Sheng Siong

Sheng Siong: facing growing competition from budding online supermarket. Budding tech start-up and online supermarket, Redmart reportedly received US$23m of fresh funds from heavyweight investors Garena, Softbank Ventures, Visionnaire Ventures and Facebook co-founder Eduardo Saverin, to finance its expansion in Singapore. In less than three years since inception, Redmart has grown rapidly. In May last year, the group chalked up annualized sales of US$5m. The average customer now makes purchases online every two to three weeks. The online store currently stocks ~8,000 products, with plans to add another 7,000 more. Redmart is on track to expand into fresh foods by 4Q14, once it moves into its 100,000 sf AVA-approved warehouse that is technologically equipped to store fresh foods. Redmart’s growing clout presents a direct challenge to local supermarket chains such as Cold Storage (under Dairy Farm Int’l) and NTUC FairPrice, which also have started growing their online presence. However, in the long run, it may pose the biggest threat to Sheng Siong. Sheng Siong adopts a low-cost high-volume strategy, not unlike what Redmart is targeting. Online stores typically already enjoy lower labour cost. As Redmart gains economies of scale and builds a more efficient logistics and distribution network, it has the potential to enjoy much lower overheads per unit sales than Sheng Siong. Meanwhile, Sheng Siong’s business model is one that is sensitive to competition. We estimate that a 10% erosion in revenue could result in a 15% decline in net income, based on the group’s current cost structure. Longer term investors may consider its current valuations provides little safety buffer due to the potential threat of disruptive technology. Sheng Siong trades at 18.4x annualized 1Q14 P/E and 5.7x P/B.