Instead of a projected profit of S$9.4 million for FY17, TradeGlobal incurred a significant loss of S$25.8 million.

Management has reported that it was due to a labour shortage in Cincinnati increased operating costs, which were impacted as well by delays in warehouse automation that were meant to improve productivity. The operational challenges also saw delays in the rollout of services for new customers. Management foresee continuing period of difficulty for the subsidiary.

-Change in dividend payout structure

Management has decided to revise dividend policy from a stable dividend payment to one based on a payout ratio of 60-80% of earnings paid quarterly due to ongoing investments in ecommerce and other growth projects.

Catalysts

-Strategic partnership with Alibaba

Alibaba acquired a 34% stake in Quantium Solutions International, a subsidiary, for S$86.2m in October 2016. The company also issued 107.55m new shares to Alibaba, increasing Alibaba’s holding in SPOST to 14.41% for S$187m. Under this strategic partnership, Quantium Solutions International will act as the platform for collaboration between the two companies, which would improve efficiency and integration in the e-commerce logistics industry.
Furthermore, the partnership has also assisted the postal segment as the company has seen increased transhipment volumes. As Alibaba continues to expand globally and in Southeast Asia at an accelerated rate, SingPost can look to benefit from this partnership.

-Southeast Asia’s first E-commerce integrated logistics hub

The e-commerce logistics hub has seen increasing utilisation for both its warehouse space and parcels sorting machine. With investment phase of the hub mostly done, the increase in volume will drive earnings growth. For instance, in May 17 the company announced that it is working with Lazada, Southeast Asia’s largest ecommerce platform and a subsidiary of Alibaba who has committed to move its entire warehouse operations to the logistics hub.

-Commencement of Singpost Centre Retail Mall in 2H17

The new retail mall within the SingPost Centre will have a Gross Floor Area of around 25,000 square metres, which is about double that of the former mall before renovation works commenced. Tenants of the new mall include NTUC FairPrice, Golden Village, Kopitiam and many other leading retail brands. The company has also signed an agreement with CapitaMall Asia to manage the mall.

Key Financials

Segment Breakdown:

Data from Capital IQ Database

SingPost has seen minimal growth in Postal and Logistics segment, eCommerce segment has improved by 171%, which was largely contributed by the newly acquired US subsidiaries.

Data from Capital IQ Database

However, growth in revenue has not translated into profits. In fact, net profit attributable to shareholders decreased 86.6 per cent from FY16 to S$33.4 million. Even excluding one-off charges, underlying net profit declined 24.7 per cent, reflecting the impact of planned investments, associates which are investing for growth, higher losses in the US eCommerce business and a decline in Postal operating profit.

Data from SingPost FY17 Annual Report

SingPost has consistently generated positive operating cash flows. Net cash from operating activities rose to S$200.1 million from S$131.4 million the previous year, boosted by positive working capital movements. High capital expenditure in FY16 and FY17 has affected free cash flow, but with the completion of the retail mall in 2H17 and eCommerce logistics hub the company should return to consistent free cash flow generation from FY18 onwards.

Balance sheet of SingPost is also relatively healthy, with cash and cash equivalents at S$366.6 million with total debt of S$364 million, resulting in a net cash position.

Analyst Opinion

As communicated by the management in FY17 annual report: “Given the structural decline of our domestic letter mail business, it is vital we advance our transformation into an eCommerce logistics enabler, leveraging on our strategic location and core assets to serve the region’s growing eCommerce markets”

Traditional post is a dying industry; hence it is clear SingPost has shifted its focus onto restructuring its business model from traditional courier to ecommerce logistics player. Hence, expect a transitional period of 2-3 years as management prioritises expansion and aggressive topline growth over profits. The short to mid-term period will definitely pose a significant challenge given the competitiveness of the fast-growing ecommerce industry, however given the company’s economies of scale and strategic partnership with Alibaba, reaching its goal of becoming Southeast Asia’s premier ecommerce logistics provider should prove achievable.

Prospect of falling dividends also poses a big issue as SingPost is traditionally seen as a dividend play for local investors, hence the new inconsistent dividend scheme will likely scare off these investors and have a negative effect on the stock.

Lastly another point to note is the recent change of management which coincided with the shift in direction of the business model. This creates an inherent business risk and it remains to be seen if the new CEO is the right fit to steer SingPost towards eCommerce growth.

Overall, lack of positive catalysts and expected decline in profits from management represents a limited upside and signals that the stock will likely stagnate or fall in the short to mid-term of 1-3 years. Therefore, only invest in SingPost if you are in for the long term and believe in SingPost’s future market position amidst Southeast Asia’s rapid ecommerce growth. However, in the short term it is more advisable to divest capital elsewhere and await more positive developments in the ecommerce segment before investing.

