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Asian Insights SparX

ASEAN Grocery Retail DBS Group Research. Equity

Will online grocery retail take off in ASEAN? 

Modern grocery retail continues to penetrate ASEAN-5



Although online grocery retail is growing at a faster rate, profitability remains an issue



Retailers are incentivised to enhance operating scale, takeover by online giants may beckon



Top picks are SSG, DFI, CPALL, RHHI

Modern grocery retail expected to grow further. Modern grocery retail (MGR) has increased penetration in ASEAN-5 over the past two years. Overall value of MGR penetration in ASEAN-5 (US$) has increased to 30% of total grocery retail sales (from 29.6% in 2015). MGR growth in ASEAN-5 is projected by Euromonitor to be at a five-year CAGR of 7.4%, reaching US$93b by 2021. Larger players to strengthen scale. Larger players in ASEAN have the advantage of gaining further operating scale, in our view. Players with efficient operations and backend logistics could present themselves as an attractive target for takeover. Amazon’s buyout of Wholefoods is testament that store network and backend logistics are important for the online model. Online grocery retail faces challenges. Within ASEAN, online grocery retail has grown exponentially in Singapore, but challenges abound. RedMart remains unprofitable and faces challenges which include the convenience of shopping in traditional stores, expensive last-mile delivery, an entrenched lifestyle of grocery shopping, and consumers’ preference to physically pick the fresh produce in stores.

Refer to important disclosures at the end of this report

18 Jul 2017 STI : 3,298.24 SET : 1,574.09 PCOMP : 7,934.50

KLCI : 1,755.19 JCI : 5,841.00

Analyst Alfie YEO +65 6682 3717 [email protected] Andy SIM CFA +65 6682 3718 [email protected] Namida ARTISPONG +66 2657 7833 [email protected] Tiesha PUTRI +6221 30034931 [email protected] Regional Research Team [email protected] STOCKS Price LCY

Dairy Farm Sheng Siong Group CP ALL Robinsons Retail Puregold Price Club Matahari Putra 7-Eleven Bison Consolidated

12-mth Mkt Cap Target Price Performance (%) US$m LCY 3 mth 12 mth

US$8.21 11,104 US$9.96 S$0.99 1,087 S$1.20 Bt61.00 16,304 Bt75.00 P87.00 2,375 P101 P46.80 2,551 P41.90 Rp650 263 Rp450 RM1.30 337 RM1.58* RM2.40 174 RM2.02*

(5.2) 1.0 0.8 10.2 10.1 (33.0) (23.1) 13.2

17.3 9.4 17.9 (1.0) 1.9 (59.5) (3.0) N.A

Rating

BUY BUY BUY BUY HOLD FV NR NR

* Potential Target Source: Bloomberg Finance L.P., DBS Bank, DBSVI, DBSVT Closing price as of 17 Jul 2017

Our top picks are SSG, DFI, CPALL, RHHI. Our stock universe currently trades at a prospective PE of 22x, at -0.5SD of their 25x historical average. Top picks are SSG, DFI, CPALL, and RHHI. All are expected to post earnings growth led by margin expansion, with potential of re-rating when earnings outperform.

ASIAN INSIGHTS ed: JLC / sa: JC, YM, PY

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Asian Insights SparX ASEAN Grocery Retail

The DBS Asian Insights SparX report is a deep dive look into thematic angles impacting the longer term investment thesis for a sector, country or the region. We view this as an ongoing conversation rather than a one off treatise on the topic, and invite feedback from our readers, and in particular welcome follow on questions worthy of closer examination.

Table of Contents Executive Summary

4

Online grocery retail is growing but they won’t be a threat to retailers as yet

6

      

Online penetration for retail in Southeast Asia is small, let alone for grocery retail Singapore’s consumers are the most digitally ready Singapore has the key factors for online grocery retail to grow Although online grocery retail has grown exponentially, players are unprofitable as the market is in its infancy In contrast, other countries with more developed online MGR markets have profitable online players Singapore will be a test bed for future ASEAN online MGR We believe online grocery retail will not be a threat to retailers over the next two years.

Online players in Singapore remain unprofitable as challenges abound         

RedMart remains unprofitable despite rapid topline growth Supermarket shopping is very convenient in Singapore and people are still shopping in stores Online retail targets a certain consumer profile Market needs to get used to paying for delivery cost or online retailers will need to subsidise Groceries face a lower risk of disruption by online retail than non-food items Flexibility options for customers add to costs Click-and-collect may be more viable for now How some online grocers failed Last-mile logistics is expensive - Zyllem has closed

Retailers will continue growing while online grocery shopping finds its feet   

Retailers will increase their store network Scale drives down costs, improves margins Staff costs will reduce with handpay, self-checkouts, and cash collection technology in stores

Macro fundamentals support the growth of MGR     

The ASEAN grocery retail market has grown by 1.3% CAGR in the past two years Convenience stores have led ASEAN’s MGR growth in the last two years Industry-critical factors support growth of MGR in ASEAN-5 5-Year CAGR of 7.4% for MGR in ASEAN-5 till 2021 Convenience stores to drive MGR growth by 4% CAGR over the next five years

