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Retailing Singapore

19 October 2011

CMP: 12 month TP: Market Cap: Bloomberg Ticker: Reuters Code: Free Float (%) Daily Avg. Volume Price Range (since IPO)

S$ 0.42 S$ 0.67 S$581 mn SSG SP SHEN.SI 28.4% 65.94mn S$ 0.31 0.57

Sheng Siong Group Ltd

For God, Country and Retailing BUY!
46% of Singapore residents do not have SSG outlet nearby-Untapped market: Sheng Siong Group (SSG) does not have a presence in 18 zones in Singapore, some of which are densely populated areas. This provides SSG an opportunity to expand their retailing network in these high potential areas so as to drive profitability growth. HDB projects to open new areas for growth: SSG is expected to aggressively expand their retail outlet network from their current 23 stores to over 40 stores. SSG will be able to target the new target markets developed by an implementation of upcoming HDB projects ( more than a 100,000 HDB units to be built in the next five years) to expand their retailing network and drive profitability growth. A large debt free piggy bank: As of 31st December 2010, Sheng Siong had S$ 85 million in cash and during CY11 was able to raise another S$ 79.5 million, providing it with ample cash to pay back its long term debt obligations, pay healthy dividends and aggressively expand their retailing network. New giant warehouse at Mandai Link to improve future margins: The one-stop facility, used concurrently with its computerized systems, should allow SSG to control and replenish inventory at its various outlets in a timely and efficient manner. Increased operating efficiency and benefits from integration will allow it to enjoy economies of scale in terms of rebates through bulk purchasing manpower, transportation and fuel costs. Focus on house brands to help margin improvements: SSG plans to focus on leveraging its established brand to launch its own brands in various food item categories. These own brands have higher margins due to lower marketing costs and lesser number of intermediaries in the supply chain. House brands are expected to contribute 10% to total revenue (2010: 5%) by CY15. Attractive valuation and dividend yield: SSG had a very successfully IPO with 1.3x oversubscription. The stock reached highs of S$0.57 but has since then cooled down and according to us currently trades at 8.39x EV/EBITDA on FY 2012 basis which is attractive given its growth prospects which look bright. Managements commitment to a 90% dividend payout will ensure the divided yield to remain above 5-6% levels in the coming 5 years at least
S$ mn

SSG vs. STI (rebased to hundred)

Figure. 1

Shareholding structure

Figure. 2

Stores added vs. New HDB units

Y/E Dec 31 Revenue EBIT PAT EPS (Cents) Growth (%) PER (x)

FY09A 625.3 39.9 33.9 2.45 N/A 16.96 N/A 37.2% N/A

FY10A 628.4 49.0 43.0 3.11 27.0% 13.36 N/A 48.0% N/A

FY11E 644.0 35.4 26.4 1.91 -38.6% 21.75 11.71 25.1% 4.14%

FY12F 692.4 47.9 36.2 2.62 37.2% 15.86 8.39 24.4% 5.68%

FY13F 812.3 57.7 43.5 3.14 20.1% 13.20 7.09 28.5% 6.82%

FY14F 877.5 59.5 44.9 3.25 3.3% 12.78 6.81 28.6% 7.04%

FY15F 944.0 61.7 46.6 3.37 3.8% 12.32 6.53 28.9% 7.31%

Figure. 3
Company Filings, Compounders estimates

EV / EBITDA ROE (%) Dividend yield (%)

Source: Company, Compounder Research

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Compounders Research

Table of contents
Page

Section A Section B Section C Section D Section E Section F

Economic overview Industry overview Company analysis Financial overview SWOT analysis Appendix

3 4 6 10 11 12

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Sheng Siong Group Ltd.

Singapore GDP (S$ bn)
400 300 200 100 0 2005 208.8 319.5

Compounders Research

Economic Overview Singapore A beacon for stability & growth

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

Figure. 4

CAGR 8.9%

2010

Burgeoning consumer sector

5.10

Population mm 5.5 5.0 4.5 4.0 3.5 2005 2010 4.29

Relatively stable labor market with low unemployment level and improving tourism scene fuels long term optimism in the consumption level of consumer goods. Nonetheless, increasing conservatism in spending triggered by below par economic climate might hurt above average growth levels.