Valuation

Fair Value: $1.360

I used a two-stage Dividend Discount Growth Model, with the first stage projecting earnings until FY2020 with a conservative CAGR of 5% to account for earnings to stabilize; factoring in lowering margins in eCommerce and logistiscs segment given increasingly competitive climate and decline in postal segment and increase in revenue of around S$10million in rental from SPC mall. The second stage will project a Gordon growth model.

WACC comes to 6.02%. Discount rate using CAPM model to calculate cost of equity (using SSB rate as risk-free rate and 10 year STI return as market return) arriving at 7.0%. SingPost cost of debt arrives at 1.92% with a weighted average of debt holdings.

Assuming conservative 2.0% terminal growth, fair value of SingPost arrives at $1.36 (0% upside). Hence, without any new developments SingPost valuation is fairly valued at the current market price.

Disclaimer
All research reports are of the analysts’ personal opinions and do not in any way reflect InvestingNote’s official opinion. InvestingNote does not issue a buy or sell recommendation on any security, and any research paper published by The Signal Blog is purely for informative purposes. This research is based on current public information, but we do not represent it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual InvestingNote users. InvestingNote users should consider whether the information in this research is reliable, and suitable for their particular circumstances and, if appropriate, seek professional advice. The price and value of investments referred to in this research and the investment income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.

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This column is jointly written by @fayewang, @gordon_ong and @J_Chou
-Faye is both a fundamental analyst and economist by nature. She is a global thinker who’s open-minded and enjoys learning from the market.
-Gordon has a demonstrable interest in equity investments, financial markets, and negotiating deals. As @NTUInvestmentClub president, he has an understanding of what factors drive an organisation’s success.
-Jay has an interest in global macro trends, financial markets and equity research and enjoys applying a combination of the three in his investments. His eventual investing goal is to manage a risk parity portfolio and achieve true financial freedom.

Together, they are your analysts on demand!

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Picture retrieved from: Transport and Storage Services Industry Infographic
http://www.singstat.gov.sg/statistics/visu...

The Logistics and Transportation industry is a key cornerstone of Singapore’s economy, contributing $27.9billion or 6.9% of the country’s GDP. Its strategic location and world class infrastructure meant that Singapore is a leading logistical player in the Asia Pacific region, with World Bank ranking the nation as the No.1 Logistics Hub in Asia in the 2014 Logistics Performance Index. Currently, Singapore is a prime location for major logistics firms, with 20 of the top 25 global logistics firms such as DHL, Schenker, UPS etc. conducting their operations here. Breaking down by sectors, marine cargo is the largest contributor, generating 64.7% of total turnover in the industry followed by air cargo at 17.9% and warehousing and storage at 2.5%.

In 2016, the industry received a further boost from the Singapore government, as the Ministry of Trade and Industry launched the Logistics Industry Transformation Map (ITM) scheme which aims to optimise current logistics systems through more effective resource allocation and leveraging of technology e.g. deployment of federated lockers and cloud based supply chain management. The transformation of the industry is expected to value-add S$8.3 billion, and introduce 2,000 new PMET (professionals, managers, executives and technicians) until 2020.


Source: Logistics ITM Infographic, retrieved from:
https://www.mti.gov.sg/MTIInsights/SiteAss...

Subsector Overview

Air Cargo

Changi Airport is one of Asia’s largest cargo airports and the world’s 15th largest cargo hub by volume, handling up to 2 million tonnes of cargo annually. Global cargo market have been struggling to maintain sustained growth since the end of the global economic downturn in 2009, with air cargo volumes remaining flat due to slower rates of growth in key emerging markets, ongoing currency volatility and the reduce in demand for airfreight. In Asia, Singapore face stiff competition from its Asia Pacific competitors, notably China who has been growing at an annual rate of 13.6% and now dominate 48% of the transpacific cargo market. This has had a negative effect on local air cargo operators, with Singapore Airlines Group subsidiary SIA Cargo being unprofitable for seven of the past eight years, with yields in steady decline leading to consistent losses despite having scaled down on its operations. Nevertheless, recent events may suggest that the situation could be turning around. Changi has reported air cargo shipments rising 6.3 per cent in 2016 and a positive outlook is expected for 2017, and the recent launch of the S$140 million DHL Express South Asia Hub at Changi Airport further bolsters Singapore’s air freight industry.


Statistics retrieved from: SIA Investor Relations Annual News Release 2010-2017
https://www.singaporeair.com/en_UK/sg/abou...