Companies with scale are the players in the sweet spot     

Companies with a store network Companies with a logistics network Smaller players to play catch-up A sizeable network and logistics chain may attract a takeover bid from an online player Top picks are DFI, SSG, RHHI, CPALL

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6 6 7 7 8 10 11

12 12 13 14 15 16 16 16 17 17

18 18 18 19

22 22 22 23 25 25

27 27 27 28 28 29

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Asian Insights SparX ASEAN Grocery Retail Appendix – Players in online grocery retail     

Opentaste Honestbee - Online concierge and delivery service HappyFresh GoFresh FreshDirect

Country profiles     

Singapore Indonesia Malaysia Thailand The Philippines

Stock profiles        

Dairy Farm International Sheng Siong Group CP All Pcl Robinsons Retail Holdings Pure Gold Price Club Matahari Putra Prima 7-Eleven Malaysia Bison Consolidated

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32 32 33 34 35 35

37 37 40 43 46 49

52 53 61 73 80 88 96 105 112

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Executive Summary The changing face of modern grocery retail provides opportunities for its retailers Modern grocery retail in ASEAN continues to penetrate in emerging markets… Urbanisation and modernisation in developing markets are changing the way people buy their groceries. Developing markets, as they progress, will embrace modern grocery retail (MGR) even more, as evidenced by the increase in penetration of MGR to 30% of total grocery retail sales from 21.7% a decade ago. Modern store formats are penetrating grocery retail beyond the traditional channels. We believe the rising middle class and each ASEAN government’s quest for economic development and progress will help drive the growth and penetration of MGR in these countries for a foreseeable future. … as well as in developed markets. By the same token, developed nations or cities in ASEAN which have seen a higher element of modern grocery retail is evolving as well. MGR in developed markets such as Singapore have seen new online channels and formats developing. MGR retailers are competing on services, pricing, selection, and efficient backend operations to drive down costs. Brick-and-mortar modern grocery retail in ASEAN is not dead. While few people can consume meals at foodservice outlets perpetually, consumers will somehow make use of the food retail channels, whether modern or traditional, as a source of their food supply. Grocery retail is therefore not dead and in fact never will die, in our view. Consumer needs and wants are ever-changing. This therefore is the cornerstone of modern grocery retail’s evolution. Modern grocery retailers that are able to identify areas of consumer demand will be the biggest beneficiaries. Consumers’ changing needs present opportunities for MGR retailers. The modern grocery retail market is dynamic. Consumers’ needs and demands for food are ever-changing, more so in a globalised world where physical and virtual connectivity are enabling consumers to be more demanding about food choices and at desired price points. These trends provide opportunities for retailers to meet consumers’ expectations and, in the process, get ahead of the competition. Consumer sophistication, exposure to global products, rising wealth, and preference for healthier choices, are driving demand for better food products.

ASIAN INSIGHTS

Industry-critical factors support growth MGR in ASEAN Industry-critical factors are playing out in ASEAN. Industrycritical factors of urbanisation, as well as a rising middle class and population in ASEAN-5, are supporting MGR penetration growth. The growth of MGR has outperformed that of traditional grocery retail at 1.3% vs -0.8% (CAGR) over the past two years. MGR penetration is now 30% in ASEAN-5, up from 2015 (29.6%) and from 21.7% in 2007. Our differentiated view on online grocery retail in ASEAN incentivizes larger players to grow Online grocery retail is not a threat but rather an opportunity to brick and mortar retailers to scale efficiently. We hold the view that online grocery retail over the next two years will not be a significant threat to ASEAN retailers. Retailers will continue growing. Urbanisation and a rising middle class will support proliferation of grocery retail stores. Meanwhile, retailers will be incentivised to build up their scale, including their logistical supply chains for extracting operating leverage, as well as the potential of being taken over by an online player in the future. E-commerce will co-exist with MGR stores Online grocery retail is here to stay. Even though online grocery retail is still at its infancy and has several obstacles to overcome, we expect it to gain traction. As the government continues to emphasise the use of technology in people’s daily lives – and a younger generation gets increasingly tech-savvy online grocery retail has the potential to be a popular channel in the future. This presents an opportunity for current brickand-mortar grocers to jump on the bandwagon as they adapt to evolving consumer behavior. Teething problems exist during online retail’s infancy in ASEAN. Online players in Singapore remain unprofitable as challenges abound. Based on filed financial records, RedMart remains unprofitable compared to brick-and-mortar grocery retailers because it lacks scale in both topline and cost. Besides, shopping is very convenient in Singapore and people are still shopping in stores. The proliferation of HDB and mall supermarkets has driven shopping convenience. Many Singaporeans do not live off the beaten path with the need for delivery. Even though housing units are densely packed, last-mile logistics is expensive and reducing delivery cost is key

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Asian Insights SparX ASEAN Grocery Retail

to profitable last-mile fulfillment. Fresh groceries have less disruption impact compared to non-food items in online sales and consumers still want to choose their own food. Catalysts for the sector Retailers must strive to gain scale and efficiency. With the evolution of the sector and potential threat of online players, it is then up to brick-and-mortar grocery retailers to reduce operating costs to offer/deliver these food items to consumers in a more profitable manner. We see an incentive for retailers to gain scale and operate efficiently. Better scale and operational efficiency can boost margins, thanks to lower costs, higher sales, and cashflow matrices. Operational scale could offer higher product margins on bulk volumes and defrayment of fixed operational/logistics costs, while efficiency could improve sales per store/square feet matrices/headcount, inventory and cashflow matrices. We believe larger listed companies are at the forefront to grow their scale further as opposed to smaller players which lack resources to implement initiatives to gain competitive advantage. Operating an efficient distribution chain, for example, drives down operating expenditure and may attract a takeover bid by online grocery players. A possible takeover by internet giants await. While it remains unclear why Amazon bought Wholefoods for US$13.7b, we believe online retailers could be going the omni-channel route in MGR. Listed Asian companies which are well operated, with some scale and efficiently-backed operations, could be potential acquisition targets of internet retailers.