Inflation Dynamics
Singapores CPI inflation has elevated in recent times reaching all-time high of 5.67% in August 2011. However, MAS core inflation has hovered around one third of CPI Inflation, which primarily has been stipulated by surging accommodation and private transport costs.

Figure. 5

CAGR 2.7%
Disposable Income per Capita (S$) '000 34 32 30 28 26 2005 2010 28.18 32.24

Figure. 6

CAGR 3.5%
Monitory Authority of Singapore, Compounders estimates

Figure. 7

Company Filings, Compounders estimates

High-Octane Wage hikes

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

Impact of Eurozone debt crisis

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

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Figure. 8
Store based retailing revenue (S$ bn) 24.5 20.5 20 15 2005 2010

Compounders Research

25

Industry Overview Grocery retailing in Singapore

The different grocery retailing formats in Singapore include hypermarkets, supermarkets, convenience stores, wet markets and other specialty stores. We focus on what is known as the grocery retail chains.. Use various combinations of different grocery retailing formats ranging from hypermarkets to convenience stores Developed rapidly in recent years, a total of 800 operated in 2010 Accounted for an increasing proportion of grocery retail revenue since 2005

Company Filings, Compounders estimates

Top 3 grocery retail chains and their formats

Ranking 1 2 3 Name NTUC Fair Price Dairy Farm Sheng Siong Group Format types Hypermarkets, supermarkets and convenience stores Hypermarkets, supermarkets and convenience stores Hypermarket, Supermarkets, wet markets and grocery stores

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

Third largest & Fast catching up with the top 2 players with a 13.1% revenue CAGR since 2006
Figure. 9

Estimated Market Share by revenue

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

Source: Company Filings, Frost & Sullivan

Figure. 10

Singapores Grocery Retail Trends & Forecasts

It is almost completely dominated by supermarket and hypermarket formats. The growth in revenues of their stores is a function of a few key variables such as increased purchasing power, economic improvement, increasing popularity of supermarkets, and inflation.

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

Historical and forecasted revenues for Singapore (S$ bn)

Future growth up for grabs..

Source: Company Filings, Frost & Sullivan

Figure. 11

Competitive Landscape 3 Main Players

The retailing industry has three main players which are NTUC, SSG and Dairy Farm. SSG has shown the highest growth in sales across the three players, with a 4 year CAGR of 9.6%. Strong brand positioning, roll out of store outlets and introduction of house brands have allowed for this strong growth in sales.

Industry Reports, Compounders estimates

Figure. 12

Seasonality
Revenue during festive periods such as Chinese New Year, Hari Raya Puasa and Deepavali tends to be higher as compared to the revenue in non-festive periods. All retailers hold promotions in conjunctions with such festive seasons.

Business Cycle
Since this industry caters to the domestic market in Singapore, it is not dependent on any export markets such as US or EU. Thus its relatively decoupled from the global economic turmoil at the moment. To add to that, FCMG retailing does not change much with changes in stock markets or economic sentiments as people consume basic essentials like food items and basic utilities in any case irrespective of price movements.

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Compounders Research

About Sheng Siong Group:

Revenue growth CAGR 13.08%
Sheng Siong Group (SSG) is the third-largest retailer and the fastest-growing grocery retailer in Singapore, with 2.6% market share of the retail market and 17.5% of super-market sales in Singapore (Frost & Sullivan). SSG operates 23 supermarkets, 1 hypermarket and 3 wet-market stalls across Singapore. During 2006-10, it gained market share vs. its larger rivals NTUC and Dairy Farm, with 13% sales CAGR vs. 9% CAGR for NTUC and 5% CAGR for Dairy Farm. SSGs market share in super-market sales rose from 13% in 2006 to 17.5% in 2010 SSGs stores are mainly located in HDB heartland of Singapore. The stores are designed to provide customers with both wet and dry shopping options, including a wide assortment of live, fresh and chilled produce, such as seafood, meat and vegetables. In addition, they also provides processed, packaged and/or preserved food products as well as general merchandise such as toiletries and essential household products

Current Locations
SSG currently operates 1 hypermarket, 22 supermarkets and 3 wet market stalls across the island.