Marine Cargo

Singapore boasts one of the busiest shipping ports in the world, and its status as a major transshipment hub has long been one of the bedrock of the nation’s economy. However, similar to air cargo, container throughput at Port of Singapore have seen a decline since 2014, with container throughput falling by 9 per cent due to increased regional competition and decrease in international trade amidst uncertain global market conditions. The global shipping industry has also seen a tumultuous 2016, with major Korean shipping line Hanjin declaring bankrupt and a wave of M&A consolidations amongst shipping companies. Recent developments by regional competitors also looks to threaten Singapore’s position. While the Port of Singapore has seen declining container throughput year on year, Malaysia’s Port Klang has seen an increase of 10.8 per cent in container throughput in 2016. Furthermore, China’s aggressive investments into Malaysian ports and rail links under its ‘One Belt One Road’ scheme which includes a new S$14 billion port to be completed in 2019 looks to further threaten Singapore’s position as the main trading port in Southeast Asia.

Despite the uncertain climate, there is still room for optimism as Singapore still holds a competitive advantage in terms of efficiency, security and the infrastructure of its ports. Looking towards the future, the country is improving its technology of its ports and shifting activities away from Tanjong Pagar and Pasir Panjang to Tuas by 2027 to improve competitiveness. The new Tuas port will carry nearly twice the capacity of the current ports, being able to hold 65 million Twenty-Foot Equivalent Units (TEUs) of containers annually, which will make it the largest port terminal in terms of capacity in the world.


Source: Karamjit Kaur et al. “Full steam ahead for new Tuas megaport”
Retrieved from: http://www.straitstimes.com/singapore/full...

Land Delivery and Storage


Statistics retrieved from: Singapore Statistics- Transport and Storage Services
http://www.tablebuilder.singstat.gov.sg/pu...

Land based Storage and Warehousing and Postal and Courier sub-sectors are much smaller in scale as compared to their air and water counterparts, with annual operating receipts only constituting 4.3% of industry total. However, unlike air and water cargo, the land based sub-sectors have seen an increase in turnover for the past decade. For postal and courier sector, although traditional postal delivery continues to see a decline in demand, the rise of e-commerce will most likely lead to a steep rise in number of courier deliveries, hence overall turnover should see an increase in the foreseeable future. The warehouse and storage sector has been assisted by the growth in demand from the manufacturing sector but the looming supply glut caused by the introduction of new warehouse space in 2017 and tapering demands due to lacklustre global trading conditions may see a drop in turnover.

Macro Trends

Advancement in Disruptive Technologies

The development of numerous disruptive technologies has revolutionized every step of the supply chain management process. For instance, the shift to a cloud based system and utilizing the Internet of Things has allowed for enhanced flexibility and efficiency in operational management. The increased use of automation and robotics has also allowed for more effective solutions such as advanced packaging labeling and streamlining warehouse sorting. Another notable advancement is the use of drones in last mile delivery, in which companies like Singpost have been looking into. Current developments of 3D/4D printing, Blockchain and self-driving cars are also set to further revolutionise the industry. Unfortunately, Singapore and Southeast Asia in general has been a laggard in implementing such technology, resulting in the region lacking a proper, cohesive logistics infrastructure that gives retailers an entry point into the region. Instead of a single network, each individual market requires separate contracts and localisation which proves expensive for the retailers and would eventually be passed on as additional cost to consumers. This potentially could slow the growth of the industry in the region. The Singapore government has been implementing steps to correct this, with the launch of The Logistics Industry Transformation Map in 2016 which aims to implement technological solutions such as the ones mentioned above would hopefully allow local logistics companies to catch up with the likes of USA and China. It is certain that technology will be the key future driver of the industry and companies that fails to innovate and keep up with current advancements will falter.

E-Commerce Boom

The rapid growth of E-commerce is a direct result of the advancement in technology (see: alternative payments) , further compounded by the increase in proportion of middle class in Asia Pacific, greater mobile and Internet penetration and increase in number of E-Commerce players. The global e-commerce market is projected to more than double by 2020, growing from US$1.7 trillion to US$3.6 trillion. China represents the world’s largest e-commerce market with US$590 billions of goods sold in 2015. In Singapore alone, total online spending is estimated to have reached S$2.6 billion in 2016 and is expected to hit S$3.4 billion in 2017. Given that the current logistical landscape in Singapore is unoptimised, the explosive growth in e-commerce demand for business to consumer deliveries of retail purchases represents an opportunity for the logistics services market to grow. Local venture capital funded start-ups such as Ninja Van and Anchanto have already taken initiative, capturing S$1.75 billion in market share in 2016 as compared to just 266 million in 2013, though increasing competition have resulted in decline of pricing power and reduced profitability. Market leader Singpost has set their sights even higher, restructuring its traditional approach and opening a S$182 million Regional eCommerce Logistics Hub with an aim to become a regional leader in ecommerce logistics. With Singapore’s extensive reach across the region, stable financial infrastructure and a tech-savvy population, the foundation is present for local logistics companies to capitalise on this opportunity.

Upsides & Downsides

Upsides

1. Singapore’s prime location and significant economic influence in Asia.


Picture source: Ho Wah Foon, ‘China projects to hit Singapore’ ,retrieved from http://www.thestar.com.my/news/nation/2017...