ASIAN INSIGHTS

Top picks are DFI, SSG, CPALL, and RHHI We remain positive on the sector. The food retail sector is generally defensive and has an attractive ROE from 10% to over 30%. Companies are projected to remain on a growth trajectory, with earnings growth outpacing revenue growth in our forecasts. We project two-year earnings CAGR of our stock universe range from 5-21%, mainly driven by store openings and margin expansion. ASEAN grocery retail is trading at >20x PE. Valuations of ASEAN grocery retail stocks are not cheap at >20x prospective PE, compared to global grocery retail peers. Nonetheless, they offer investors defensive earnings of a noncyclical nature, net cash balance, cash generation capabilities, earnings growth and dividend yield for selected stocks. There is also potential for some of these stocks to re-rate should earnings outperform. Our top picks are SSG, DFI, CPALL, RHHI. Our picks for the sector are SSG and DFI in Singapore, CPALL in Thailand, and RHHI in the Philippines. Earnings growth is expected to outpace revenue growth on margin expansion. Margin expansion trend for SSG is expected to continue on a shift to more fresh food and better supplier rebates. We expect DFI’s margin to post improvement on rationalisation of loss-making stores, especially in Singapore. RHHI’s margin is also expected to trend up on price adjustments and closure of loss-making stores. CPALL has both network and margin expansion, fuelled by penetration in Thailand and the discontinuation of discount coupons to big-basket customers.

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Asian Insights SparX ASEAN Grocery Retail

Online grocery retail is growing but it won’t be a threat to retailers as yet Online penetration for retail in Southeast Asia is small, let alone for grocery retail Southeast Asia’s online retail market is fast growing but remains small. According to Bain & Company (Bain), the online retail market is worth US$6b in Southeast Asia but represents just 3% of total retail sales. Southeast Asia’s online retail market is not as developed as those in markets such as China and USA, where online retail accounts for 14% of total retail, and is worthUS$293b and US$270b, respectively. However, Bain projects that online retail sales in Southeast Asia will grow exponentially to US$70b by 2020. Even though there are about 250m smartphone users aged 16 and above in Southeast Asia, only 100m engage in online transactions, Bain estimates. Majority of consumers in Southeast Asia are not yet digital-ready Digital consumers who search for products online and purchase online 25%

Singapore’s consumers are the most digitally ready Singapore has the highest proportion of digital consumers. The highest proportion of digital consumers amongst its population in ASEAN can be found in Singapore. Singapore boasts high internet and mobile broadband penetration rates. This, along with various e-commerce websites, have fueled the growth of e-commerce in Singapore. Proportion of online consumers in ASEAN % of digital consumers 60% 50% 40% 30% 20% 10% 0% Indonesia

Philippines

Vietnam

Thailand

Malaysia

Singapore

Source: Bain & Company, DBS Bank

Digital consumers who search for products online but do not purchase online 13%

High internet and mobile broadband penetration rates in Singapore Consumers who are not yet digital 62%

Source: Bain & Company, DBS Bank

ASEAN is not yet ready for online retail. Most of Southeast Asia is showing signs of early-stage e-commerce adoption, according to Bain. Southeast Asia’s diversity is a challenge for e-commerce success; different ethnicities, languages, consumer preferences, and regulations are some of the challenges hindering the growth of e-commerce. Most of Southeast Asia is still lacking a solid regional payment and logistics infrastructure necessary for the proliferation of e-commerce. Consumers continue to distrust e-commerce platforms, are concerned about the lack of touch and, feel inherent in digital commerce, and have trouble locating the products they want.

ASIAN INSIGHTS

Internet penetration Indonesia

Mobile Broadband penetration

34%

65%

Philippines

53%

65%

Thailand

60%

131%

Malaysia

68%

104%

Singapore

81%

146%

Vietnam

52%

40%

Source: Nielsen, GSMA Intelligence, DBS Bank

Singapore has high online shopping adoption rate. According to the Singapore government's open data portal – the Annual Survey on Infocomm Usage in Households conducted by IDA since the 1990s – showed that the proportion of Singapore residents who bought or ordered goods and services or conducted transactions over the Internet before was 57% in 2013 and 47% in 2014. About 75% of those between the age of 25-34 years are online shoppers.