Costs Breakdown FY10 operating expenses

Sales Mix (2010)

Total sq. feet area of stores

Company Filings, Compounders estimates

Figure. 14

Expansion Plans
The company raised net proceeds of S$79.5 million from its recent IPO of which about 30% will be allocated to the expansion of the store network. On an average, it costs the company S$1.5 million for every 10,000 sq ft of store expansion. This translates to a potential addition of 125,200 sq ft (+37%) from current operational area. The management targets to increase the number of stores to ~40 by 2015, which it feels the market can absorb, especially given the fact that there are several highly populated areas that still do not have an SSG outlet.
Company Filings, Compounders estimates

Figure. 13

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Compounders Research

Area Bishan Bukit Merah Bukit Panjang Bukit Timah Downtown Core Geylang Hougang Jurong East Kallang Marine Parade Newton Novena River Valley Sembawang Sengkang Tampines Tanglin Tao Payoh

Region C C W C C C NE W C C C C C N NE E C C

# of Residents 91,298 1,57,122 1,28,734 70,314 3,722 1,20,690 2,16,697 88,188 99,559 47,318 6,242 46,640 8,206 72,732 1,67,054 2,61,743 17,293 1,24,653 Potential Areas

NTUC 3 5 2 3 3 6 5 3 4 3 0 5 1 3 4 9 0 4

SSG

Untapped markets

Business Model for Sheng Siong

Supplier

Procurement

Warehouse / Distribution

Retail

Supplier
Shorter Supply Chain to Reduce Costs and Improve Margins

Mandai Facility

Retail

Singapore Retail Food Sector Report, Compounders estimates

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Compounders Research

Differentiating Factors
Productive space use and lean supply chain
1. SSG packs more items per isle as compared to its peers 2. SSG maximizes the amount of floor space to display product items by eliminating the traditional on-site storage areas in its outlets 3. To eliminate potential stock depletion, problems, the goods are replenished more than four times a day. 4. Existence and use of a real-time inventory management system provides for effective communications between the central warehouse and respective stores thus optimising the value of delivery trips.

Benefits realised

Unique product positioning within stores

1. Maximisation of Revenue per foot-highest in the industry as shown below 2. Efficiently able to meet satisfy consumer demand for rapidly turned over products 3. Ensuring freshness and quality for its fresh food products Revenues in FY2009 per sq.m. (S$ per sq.m.)

20,000 15,000 11,924 8,456

17,085

Revenues per square meter are highest

10,000 5,000 0 NTUC

Dairy Farm

Sheng Siong
Figure. 15

Rebates on Bulk Breaking

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

100%

Bulk breaking

100% 99% 99% 98% 98% 2008 Direct Material Cost

Company Filings, Compounders estimates S$491 mn 99% S$491 mn 98.79% S$483mn 98.37%

2009 Other Costs

2010

Figure. 16

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TV Show

Compounders Research

Unique promotional initiatives

The Sheng Siong Show, a live television variety show, was launched in April 2007 and attracted strong viewership and has become a regular TV Show with leading TRPs. thus strengthening the brand.

Taiwan Fair 2011

In an attempt to let local consumers enjoy top-grade agricultural produce, processed foods and other food specialties from Taiwan, SSG, launched Taiwan Food Fair 2011. A series of Taiwan frozen delights, Taiwan fruits and vegetables# that were in : season, Taiwanese Peng Lai Rice, vinegar-based health drinks and delicious snacks were made available, totalling to more than 500 types of items.

Numerous household brands give SSG a competitive advantage

Fresh food retail advantage

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

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

Can sustain price war in Industry

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

Price competitiveness

Minimum Cannibalization

Strategic store locations

Store selection is carefully done to avoid cannibalization. The shortest distance between Sheng Siong stores is 1.2-1.3Km compared to NTUCs 300-500m.

Dedicated fleet of trucks

Self owned fleet reduces costs

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

No single voluminous supplier

Not at suppliers mercy

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

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1,000 900 800 700 600 500 400 300 200 100 FY09A FY10A FY11E FY12F FY13F FY14F FY15F Revenue (LHS) S$ mm Net Margin 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

Compounders Research

Financial Overview
Margins Strength with Stability
The company is expected to have stable margins despite rising costs as it increases its focus on high margin house brands, reducing costs through operational efficiencies and spreading fixed costs over a larger revenue base through the expansion of their retailing network in high density areas of Singapore where revenue per sq ft would be optimized.