According to the Singapore Logistics Association, history of Singapore’s freight forwards development can be traced back to the 19th century. Singapore locates at the heart of the Asia Pacific, and serves as the geographical linkage of Europe, India, China and the U.S. Prime location makes Singapore the ideal springboard for logistics and provides excellent connectivity that shapes Singapore as one of the busiest port worldwide. Approximate 80% of the world’s maritime trade among Europe, Asia and the U.S pass through the strait of Malacca, which is the linkage of Indian Ocean and Pacific Ocean and major economies in Asia area. Besides, its advanced technology, world-class infrastructure and efficient supply chain management jointly contribute to Singapore’s position as a global logistics hub. According to the Singapore statistics bureau, logistics industry contributed 5.3% of the total GDP in 2015. Changi airport is Asia’s second largest cargo airport that dealing with 2 million tons of cargo annually.

2. Collaborations between shippers and top global 3PLs (Third-party logistics).


Picture source: Digimag Industry Report 2017, Supply Chain Asia, retrieved from http://supplychainasia.org/wp-content/uplo...
The future trend of logistics inclined towards collaborative partnerships. According to the 21st annual third-party logistics study, services provided by leading 3PLs have benefited 75% of shippers who use logistic from cost deduction and efficiency improvement. Diligent effort was also made in the aerospace logistic subsector through collaborations with 3PLs including DHL, DB schenker, Kuehne +Nagel ad SDV, which are several top global logistic players based in Germany, Switzerland and France. Nowadays, 20 out of top 25 logistic players embarked their operations in Singapore, examples can be Sankyu (Japan), UPS (U.S) and Yusen Logistics (Japan). Additionally, the three-year collaboration between P&G and The logistics Institute - Asia Pacific focused on supply chain research. It seems like that the current pattern of Singapore’s logistic industry is sharing the pie, which indicates incumbents within the industry pursue efficiency by collaborating and sharing the network, and this pattern will lead to greater connectivity and low-cost competition.

3. People’s changing consumption preference.
With the penetration of e-commerce, growing number of consumers like online shops avidly. It sounds like clichés, but growing deliveries is prompting the evolution of the modern logistic industry. Last mile logistic refers to the segment where parcel is delivered from transportation hub to the final recipient, and it is a result of rising e-commerce. In Singapore, people who shopping online form a stream of logistic demand. Company like Singapore post launched robotics and automation such as unmanned vehicles in deliveries to ease the pressure manpower. Further innovation in logistics operation is foreseeable.

Downsides


Picture source: ‘The trains and sea ports of One Belt, One Road, China's new Silk Road’, Strait Times, retrieved from http://www.straitstimes.com/asia/the-train...

1. PM Lee’s absence in China’s ‘One belt, one road ‘forum and possible influence of the project.
Infrastructure is the key pillar of China’s Obor plan, which intends to build a network of railways, ports and roads that links China closer to other Asian countries, Africa as well as Europe. The relationship between China and Singapore became more sensitive after the ‘Terrex incident ’and South China sea issue. Hence, the absence of Singapore’s prime minister Lee Hsien Loong in Obor forum should be a concern. Obor may provide an alternative to the traditional sea route of trade that go through Singapore, also, port & railway constructions in both Malaysia and Indonesia can bring Singapore threats to its advantageous logistic position.

2. Competition brought by Malaysia.


Picture source:http://www.spad.gov.my/land-public-transpo...

Malaysia is one of the biggest threats to Singapore’s logistic industry. As mentioned previously, China planned to invest in Malaysian ports construction through its Obor project. Once China accomplished the construction in Malaysia, numerous of trade may be shifted from Singapore to Malaysia. Malaysia and China have signed the contract for RM55Bil East Coast Railway Line (ECRL), and it functions as a channel that links Port Klang, Kuantan Port and others lied in the East Coast. In other words, after the complete of ECRL, China can ship their goods from Port Klang to Kuantan Port by using inland railway in Malaysia, in lieu of go through Singapore port. At the same time, goods can be transferred by the same route but with the reverse direction. It turns out that hundreds of millions of China-bound goods from Thailand, Middle East and Indonesia can be shipped through the Port Klang-ECRL-Kuantan route, and Singapore will suffer from the shifted trade, without which Singapore should has gained. Apart from development of new route, facilities of all existing ports in Malaysia will be enhanced by using the belt-road funds for various types of ships and services.

Key Players

$SingPost(S08)

Singapore Post Limited provides postal, logistics, and retail services in Singapore and internationally.

Mail segment offers services for collecting, sorting, transporting, and distributing domestic and international mail.

Logistics segment offers a range of logistics solutions, including freight, warehousing, domestic and international distribution, and delivery services.

Retail & eCommerce segment provides various products and services, such as agency services, financial services, and front-end e-commerce solutions.