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Asian Insights SparX ASEAN Grocery Retail

Close to 40% of Singapore aged 15 and above shopped online in 2014

Market factors for online grocery retail success Internet and mobile penetration rates

100% 90%

High Internet adoption, especially among young Gen-Z and Millennials, will help online MGR gain traction

80% 70%

Population density and wealth

60%

Densely-populated, centrally- located urban areas enable better cost efficiency for deliveries (labour and transit costs)

50% 40%

Immense growth potential in e-grocery development in areas with increasingly affluent populations

30% 20% 10%

Consumer preference and lifestyle

0%

Desire for convenience and efficiency because of long working hours and busy lifestyles

15 to 24 years 25 to 34 years 35 to 49 years 50 to 59 years 60 and above Online shoppers

Rest of age group

Source: data.gov.sg, DBS Bank

Source: DBS Bank

Singapore has the key factors for online grocery retail to grow

Although online grocery retail has grown exponentially, players are unprofitable as the market is in its infancy

Factors affecting growth in online grocery penetration. We see three key factors driving the growth of online grocery retail: 1) Internet and mobile penetration rates; 2) population density and wealth of countries; 3) consumer preferences and lifestyle.

Online grocery retail’s share of the market projected to grow to 5% by 2020, from 3% in 2016. Euromonitor estimates that Singapore’s online grocery retail market was worth S$96m in 2016. Based on Singapore’s MGR market size of S$4.3b in 2016, online grocery retail’s market share of total grocery retail sales is 3%. The online grocery retail market has grown at a CAGR of 38% over the past five years. According to The Institute of Grocery Distribution’s (IGD) projection, online grocery sales is forecast to reach S$500m by 2020.

A high Internet adoption and mobile penetration rate, especially among young Gen-Z and Millennials, should help online grocery gain traction. Countries with high population density in urban areas will enable better cost efficiency for deliveries (especially for labour and transit costs). We believe there is growth potential in e-grocery development in areas with an increasingly affluent population as well. A society’s desire for convenience and efficiency – because of long working hours and busy lifestyles – will also drive the increase in online grocery retail. The Singapore market has all of the above.

Singapore online grocery retail market was S$96m in 2016 S $m

Cold Storage

NTUC Fairprice

RedMart

Sheng Siong

100 80 60 40 20 0 2010

2011

2012

2013

2014

2015

2016

Source: Euromonitor, DBS Bank

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Asian Insights SparX ASEAN Grocery Retail

Online grocery retail is at its infancy in Singapore. Singapore’s largest online player RedMart only started four years ago and has yet to turn in a core profit. The online business model, in our view, is still trying to find the right balance between gaining market share and becoming profitable. Core losses as at FY16 stood at S$51m for RedMart, based on financial records filed.

In contrast, other countries with more developed online MGR markets have profitable online players According to data from Kantar Worldpanel, markets with the highest grocery penetration rates are South Korea, Japan, France, and the UK. South Korea has clearly led the way with high connectivity, strong digital infrastructure, and free delivery.

Even Ocado took 15 years to break even. The UK’s leading online grocery retailer Ocado, which was founded in 2000 and delivered groceries for Waitrose, took 15 years to break even. It recorded £12.5m headline losses in FY13 but showed headline profit turnaround of £7.2m in FY14, followed by £12m each for FY15 and FY16. If not managed properly, online grocers can fail, as seen by the examples of HomeGrocer and Webvan.

Online grocery penetration rate by country

Source: Kantar Worldpanel

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Asian Insights SparX ASEAN Grocery Retail

Why some countries are more successful in online grocery retail 1) South Korea South Korea has a highly digitised economy. As seen in the chart, South Korea has the highest online grocery retail penetration at 16.6%, with almost 100% of consumers aged between 10 and 40 shopping online. South Korea’s online business is robust, with consumers paying low delivery costs. This is largely due to its highly digitalised economy which is constantly developing new technologies. South Korea boast one of the highest Internet speeds in the world, has a high smartphone penetration rate of 85%, and leading financial payment systems that make online purchases easier and safer for both retailers and consumers. Koreans are tech-savvy and known to be extremely willing to adopt the latest technologies. The capital Seoul is densely populated with 25.6m South Koreans – out of the country’s total of 51m – living in the Seoul Metropolitan area, creating a critical mass for online grocery retail. There are no wet markets unlike Singapore which makes for easier transition from shopping at supermarkets to online channels. Household clusters are also getting smaller at 2.37 persons per household in 2016 compared to 2.91 in 2000, based on statistics by the Seoul Metropolitan Government. Smaller households, especially single-person households, would buy less bulk items while seeking shopping convenience. Lastly, Koreans are used to shopping from home, having an already established TV home shopping market (introduced in 1995). There are at least five major players and excellent logistics/parcel delivery services to support shopping from home. South Korea’s online retailers use a myriad of strategies to increase their sales. These include setting up online chat-rooms; reaching out to consumers with enewsletters and promotions through email; as well as placing advertisements on social media channels. The Korea Online Shopping Association (KOLSA) reported that mobile shopping sales grew 45.7% y-o-y to 35.5t won (US$30.9b) in 2016.

