Is China Sheng Siong Group Ltd’s Next Big Growth Opportunity?

Singapore-based supermarket retailer Sheng Siong Group Ltd (SGX: OV8) has finally revealed its next growth engine. Despite having great success in Singapore running its eponymous Sheng Siong outlets – the company’s profit has doubled from S$20.6 million in 2008 to S$44 million in the past 12 months – many investors have been worried about Sheng Siong’s future growth.

Sheng Siong operates solely in Singapore and saw its total retail area grow by only 5.2% per year to 400,000 square feet from 2010 to 2013. As of 30 June 2014, its total retail area remains unchanged at 400,000 square feet. With such figures, it’s perhaps fair to think that expansion in Singapore would not happen too quickly for the retailer going forward. So, that leaves foreign shores as the more plausible growth option for the company. But, how can Sheng Siong expand its presence and business outside of Singapore?

That has been answered this week, with Sheng Siong announcing that it has proposed a joint venture with Kunming Luchen Group Co. Ltd in China. The JV’s main purpose is to operate supermarkets in the country.

Who is Kunming Luchen?

Kunming Luchen is actually a manufacturer and distributor of food products such as sauces and condiments in China. Both Kunming Luchen and Sheng Siong are planning to commit a total of US$10 million as start-up capital for the JV. The plan is for Sheng Siong to hold a 60% interest in the JV with Kunming Luchen owning 30%. The remaining 10% of the pie would belong to Sheng Siong’s Executive Director, Mr. Tan Ling San.

Is this a good idea?

On paper, the plan sounds really nice. After all, China’s such a fast-growing country and its government has plans to transform its economy into one which is led by consumer spending. That’s also not to mention its huge population of some 1.4 billion people.

However, the truth remains that China is one of the most competitive retail markets in the world. Many large foreign retail players have tried entering the Chinese market and have struggled to make a big impact or have basically failed. US-based Walmart’s an example of the former while Tesco from the UK is a good fit for the latter; both companies are in the same kind of industry as Sheng Siong and both have a lot more resources to play with. For instance, Walmart and Tesco clocked around S$600 billion and S$120 billion in annual sales respectively in 2013.

With Sheng Siong now so late to the game, competition might be even greater now in China.

In addition, as fast as China has been growing, there are also some signs of a slowdown in its Gross Domestic Product growth. Add on a crackdown on corruption by the Chinese government, and what China ends up with is a retail industry that’s not in the best of health. For instance, China’s largest hypermarket operator Sun Art Retail Group is facing much slower growth going forward.

In such an environment, it might be good for Sheng Siong’s investors to prepare themselves for a very long gestation period for the company’s latest JV in China and also to readjust any high expectations they might have regarding its short-term growth potential.

Foolish Summary

With all that said, there is really no harm for Sheng Siong to give it a shot in China. An investment of US$6 million (corresponding to 60% of the US10 million start-up capital in the JV) is less than 1% of the company’s total market capitalisation. Given the risk/reward payoff, it seems like a risk worth taking.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.