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Thursday, 13 April 2017

Sheng Siong vs ThaiBev

With the heightened geopolitical uncertainties, Trump's failure to replace Obamacare and upcoming Eurozone elections, defensive stocks may see a re-entry into investor radars. Today we're comparing 2 of Singapore's listed consumer staple stocks, Sheng Siong and ThaiBev, to have a gauge of which might be a better investment for a defensive stock.

Sheng Siong operates in the grocery business, owning 43 supermarkets in Singapore with 1 to starting operations in China on 3Q2017, and ThaiBev operates in the food and beverage business, producing and supplying Spirits, Beers, Non-Alcoholic beverages and Foods. Sheng Siong's revenues come mostly from Singapore, whereas Thaibev's mostly from Thailand, with its market share more than 90% and 40% for Spirits and Beers respectively.

When it comes to comparing companies, there are many indicators that investors can use. For Sheng Siong and ThaiBev, we will be comparing their profitability and growth stories.
  • Profitability
Which company is more profitable? Profits are what most investors look for when they invest in companies. A gauge of profitability is the Return on Equity (ROE) ratio, which measures a company's competency in generating profits with the money shareholders have invested.

Sheng Siong ROE: 25.1%
ThaiBev ROE: 16.0%
Source: www.sgx.com, StockFacts

Boasting a higher ROE, Sheng Siong generates more profits per dollar of shareholder investment than ThaiBev. Investors might use this as an indication to invest in Sheng Siong over ThaiBev for a higher rate of return for their investment. However, investors should note that solely relying on ROE as a profitability gauge may be insufficient, and that it should be used with other indicators for a more complete picture.
  • Growth Story
In addition to profitability, a company's growth story is another important criteria for investors to consider when picking a better investment. A company's growth story speaks of how it will be able to generate higher returns in the future. It might be a new product, strategy or a more favorable market condition that might boost the company's profits. Management will usually state these in their annual or quarterly reports, freely available to the public.
Sheng Siong's growth story is simple; store expansion. The company seeks to increase its store count in Singapore as well as abroad. They had opened 4 new Singapore stores in 2016, located in newly developed HDB towns, inline with their strategy. Looking ahead, they could be adding "new HDB towns like Bidadari and Tengah to the list" as stated in their 2016 annual report. They are also venturing into Kunming, China, with their first supermarket could commence operations by end of 3Q2017. The state has a population of 7 million, larger than Singapore itself. If successful, Sheng Siong could enjoy strong profit growth for years to come. Their current growth strategy has yielded them a strong 4.5% compounded annual growth in revenue for the past 5 years.
ThaiBev's growth story in recent years has been through acquisitions. The company is seeking diversification into the non-alcoholic beverage segment, which currently constitutes 9% of its revenue. In 2008 they acquired Oishi Group Public Company Limited (“Oishi”), the No. 1 green tea beverage producer in Thailand, followed by Sermsuk Public Company Limited (“Sermsuk”), the beverage producer with the most extensive distribution network in Thailand, in 2011, and lastly F&N, a leading Singapore company in the beverage, publishing, and printing industries, in 2012. They are also seeking higher market share for their beer segment in Thailand, currently 40%, through product re-branding. This strategy has yielded the company a compound annual growth rate of 5% in revenue the past 5 years.
Upon analyzing the 2 growth stories, investors get a better idea of how their company plans to grow their business, and are more able to decide if they believe in it. One could argue that Singapore's supermarket segment is over saturated and unable to grow, and the business is difficult to penetrate in China, thus Sheng Siong's growth story cannot be achieved. Or the non-alcoholic beverage segment is too competitive, preventing ThaiBev's entry into it.

Whether it is by comparing profitability or growth stories, investors should thoroughly research companies that they invest in to determine if they are comfortable with the investment.

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