2) Japan Japan’s smartphone penetration is high and the country has a robust online environment. Japan has the second-highest online grocery retail penetration of 7.2%. The country’s smartphone penetration is also rising. As at the end of 2014, 64.2% of all households in Japan have a smartphone. Thanks to robust online channels, consumers have access to information which can help them make purchase decisions. Retailers are able to reach out to consumers through these online channels as well, fuelling online grocery retail penetration. There are at least nine online grocery retail players in Japan including HealthyTokyo.com, SuperOrganic Foods, Hilo Market, Tengu Natural Foods, Japan Square, The Flying Pig, Enoteca, The Meat Guy, and the Foreign Buyers’ Club. 3) France The drive-through model is popular with the French. France’s online grocery retail penetration of 5.3% is largely driven by the increase in popularity of the Click-and-Drive model. The Click-and-Drive format has grown at a CAGR of 98% – from 96 stores in 2010 to 2,903 in 2016 - according to data by Nielsen. Nielsen also observed that 80% of French households have access to a Click-and-Drive less than 15 minutes from home, against 75% for hypermarkets. Consumers make their purchases online and collect the items by driving through the physical stores. Consumers like to shop at hypermarkets as they sell a large range of products and the Click-and-Drive model makes shopping at hypermarkets more convenient for consumers at no extra cost. This model is more popular among families with young children. Number of Click-and-Drive/Services Drives in France 1137 Click & Drive

642

591

555

Services Drives

467 168

83

70

Source: Nielsen TradeDimensions, DBS Bank

ASIAN INSIGHTS

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Asian Insights SparX ASEAN Grocery Retail

4) UK The UK has a very developed MGR scene. With a population of 64m in the United Kingdom, the grocery retail scene is very developed and competitive. There are more than eight established chain-store grocers across different formats including discounters and online channels. However, while the online penetration of market in the UK may be the thirdlargest globally, the environment is challenging for online retailers to operate in. Online retailers struggling with delivering products in a profitable manner. As a result, online retailers have imposed minimum spending and delivery fees on consumers. It is vital for retailers to improve the delivery logistic issue for online retailing to take off. Several online retailers including Sainsbury’s, AmazonFresh, and Chop Chop currently provide same-day delivery in a bid to attract more consumers. The UK has an online MGR penetration of 6.9% (7.3% in 2017).

Key online players in ASEAN Online grocery players/portals

Is online grocery shopping popular with consumers?

Singapore

Cold Storage, NTUC Fairprice, Sheng Siong, RedMart, Opentaste, Honestbee, Gofresh

Gaining some traction, but most still shop in the stores

Malaysia

HappyFresh, Tesco, PasarTap Delivery, Redtick, BIGbox Asia, SAM’s Groceria

Serve very niche market as brick-and-mortar grocery shopping continues to be favoured by most

Thailand

BIG C, Makro, Tesco Lotus

Gaining popularity but may take time to be a big hit. Current contribution to sales is S$49  Free delivery

NTUC Fairprice

< S$99  S$7 delivery fee ≥ S$99  Free delivery

Giant

< S$60  S$12 delivery fee ≥ S$60  S$7 delivery fee

Cold Storage

< S$60  S$12 delivery fee ≥ S$60  S$7 delivery fee

OpenTaste

< S$35  S$4.95 delivery fee ≥ S$35  Free delivery

E-mart

< S$30  S$3 delivery fee ≥ S$3  Free delivery

90%

Ocado

< £75  £2.99 - £6.99 delivery fee ≥ £75  Free delivery

70%

< S$60  S$15 delivery fee ≥ S$60  Free delivery

50%

Gofresh

Source: Companies, DBS Bank

Most online grocery shoppers prefer delivery to their homes 100%

80%

60%

40% 30% 20%

Minimum online purchase to discourage low value orders. In order to keep online grocery retailing profitable, many online grocery retailers have imposed minimum purchases for consumers to qualify for free delivery or lower delivery fees. These retailers recognise that delivering single items or lowvalue purchases will erode their margins and be unprofitable for their online business. Imposing minimum orders will ensure that their fulfillment costs are covered and their profitability

ASIAN INSIGHTS

10% 0% Deliver to home

Pick up inside store

Already using

Drive through

Willing to use

Pick up outside store

Unwilling to use

Source: Nielsen, DBS Bank

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Cold-chain logistics will be relatively more expensive. Service providers need cold-chain management to preserve freshness, adding to costs. Non-fresh grocery items such as water, detergent, canned food, pasta, toiletries, etc with no requirement for refrigeration have longer shelf life. Frozen and fresh food however remains a challenge and cold-chain logistics is necessary to preserve freshness. Unlike non-food items in e-commerce, product failure in fresh food has some impact on food safety. Service providers need to prevent food products from being contaminated during delivery. Delivery costs will hence be more significant to for online grocery players. Logistics costs will be higher for online players in cities that sprawl across a large area and/or have an expensive transport system. Groceries face a lower risk of disruption by online retail compared to non-food items The challenge is in preserving freshness. Shoppers want to choose their own fresh groceries. Nielsen’s Global Connected Commerce Survey in 3Q 2016 showed that grocery items rank among the lowest for online purchase amongst 18 durables and consumables product and service categories. Fresh groceries rank the highest, with 44% of shoppers preferring to buy more often in-store. Evidently, grocery consumers rank the ability to select their own fresh products highly. Online players will hence have to gain shoppers’ trust and prove that they can deliver fresh grocery items to customers or risk losing sales in this product category. For this reason, we believe that fresh food will face less online disruption than non-food items.