Negative Cash Conversion Cycle

The company enjoys a negative cash conversion cycle as cash is received upon purchase and suppliers have increased credit terms from 30 days to 45 days. Additionally, because of its new efficient mandai warehousing and distribution facility, inventory days are less than three weeks.

ROE 2011E

Cash Rich & Debt Free

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

Return on Equity Commendable Management

The management has shown high returns on equity in the past and are expected to maintain 25%+ ROE in the future as new stores come online and operational efficiencies are realized. Furthermore, rebates through bulk purchasing will also

Valuation
Net Profit Margin % FY 2010 Based on an FCFE analysis and assuming a discount rate of 7.2%, our fair market value for SSG is S$ 0.67 per share. The cost of equity takes into account risk premium related to the Singapore market as well as an additional risk related to dilution through share options. Based on FY11 financials, the company may seem fairly valued, however, these were due to listing expenses (which are one time) and two stores closing down (which are expected to be replaced in 2012). However, if we take a look at the 1 year forward valuation multiple (FY12) analysis of SSG vs. its peers we see that SSG is relatively cheaper based on EV/EBITDA (x) and PE(x) valuation multiples as this excludes the one time listing expense, and takes into account the additional revenue from new outlets for which leases were secured in FY11. Furthermore, we can see that SSG offers a high dividend yield and is expected to offer such yields given the management commitment to high dividend payout ratios and a business model based on high generation of cash flows.
M Cap Name Country US $ bn Beijing China 0.3 Jinkelong Dairy farm HK 11.2 Lawson Inc Japan 5.8 Lianhua Super China 1.8 SSG S ingapore 0.5 Sun Art retail China 10.4 Wumart China 2.7 P/E 2011E 2012E 14.5x 24.9x 18.9x 15.2x 21.8x 41.1x 36.3x 12.6x 22.2x 13.4x 13.2x 15.9x 30.2x 29.7x EV/EBITDA Div Yield 2011E 2012E 2011E (%) 6.1x 15.1x 4.4x 4.4x 11.8x 14.9x 13.1x 5.4x 13.3x 4.2x 3.9x 8.4x 11.7x 11.0x 3.90 2.60 4.00 2.60 4.14 1.00 1.80

Asset Turnover ratio FY 2010

Source: Company Filings

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Compounders Research

SWOT Analysis

trengths

W
Lacking focus operations

eaknesses on Sustainable

Strong focus on fresh food and dedicated Infrastructure for it. Out of 540,000 sq. ft., 100,000 sq. ft area serves need of fresh food at new Mandai Link warehouse Experienced Management Management of SSG still rests in the hands of the three founding Lim brothers. They have 73 years of combined experience in grocery retailing. With their in-depth knowledge of the industry in Singapore, they have been able to drive SSGs remarkable growth over the years.

SSG can add value by improving employee retention/motivation through sustainability activities by raising prices or achieving higher market share with new or existing sustainable products. Whole Foods Market, for instance, raised its sales by 13 percent a year from 2005 to 2009. Susceptible to rent hikes/denials of lease renewals: Closure of two stores (Ten Mile Junction in Nov 2010 and Tanjong Katong in Sep 2011) significantly affected revenues of company.

pportunities

hreats

46% of residents across 18 locations in Singapore do not have an SSG outlet in the vicinity. While some NTUC outlets are located in the central areas, this frees up the hinterlands for SSG to enter. Thus SSG has a lot of scope for its store network, and we see no issue with it supporting and managing up to 40 stores

Highly competitive operating environment Although SSG has built up a strong following over the years, its ability to generate future revenue growth is certain. Its existing stores may face competition from new competitor outlets; it may lose customers to aggressive promotional marketing by its competitors. External factors

Increased profit margins by increasing number of house-brands Increase fresh product market share: In terms of its revenue mix, fresh produce is a key revenue generator, contributing roughly 30% to its revenue. Furthermore, the segment is highly profitable with gross profit margins ranging between 21% to as high as 30%

Economic recessions/supply disruptions/labor costs etc.