$CWT(C14)

CWT Limited provides integrated logistics and supply chain solutions for small establishments and multinational corporations in Singapore and internationally.

Logistics Services segment provides warehousing, transportation, freight forwarding, cargo consolidation, collateral management, and container management services, as well as supply chain management services and container management services; This segment serves commodities, defense, food and beverage, freight forwarding, marine, and petrochemicals and chemicals industries.

Commodity Marketing segment offers physical trading and supply chain management services for base metals, including copper, lead, zinc, and other minor metals, as well as energy products, such as diesel, gasoline, naphtha, and distillates.

Company also offers Engineering Services and Financial Services, which occupies a lower proportion of revenue and net income.

$Poh Tiong Choon(P01)

Poh Tiong Choon Logistics Limited, together with its subsidiaries, provides logistics services to the petrochemical industry in Singapore. It operates through four segments: Transportation and Bulk Cargo, Warehousing, Trading, and Leasing.

The company offers transportation services for high value, sensitive, and chemical cargo in various forms, including conventional, general containers, bulk and bulk liquid containers; owns cargo vehicles comprising prime movers, trailers, and other vehicles, such as refrigerated trucks, tipper trucks, and general usage lorries, as well as heavy haulage equipment.

It also engages in the provision of bulk cargo handling and stevedoring services; and warehousing, drumming, and related services comprising drum filling of chemical products, open and covered warehouse storage, cold room storage, inventory management, and local and international freight management, as well as storage and distribution of loaded containers.

In addition, the company is involved in the sale of diesel fuel; rental of industrial property; property development activity; equipment leasing and general contracting activities; and providing terminal management services.

$Keppel T&T(K11)

Keppel Telecommunications & Transportation Ltd, an investment holding company, provides integrated logistics services and supply chain solutions.

Logistics segment provides integrated logistics port operations, third-party logistics services, supply chain solutions, warehousing, distribution, container storage and repairs, and freight forwarding services primarily in Singapore, China, Malaysia, Indonesia, and Vietnam.

Data Centre segment provides data center co-location services, business continuity, disaster recovery, facility management, and real estate investment trust management services primarily in Singapore, Ireland, the Netherlands, Australia, the United Kingdom, Germany, and Malaysia. This segment also provides technical support services.

Keppel T&T Ltd is also involved in the food trading, shipping agency, and fund management activities; provides and trades in communications system and accessories; and develops and trades in industrial property rights. Keppel Telecommunications & Transportation Ltd is a subsidiary of Keppel Corporation Limited.

YCH

YCH Group Pte Ltd. provides integrated end-to-end supply chain management and logistics solutions for suppliers, manufacturers, brand owners, resellers, consumers, and original equipment manufacturers in the Asia Pacific.

It offers Intribution, a Web-enabled manufacturing logistics solution for managing the flow of raw materials, information, and financial transactions; Intrabution, a solution for consumer goods fulfillment, order management and fulfillment, and e-commerce fulfilment; and Retrogistics, a solution that manages the service and returns logistics for retailers when their products require after-sales parts replacement, warranty returns, and servicing, as well as provides parts and components inventory management, auto replenishment, and spare parts delivery to facilitate on-site after sales service.

The company also provides lead logistics provider and third party logistics services, such as freight management, transportation and distribution management, and warehousing and inventory management services.

The company was founded in 1955 and is based in Singapore. It also has operations in Malaysia, Thailand, Indonesia, China, Hong Kong, the Philippines, Australia, India, Vietnam, and Korea.

$GKE(595)

GKE Corporation Limited, an investment holding company, provides logistic services in Singapore and the People’s Republic of China. The company’s Third Party Logistics segment offers various logistics services, including non-ferrous metal storage, general warehousing, containers trucking, conventional transportation, project logistics, and international multimodal sea and air freight forwarding services.

Its Shipping Logistics segment is involved in building and chartering of vessels. The company’s Infrastructural Logistics segment produces and sells environmental friendly lightweight bricks, building materials, and cement products. It also provides crane services for loading and unloading of cargo.

The company was formerly known as Van der Horst Energy Limited and changed its name to GKE Corporation Limited in April 2012. GKE Corporation Limited was founded in 1995 and is based in Singapore.

Sector Financials

As industry is dominated by large cap companies with unusually depressed earnings such as Singpost, average P/E ratios may be slightly skewered upwards. ROE is lower than STI ETF, showing that logistics sector underperformed the overall market. ROE of logistics sector usually range from 5% to 15%, showing that Singapore’s logistic companies are underperforming global counterparts.

Logistics industry margins are traditionally low. However, Singapore logistics were exceptionally low at 2.4% operating margin and 1.7% net margin due to slowdown of container volumes and increased competition both domestically and regionally. Businesses have also been negatively generating free cash flow.