Flexibility options for customers add to costs Online players are currently in a catch-22 situation. Customer service includes sales guarantees and replacements, flexibility for immediate and appointed delivery times; otherwise, consumers may be reluctant to buy online. These promises add to costs, including that for double delivery, until the business gains scale. It is then up to the businesses to execute efficiently. With scale, online players are then able to provide such customer services profitably. Click-and-collect may be more viable for now Customers undertake delivery costs under “Click-and-collect” model. “Click-and-collect” is a grocery retail model highly popular in France and the UK. Under this model, consumers submit their orders online and collect their purchases from a collection point. The collection point may or may not be at the grocery retail store. It may be a more viable model for businesses because it slashes delivery costs for the online retailer. This model is being considered by supermarkets as it is more viable for profitability and helps reduce the costs incurred for preserving freshness, logistics, fuel, traffic, cold trucks, etc. Carrefour Drive pick-up point in Belgium

Consumers most averse to purchasing fresh groceries online % 70 60 50

69

62

58 49

45 45

40 30

41 38 38 37 35 33 33 30 29 26 25 23

20 10

Source: Nielsen, DBS Bank

0

Source: Nielsen, DBS Bank

ASIAN INSIGHTS

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Asian Insights SparX ASEAN Grocery Retail

Baby and family items dominate Click-and-Drive in France (Click-and-Drive weight of each product category) 14.0% 12.0%

13.1%

12.2%

11.5% 11.2% 11.2% 10.0% 9.9%

10.0%

9.8%

9.0%

8.7%

8.0% 6.0%

Servicing the wrong area. Webvan expanded into cities with low population density, which resulted in relatively high delivery costs that made fulfilment unprofitable. Its trucks were making trips to areas with low order count/ticket size. These made delivery trips and trucking costs inefficient, leading to poor profitability.

Source: Nielsen, DBS Bank

Owned infrastructure, no leverage on third parties. Webvan had its fully owned infrastructure from warehousing to the picking of orders, delivery and customer service. It didn’t leverage on third-party suppliers such as brick-and-mortar grocery stores and concentrated their resources on the delivery and customer service aspects. Grocers such as Ocado and Peapod leverage on grocery stores and started warehouses when it made economic sense.

How some online grocers failed

Last-mile logistics is expensive - Zyllem has closed

Webvan operated for five years. Webvan was an online grocery retailer founded in the USA in 1996 but made several mistakes which contributed to its downfall – including moving into online too early – and eventual bankruptcy in 2001. In the process, Webvan drained c.US$800m in venture capital and IPO proceeds.

Last-mile logistics is expensive. Last-mile logistics firm Zyllem stopped providing delivery services on 7 September 2016 in Singapore. Zyllem had up to 5,000 drivers and was growing at a double-digit rate month-on-month. Costly delivery services, which led to poor profitability, resulted in its closure. The delivery services market in Singapore is competitive and players compete on every measure, from prices to delivery time. High logistics cost including vehicle and labour costs, along with the competitive market pricing, pose challenges to logistics players Similarly, high logistics costs will pose a challenge for online grocery players when they try to make their business profitable.

4.0%

4.0% 2.0% 0.0%

Wrong pricing and target audience. By offering a wide range of high-quality goods at low prices, as well as home delivery services, the company turned in low profit margins. The low prices failed to attract upmarket consumers and it was left with consumers who bought low-margin products. Over-expansion. Webvan expanded quickly into nine cities within 18 months and had aggressive plans for new cities before it was successful in its first market. It even had plans to expand into 26 more cities by 2001, the year it went into bankruptcy. It built several warehouses with a US$1b investment.

ASIAN INSIGHTS

More viable for retailers with own backend logistics to deliver to online consumers as stores are already profitable. MGR retailers with their own logistics abilities already have resources to fulfil deliveries – from distribution centres to stores. Deploying a truck or dedicating a hub store to fulfil last-mile delivery will be more viable for profitability than pure-play online players with backend logistics dedicated solely for online purchases.

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Asian Insights SparX ASEAN Grocery Retail

Retailers will continue growing while online grocery shopping finds its feet Retailers will increase their store network Larger players are growing their store network and operational scale. ASEAN’s largest listed grocery retail players continue to drive growth and topline with store openings. This is a common theme regardless of whether grocery markets are well developed or not. Even in densely-populated Singapore, proliferation of stores at every corner will drive convenience and purchase frequency. Operators in ASEAN are growing store count

from suppliers. Due to their smaller store network, suppliers cannot penetrate the market overnight by putting up their new products with the smaller retailers. They are unable to collect listing fees as well. Smaller MGR players in Singapore have therefore tried to build up their store networks recently. HDB rents have been tendered at aggressive rates of c.S$20psf because smaller players have been trying to win more shop spaces to build up economies of scale. With an additional outlet or two, retailers will enjoy better economies of scale and profitability for volume discounts and rebates, provided that rental rates are economically sensible.