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Compounders Research
Balance Sheet

APPENDIX
Income Statement
Year ending 31 Dec CY08AY09A FY10A FY11E FY12F F All Figures in S$ Millions Revenue Cost of Goods Sold Gross Profit Gross Profit Margin Other Income Distribution Expense Admin Expense Other Expenses Operating Income Operating Margin Interest Income Listing Expenses Invitation Expenses Financial Expenses Profit Before Tax Sharing Scheme Profit After Sharing Before Tax Income Tax Expense Profit After Tax Net Margin EPS (Cents) 625.3 (497.0) 128.4 20.5% 12.9 (4.3) (96.3) (1.0) 39.9 6.4% 0.2 (0.0) 40.1 (6.3) 33.9 5.4% 2.45 628.4 (491.7) 136.8 21.8% 16.0 (4.4) (98.3) (1.3) 49.0 7.8% 0.03 49.1 (6.1) 43.0 6.8% 3.11 644.0 (503.1) 140.9 21.9% 8.2 (3.8) (108.5) (1.3) 35.4 5.5% 0.5 (3.9) (0.21) 31.8 31.8 (5.4) 26.4 4.1% 1.91 692.4 (538.3) 154.0 22.2% 8.7 (7.6) (105.8) (1.4) 47.9 6.9% 0.5 48.5 (4.8) 43.6 (7.4) 36.2 5.2% 2.62

Year ending 31 Dec PP&E Investment Properties Non Current Assets

CY08A FY09A FY10A FY11E FY12F All Figures in S$ Millions 24.4 24.4 24.9 42.5 72.5 39.1 179.0 203.3 16.0 13.4 84.4 113.9 0.7 0.7 80.5 8.2 88.7 203.3 58.3 58.3 26.4 4.7 85.9 117.0 175.3 30.0 33.9 63.9 19.1 0.6 19.7 81.5 3.2 7.1 91.8 175.3 87.1 87.1 23.4 5.3 105.9 134.6 221.7 36.4 73.8 36.5 146.7 0.6 0.6 68.9 5.4 74.3 221.7 90.4 90.4 25.1 5.7 103.5 134.3 224.7 36.4 73.8 40.1 150.3 0.6 0.6 66.4 7.4 73.8 224.7

Inventories Trade and other Receivables Other Investments Cash and Cash Equivalents Current Assets Total Assets Share Capital Share Premium Fair Value Reserve Retained Earnings S hareholders Equity Financial Liabilities Deferred Tax Liabilities Non Current Liabilities Trade and other Payables Financial Liabilities Current Tax Payable Current Liabilities Total Equity and Liabialities

Key Assumptions Company S pecific Number of Outlets Number of Vehicles Revenue per Outlet Average Store Size (Sq Ft) Housebrands as % of Revenue Normal Goods GP M argin Valuation S pecific Risk Free Rate (S$ 20 yr bond) Market Risk (Rm) Beta Cost of Equity
Y/E Dec 31 Gross Margin EBIT Margin Net Margin ROE Inventory Days Receivable Days Payable Days Cash Conversion (days)

FY11F 25 37 27.7 14,000 6.0% 22.0% 2.2% 8.5% 0.80 7.2%

FY12F . 28 41 28.0 14,000 7.0% 23.0%

FY13F 32 47 28.3 14,000 8.0% 22.5%

FY14F 33 49 28.5 14,000 9.0% 22.2%

FY15F 35 52 28.8 14,000 10.0% 22.2%

FY09A FY10A FY11E FY12F FY13F 20.5% 21.8% 21.9% 22.2% 21.9% 6.4% 7.8% 5.5% 6.9% 7.1% 5.4% 6.8% 4.1% 5.2% 5.4% 37.2% 48.0% 25.1% 24.4% 28.5% 18.29 19.60 17.00 17.00 17.00 24.78 2.74 3.0 3.0 3.0 49.2 50.0 50.0 45.0 45.0 (6.1) (27.7) (30.0) (25.0) (25.0)

Company Filings, Compounders estimates

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Compounders Research

Risk factors
High Risk No Risk

Failure to open stores

The company operates in a stiffly competitive environment and hence, the success of the new stores that the company plans to operate in future cannot be guaranteed. Mitigant: Experienced management team with proven ability in rolling out outlets all over Singapore.