Due to the significant capital expenditure and fixed assets required for logistics, high D/E ratio of 58.3%. Global logistics sector usually have D/E between 40% to 150%, hence Singapore’s logistics sector is still relatively unlevered. Revenue 3-year CAGR also decreased due to slowdown in logistics sector and Port of Singapore volumes since 2014.

For industry-specific ratios such as fixed mileage costs ratio, variable cost ratio and deadhead costs, I couldn’t find an industry average. However, investors will do well to search the financial statements of individual companies for such disclosures.

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$Sheng Siong(OV8) ’s strategy change in recent 6 years

Given the fierce competition in Singapore’s retail supermarket industry, Sheng Siong is facing the threat from powerful competitors and the fear of declining market share. During the time period of 2008-2010, Sheng Siong put their emphasis on consolidation, upgrades and renovation of their existing outlets. This explained why Sheng Siong merely opened one new store in each year of 2008 and 2009, and did not add any outlet into the brand in 2010. The financial year of 2011 is important for Sheng Siong, the firm launched the e-commerce project and adopted strategy of expansion in both local and overseas market.

2011: Expansion without debt burden
In 2011, Sheng Siong’s revenue decreased by 8% due to intense competition. Government announced to reduce the ratio of foreign workers, which leads to rising cost of labor for Sheng Siong since then. However, Sheng Siong cleared off all their debt and held abundant cash in balance. The company realised the strategic meaning of increase presence of outlets to reach more customers, thus opened 4 at Elias Mall, Teck Whye, Woodlands Industrial Park and Thomson Imperial Court.

2012: Aggressive expansion
In 2012, Sheng Siong brought 8 new stores to places which they didn’t reach previously. Under the circumstance of weakened market and unfavourable policy, Sheng Siong’s revenue increased by 10.17% and net profit almost doubled from $27.256m in 2011 to $41.677m, which benefits from soared online sales and increasing revenue from new stores. For overseas market, Sheng Siong had a wholly owned subsidiary in Malaysia called Sheng Siong (M) Sdn. Bhd. The 8 new stores are spread out across the island which includes Toa Payoh, Yishun Central, Jalan Besar, Geylang, Bukit Batok, Bedok North, Ghim Moh and Clementi.

2013: Services upgrade
In 2013, Sheng Siong stuck to their strategy of spread wings and located at places without previous presence. However, they didn’t manage to secure appropriate place for new operation, instead, Sheng Siong extended open hours of their 29 stores. After that, 29 out of 33 outlets of Sheng Siong provided 24 hours services to consumers. Sheng Siong observed 7.86% revenue increase but 5.6% drop of net profit compared to performance of 2012 because Sheng Siong didn’t win a bid for retail place and constructions near their stores at Bedok Central and The Verge impacted their sales.

2014: Cost management & preparation for further expansion
In 2014, Sheng Siong kept their strategy to mainly hire elderly singaporean in order to avoid rising cost of hiring foreign workers. Actually their started to do this since 2013, and in 2014, Sheng Siong’s efforts got paid off as they observed the lowest ratio of administrative cost to gross profit over 3 years. Additionally, profit margin improved from 5.66% in 2013 to 6.56%. Sheng Siong preferred to acquire capital from equity compared to using debt and borrowing, and the firm issued 120 million new shares at $0.67 each, which reflected persist expansion plan of the management group. At the end of year 2014, Sheng Siong held additional $30m cash when compared to balance in last year.

2015: Another wave of expansion
At the beginning of 2015, Sheng Siong held cumulative cash amount of $130m, which jointly contributed from business and stock issues. With sufficient funds, Sheng Siong added amount of stores to 4 more locations. At the end of 2015, Sheng Siong stated in their financial report that “out of this 5.3% growth, 4.6% was contributed by the new stores opened in 2014 and 2015 and 0.7% from comparable same store sales. ” It turned out the dynamic expansion strategy, which Sheng Siong adhere to, eventually bring them good return. While at the same time, competitor hypermarket like Giant plunged into an unfavourable position in competition because of expansion weakness. For overseas market, the firm set up a 60% owned subsidiaries in China called Sheng Siong (China) Supermarket Co, Ltd.

2016: New era of retail business
In 2016, followed the spread pace in 2015, Sheng Siong opened 4 new stores at Circuit Road, Upper Boon Keng Road, Fernvale and Yishun Junction 9. The firm noticed opportunities that technology and new shopping habits of consumers bring to grocery retailing. As there is a growing number of consumers who prefer shopping online and enjoying payment with their electronic devices, thus Sheng siong devoted themselves to e-commerce, mobile wallet and collaboration with different credit card issuers. Greater frequent usage of self-service payment machine also saved Sheng Siong some manpower costs.

Key takeaways

This article explains detailed change of Sheng Siong’s expansion strategy, and how the firm makes efforts to solve problems of high administrative cost and updates to cater new preferences of customers. Also, by hiring elderly singaporean employees, applying self-service payment machine and improving management, Sheng siong managed to maintain growth under intense labor policy. Based on Sheng siong’s performance in recent years, I found that the management team has a clear awareness of problems, formulates practical solutions, able to stick to their plans and adapts to the newest trends.