Store growth strategy Sheng Siong

Targets 50 stores and beyond island-wide eventually and in places where it has no presence

Dairy Farm

Has started to expand store count after store rationalisation exercise

NTUC Fairprice

Continues to bid for shop spaces

7-Eleven Malaysia

Management maintains its new store expansion plan (about 200 stores/annum)

Bison Consolidated

The group has planned to open 70 new stores per year in FY17- 18

CP All

Plans to open at least 700 stores p.a. in the next five years

Matahari Prima Putra

Targets to open 22 hypermarkets and supermarkets in 2017 with focus in underpenetrated ex-Java cities. This will bring MPPA’s hypermarket and supermarket store counts to over 210

Pure Gold Price Club

Targets to open 25 Pure Gold and two S&R stores every year till 2020.

Robinsons Retail Holdings

Plans to roll out 150 new stores nationwide for 2017. This would bring total store count to 3,665 and could translate to a growth of 8-10% in gross floor area

Source: Companies, DBS Bank

Smaller players have incentives to build up their network or consolidate to build scale. Smaller MGR players have a disadvantage in terms of scale and should look to scale up to build a competitive advantage. Extremely small or independent grocery retailers typically have lower sales volumes and obtain lower discounts/rebates and poorer credit terms – often cash terms – from suppliers. Compared to larger players with centralised sourcing and distribution functions, smaller players also do not have volume discounts and bulk handling discounts

ASIAN INSIGHTS

Successful HDB rental tender rates have gone up as smaller players have been bidding aggressively S $ psf 22 20 18 16 14 12 10

Source: Place2lease, DBS Bank

Scale drives down costs, improves margins Ways to drive down costs. The grocery retail business has thin net margins of 40 stores islandwide with more than 400,000 sqft of selling space. In our opinion, being the third largest supermarket player in Singapore with a Mandai distribution centre, Sheng Siong has both critical mass and economies of scale. We believe focus has been on cost management rather than driving sales. If Sheng Siong’s focus was to drive sales, it would be bidding aggressively against the smaller players regardless of price. However, it emerged as the winning bidder in only one out of six supermarket bids this year, at a reasonable S$15 psf, lower than c.S$20 psf bids in 4Q16. Market is concerned that top line is slowing, but we believe it is short term and see store network increasing eventually. We refute the argument that outlook is unexciting because Sheng Siong has not been winning new shop space. Instead, we believe the market should focus on the rental levels that Sheng Siong is securing new stores, rather than short-term headwinds of two store closures and not winning new stores. Sheng Siong also recently won one 11,000-sqft new store in Woodlands St 12. Meanwhile, the Tampines Central store expansion will add 15,000 sqft to its store network space. These will mitigate the impact of store closures. Also, we believe that footfall for the Verge and Woodlands has been tapering and well accounted for in recent quarters results due to news of their imminent closure. Negative short-term impact should therefore be minimal. With HDB continuing to put up shops earmarked for supermarkets for tender in existing and new estates, there are ample opportunities to secure more stores going forward. Growing through operating efficiencies. Store count is not the only factor that drives growth. Higher store efficiencies can supplement growth as well along with greater focus on cost. These include running more promotions, quicker checkout process, store layout, new SKUs, higher-margin products to generate greater stock turnover, sales volumes and better profitability. Online is not a real threat for now. We do not see online business as a significant threat for now. There are

ASIAN INSIGHTS

supermarkets located across Singapore, making it convenient to pick up groceries. HDB has put up properties earmarked for supermarket over the years and as such, supermarkets are now conveniently located across Singapore. Online businesses although gaining traction, remain in an unprofitable state. Pureplay online grocery retailer Redmart’s business remains in core operating losses and negative free cash flow. It has less than S$100m of revenue in a S$6bn Singapore grocery retail market after four years of operation. HDB will release six supermarket and two minimart properties in the next six months, not forgetting future supermarket properties in new estates such as Biddadari. Scope for growing store network abound over the long term. We believe this will give online a run for its money as it remains convenient for consumers to pick up groceries. About 80% of people living in Singapore live in HDB estates (which have planned amenities including grocery shops) and do not live “off the beaten path” to really warrant grocery delivery in our view.

Financial impact Internally funded. Sheng Siong will internally fund the warehouse expansion to the tune to S$19m comprising construction and fit out. As of 1Q17, Sheng Siong had S$68.3m cash on its balance sheet with no debt. Sheng Siong generates c.S$70-80m in operating cashflow each year, more than sufficient to fund the expansion. There is no further cashflow burden on past property purchases as previous cashflow strain on the purchases of Tampines property (2014, S$65m), Bedok property (2016, S$55m) and Junction 9 (2013, S$55m) have all already been expensed.

Valuation Maintain BUY, TP S$1.20. We maintain our BUY recommendation on Sheng Siong. We like Sheng Siong for its steady earnings growth, net cash, growing margins and strong dividend yield. Our TP of S$1.20 is derived from 25x FY18F PE.