Heavy dependence on imports

The Company imports majority of its inventory from China, Malaysia, Indonesia, Thailand and Vietnam. Any political instability in these countries or changes in Singapores import policies may hinder the operations of the company to a great extent. Mitigant: Management could utilize its new warehousing facility to build up inventory in anticipation of any supply shock

Foreign currency exposure

The company has foreign exchange exposure on account of its high volume of imports. Currently, the company follows no foreign exchange hedging policy and hence any adverse fluctuations in the movements of these currencies could adversely affect its profitability. . Mitigant: The company largely holds its cash in USD and other currencies, therefore with expenses in S$, an appreciation of the USD would help to improve margins.

Rising Costs
Labour costs and lease rentals are expected to rise and these constitute a material portion of the companys operating costs. An increase in these would hence, lead to an increase in the overall operating costs and reduce profitability. Mitigant: The company largely holds its cash in USD and other currencies, therefore with expenses in S$, an appreciation of the USD would help to improve margins.

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Compounders Research

Porters Five Forces Analysis

Threat of Substitutes Fresh food is now core strength of SSG SSG is able to provide food items at discounted prices because of increasing scale of economies. SSG is able to create product differentiation, hence lowering the threat of substitutes.

Threat of New Competitors The threat of entry of new competitors into the retail industry is low. Major brands have already captured the retail market in Singapore. Therefore, new entrants have to produce something at an exceptionally low price and/or high quality to establish their market value. Resources such as supplier base, warehouses & land are required to establish new supermarkets and this is therefore a considerable barrier to new entrants.

Intensity of Competitive Rivalry The intensity of competitive rivalry in the retail industry is extremely high because of a lesser degree of product differentiation, high exit barriers, and high fixed costs. But SSG is increasing its home-brands and focusing on wet market that : will provide significant product differentiation. This leads to stable operations despite of high competitive rivalry. It should be noted that from 2005-10 market share of SSG increased from 12.2% to 17%. Others share remained unchanged, clearly showing the strength of SSG in competitive environment.

Buyers bargaining Power Bargaining power of buyers is fairly high in the Retail Industry. Using Fresh food as its strength & increasing scale of economies, SSG is able to create product differentiation. This will not let customers switch easily, hence lowering buyers power.

Sellers bargaining Power The bargaining power of suppliers is fairly low in retail industry. It should be noted that the single supplier contribution is around 5-10% of total purchase by Supermarkets. Hence, the position of the Supermarkets such as SSG is further strengthened and negotiations are positive in order to get the lowest possible price from the suppliers.

Sensitivity Analysis
Market Risk
Housebrand COGS % of Sellling Price

Market Risk

Store Cost

1 1.50 1.75 2.50

7.5% 0.97 0.80 0.67

8.0% 0.88 0.73 0.61

8.5% 0.81 0.67 0.56

9.0% 0.75 0.62 0.52

0.67 68% 69% 70% 74% 76% 78%

7.5% 0.82 0.81 0.80 0.76 0.74 0.71

8.0% 0.75 0.74 0.73 0.69 0.67 0.65

8.5% 0.68 0.68 0.67 0.63 0.61 0.60

9.0% 0.63 0.62 0.62 0.58 0.57 0.55

Market Risk
Rental Increase

1 10% 15% 18%

7.5% 0.84 0.80 0.77

8.0% 0.77 0.73 0.70

8.5% 0.71 0.67 0.64

9.0% 0.65 0.62 0.59

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Disclosures:

Compounders Research

Ownership and material conflicts of interest: The author(s), or a member of their household, of this report [holds/does not hold] a financial interest in the securities of this company. The author(s), or a member of their household, of this report [knows/does not know] of the existence of any conflicts of interest that might bias the content or publication of this report. [Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does [not] serves as an officer, director or advisory board member of the subject company. Market making: The author(s) does [not] act as a market maker in the subject companys securities. Ratings guide: Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater over the next twelve month period, and recommends that investors take a position above the securitys weight in the S&P 500, or any other relevant index. A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with [Society Name], CFA Institute or the CFA Institute Research Challenge with regard to this companys stock.

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