Outlook for 2017
In 2017, still, Sheng siong will seek for appropriate places for new outlets and further expansion. Apart from NTUC fairprice and Dairy Farm group, some small supermarkets such as Yes, U Stars and Ang Mo Supermarket brought competition to Sheng Siong. Recent news has reported that Sheng Siong failed to secure some HDB sites in the competition with smaller players. However, Sheng siong has made statement in their 2016 financial report that they will not consider to win a bid at a price price that they do not think makes economic sense. For the overseas market, Sheng siong's 60% owned subsidiary in China will start operate at 3Q2017. In the future, Sheng Siong should focus on products differentiation and improve their customers’ brand loyalty. Though the competition with NTUC fairprice and Dairy farm will still be intense, Sheng siong is supported by strong financial position and a well-managed team.

This article is written by @fayewang from InvestingNote.
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*Data source: Sheng Siong Annual report 2011-2016, http://www.shengsiong.com.sg/pages/investo...
*All the dollar unit ($) in this article refer to SGD.

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Quick review of 3 stocks’ fundamental situations and Your stock vote!

This column is written by @fayewang, InvestingNote’s stock analyst.

Faye is both a fundamental analyst and economist by nature. She is a global thinker who’s open-minded and enjoys learning. If you like this column, please start voting which of these 3 stocks you would like her to write on in her next article! This is your chance to interact with Faye and she will write on the most voted stock!

How to vote: Comment the stock of your choice: either Japfa, Yanlord Land or Sheng Siong. The most number of likes/comments by the end of the day will be chosen. It’s that simple!

Voting starts now and ends when the market’s close on today (19 Apr)!

Disclaimer: this article simply provided analysis on stocks from the fundamental perspective, it does not represent any buy/sell recommendation from Investingnote. *All the dollar unit ($) in this article refer to SGD.

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1. $Japfa(UD2)
Japfa Ltd is a Singapore-based agri-food company. Business of Japfa contains four segments: 1) Animal protein 2) Dairy 3) Consumer food and 4) Others.

Overall performance in recent 5 years:
Japfa enjoy robust growth of both revenue and profit. The company issued their IPO in 2014, and observed solid expansion afterwards. Net profit almost doubled from $91.686m in 2015 to $171.676m in 2016, and almost tripled if traced back to number of $65.086m in 2012 (but the number of net profit is small compared to revenue, thus the curve looks flat in the chart). Japfa has witnessed steadily growing amount of assets and equity, and also observed surge of operating cash flow from $32.957 five years ago to $524.553m in 2016. Based on these data, it is quite obvious that Japfa is an expanding company with rapid growth. In the financial year of 2016, though the net profit margin is 3.916% and less than 5%, Japfa shown their earning potential with a return on equity (ROE) ratio of 20.63% and abundant cash in hands.

Business segments overview:
66.89% of the group revenue comes from animal protein business in Indonesia. Japfa runs their animal protein operation through their 51% share owned listed company -PT Japfa TBK, which holds the popular milk brand greenfields in Indonesia market. Prospects of milk market in Indonesia is optimistic as Indonesians are becoming wealthier thus have increasing demand for milk, while their milk consumption is still lower compared to Malaysians, Thais and Philippines.

More information about Indonesian milk market: https://www.pressreader.com/indonesia/the-...
Japfa operates the dairy business mainly in China and Indonesia. China is also a market with high demand of milk due to the large population and pursue of healthier diet, besides, the quality of milk that produced by local producer is not reliable because of plentiful food safety scandals in recent years. Vietnam market also occupies 12% of Japfa’s revenue.

Stock information:
Japfa stocks has an earning per share (EPS) of 0.097, and a lowest PE ratio of 8.339 in recent 3 years, which is also lower than the average number of agricultural commodities (12.996) and average number of Indonesia market (17.770). Thus we can consider Japfa as an undervalued stock, which means the stock is trading with a discount price. Japfa started to pay dividend with $0.005 per share in 2015, and paid $0.01 per share in 2016. Earning per share doubled from $3.67 cents in 2015 to $6.73 cents in 2016.

Conclusion :
Japfa is a growing agriculture firm with prospective and potential market in Indonesia. Their financial performances were robust in recent years and they already built a complete business model to cover the whole value chain.
However, like the most agriculture companies, Japfa’s business is easily affected by seasonal factors, CIMB Securities recently downgrade Japfa because of weaken poultry prices caused by oversupply in both Indonesia and Vietnam in 1Q17, check the research report at https://www.investingnote.com/posts/88813
Overall, there will be temporary headwinds in 2017, but there is high chance that Japfa will recover after the cyclical fluctuation and the price drop now make the stock greater undervalued.

2. $Yanlord Land(Z25)
Yanlord Land Group Limited (Yanlord) is a Singapore-based investment holding company. The Company is a procurer of funds. The Company has 3 segments include: 1) Property development 2) Property investment and 3) Others. Similar to most of the bluechips, Yanlord is traded at their 52-week high price.

Overall performance in recent 5 years:
Within the recent five year, Yanlord has seen an average revenue growth of 28.75%. Net profit has climbed from $357.52m in 2012 to $561.46 in 2016. When solely compared to the result in 2015, Yanlord land gained 75% growth of net profit in 2016. Similar to Japfa, Yanlord experiences rapid expansion and enjoy strong growth, despite the tighten real estate policy and contractionary market in China. With increasing assets and equity, and light burden of debt, the firm kept expanding their construction of superior residential buildings into first and second tier cities in China such as Shanghai, Nanjing, Chengdu and Zhuhai.

Business Segments overview:
In the financial year of 2016, over 95% of the total revenue came from the segment of property development. Hotels, serviced apartments and commercial & office offerings are three integral parts of the property development segments, and they jointly contribute to total segment revenue. In 2017, Yanlord will inject new projects such as an office tower in Tianjin and Hotels in Sanya. At current stage, Yanlord is engage in the redevelopment project that aims at ‘enhancing the cityscape of established cities’. The example of “Xiongan zone” in China has revealed the economic potential of redevelopment in satellite towns around metropolis. Thus, Yanlord is on the right track and need put greater efforts in environmental protection and sustainable growth.

Stock information:
The FY2016 result of Yanlord released at 28 February of 2017, with a surge of profit attributable to owners rises 83.7% to RMB2.697 billion. After the result came out, with a buy call from the DBS bank at the beginning of March, stock price of Yanlord soared all the way to the recent five-year high. From the perspective of PE ratio, Yanlord has a number of 6.44, which is lower than the average number of real estate development industry (8.862), and also lower than the average number of property & construction industry (10.478). However, when compared to its competitors, Yanlord’s PE ratio is not that low. Dividend per share is $0.043 per share, highest number since 2012.

Conclusion:
Yanlord has delivered commendable performance to their shareholders over 5 years. The firm managed to maintain steady growth under unfavourable policy in 2016. Though Yanlord is still slight undervalued when compare the PE ratio with the peer companies and industrial average number, the stock price is around 52-week high thus need to trade with caution. Outlook of Yanlord in 2017 is optimistic.

3. $Sheng Siong(OV8)
Sheng Siong Group Ltd is a Singapore-based investment holding company, which is engaged in the supermarket operations, and trading of general and wholesale importers and exports through its subsidiaries. Sheng Siong is a retailer that operates through the provision of supermarket supplies and supermarket operations segment, with over 40 supermarket/grocery stores located all across the island.

Overall performance in recent 5 years:
Sheng Siong observed growth of both revenue and profit in recent five years. Profit margin kept improving little by little during the five years, to 7.9% in 2016. Return on equity (ROE) is over 20% over the five years, and the number is 25.128% in 2016. As one of the biggest retailer in Singapore, Sheng Siong has shown stable performance and proved their profitability by relative high profit margin and ROE. However, there are several negative sign in their operation. Growth rate of both revenue and profit is decreasing, administrative expenses was too high and occupied 65% of the gross profit. Inventory increase 18% from 2015 to 2016, plus continuous rising average days of inventory, jointly indicate Sheng Siong spend longer time to sell their goods. The company also held less amount of free cash in 2016.


Business Overview:
Grow all the way from a family business to one of the biggest supermarket retailers in Singapore, Sheng Siong has achieved incredible success. Sheng Siong’s revenue mainly come from three parts: 1) supermarket operation 2) retail income and 3) Government grants. However, the detailed segment number is internally provided and directed reported to executive directors. Sheng Siong faced fierce competition in the Singapore market, and its major competitors include NTUC fairprice, Giant and Cold storage owned by Dairy Farm.
Sheng Siong mainly focus their business in Singapore market and they are losing market share in recent years. Other problems include higher administrative cost and longer selling period. Absence of presence in areas with large population like Hougang is another problem, but Sheng Siong has made effort to solve it. They had investing cash outflow of $89.86m on purchasing new property, plant and equipment in 2016, and opened 4 new shops Tat Circuit Road, Upper Boon Keng Road, Fernvale and Yishun Junction 9.

Conclusion:
The absolute number of both revenue and profit is increasing, but the decline of growth rate indicate that Sheng Siong is losing impetus for further progress. Overall, Sheng Siong still held healthy financial position. Sheng siong has to focus on cost management and service improvement to prevent further drop of market share and growth rate. They were working on expand business area but the way ahead is still long, as expansion might be a solution, but Sheng Siong is supposed to solve the problem of longer selling time before that step.

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