VICKERS SECURITIES Page 63

Company Guide Sheng Siong Group

Sheng Siong’s U-shaped layout and location of warehouse expansion

Rail corridor

Not Sheng Siong’s building

Ex-KTM railway land

Source: Google map, DBS Bank

Trades below peers’ average of 30x PE M ark et Cap (S$m)

Px L ast

PE (A c t )

PE (Y r 1)

PE(Y r 2)

P/BV (x )

P/Sales (x )

ROE (%)

Operat ing M argin (%)

Net M argin (%)

Div idend Y ield (%)

Company

Rat ing

Count ry

Sheng Siong

BUY

SGX

1,489

0.98

26.2x

23.7x

21.7x

5.9x

1.9x

25%

8.2%

7.9%

3.8%

SGX SET

15,294 22,598

8.02 61.75

25.8x 40.5x

23.9x 33.4x

22.8x 27.6x

7.3x 10.1x

1.0x 1.3x

33% 36%

4.0% 6.5%

4.2% 3.8%

2.6% 1.5%

7,461 222.00 6,986 35.75 3,448 45 428 760 2,439 565 2,033 160 518 1,200 3,375 88 546 1.37 234 2.33 24 50 264 880 Regional av erage Ex - Indonesia av erage

26.6x 29.7x 25.0x 22.5x 38.9x 63.7x 27.7x 28.1x 35.7x 36.6x nm 12.6x 29.5x 35.3x

23.1x 27.4x 22.7x 53.3x 29.3x NaN 26.1x 25.2x 31.2x 29.3x NaN NaN 29.5x 27.0x

20.3x 25.5x 20.8x 21.0x 25.7x NaN n/a 21.8x 28.0x 23.4x nm NaN 20.3x 24.2x

3.5x 9.9x 2.9x 1.6x 4.5x 14.1x 0.9x 2.6x n/a 4.4x 0.2x n/a 5.2x 8.0x

1.5x 1.0x 1.1x 0.3x 0.4x 2.5x 0.4x 1.2x 0.8x 2.5x 0.3x n/a 1.1x 1.3x

16% 45% 14% 3% 14% 37% 3% 11% 148% 12% -3% 31% 29% 47%

8.2% 4.1% 7.2% 1.3% 2.3% 6.1% 1.6% 5.2% 3.5% 8.9% 6.7% 5.0% 5.0% 5.7%

6.3% 3.1% 4.9% 0.5% 1.1% 4.1% 1.1% 4.6% 2.5% 6.9% -4.8% 2.3% 2.9% 4.1%

1.3% 2.4% 0.7% 0.7% 0.8% 0.3% na 0.8% 1.7% 0.6% na 2.3% 1.3% 1.5%

Sout h East A sia Peers Dairy F arm Intl CP ALL

BUY BUY

Big C Supercntr Siam Makro Puregold Matahari Putra Sumber Alfaria PSC Hero Supermarket Robinsons Retail 7 Elev en Bison Cons Modern Internasi Midi Utama ID

F ULLY V ALUSET NOT RATED SET HOLD PSE F ULLY V ALUIDX NOT RATED IDX NOT RATED PSE NOT RATED IDX BUY PSE NOT RATED KLSE NOT RATED KLSE NOT RATED IDX NOT RATED IDX

Closing as of 19 Jun 2017 Source: DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 64

Company Guide Sheng Siong Group

There are 6 HDB supermarkets up for bidding in the next 6 months S/N

Estate

Precinct Name

Block

Street Name

Commercial Units Minimart

Shop

Supermarket

Eating house

1

BUKIT BATOK

Skyline @ Bt Batok

296A

Bukit Batok Street 22

1

1

-

-

2

JURONG WEST

-

990

Jurong West St 93

-

-

-

1

3

PUNGGOL EAST

Waterway Sundew

660A

Edgedale Plains

-

5

1

1

4

PUNGGOL WEST

Matilda Edge

224A

Sumang Lane

-

5

-

-

5

QUEENSTOWN

Ghim Moh Edge

29A

Ghim Moh Link

-

4

1

-

6

SEMBAWANG

EastLace @ Canberra

115

Canberra Walk

1

4

-

-

7

SENGKANG

Anchorvale Parkview

338

Anchorvale Crescent

-

9

1

1

8

SENGKANG

Fernvale Riverwalk

417

Fernvale Link

-

9

1

1

9

WOODLANDS

Admiralty Flora

691

Woodlands Drive 73

-

4

1

1

10

WOODLANDS

Woodlands Glen

573

Woodlands Drive 16

-

8

1

1

2

49

6

6

Total

Source: Place2lease, DBS Bank

SSG won one new 11,000-sqft store in Woodlands St 12 at 20% of its 316 store-network as at end FY16) in FY1718, coupled with gradual recovery in consumer sentiment, we are positive that the group will continue to record strong earnings growth going forward.

6%

7% 6.4

6% 4% 2%

Inability to secure strategic locations. As a convenience store operator, one of the key success factors for Bison lies with its ability to secure outlet locations with high foot traffic. Bison plans to open 70 new outlets per year as part of its expansion plan. With the new outlets mainly in the Klang Valley region, it is crucial for Bison to secure prime locations especially in the shopping malls. However, in the event of Bison failing to secure optimal retail locations for its new outlets, the group’s growth prospects could be adversely affected. Unforeseen changes in tenancy arrangements. Bison does not own the properties of its outlets. The outlets located in shopping malls, hypermarkets, high streets, office spaces, transportation hubs, resorts and medical centres are all rented from third parties with most tenancy contracts having tenures of less than three years. The terms and conditions of the tenancy agreements may be subject to the landlords’ review and revisions. There is a risk that the landlords will increase rental rates or not renew the tenancies when they expire.

0% FY13

FY14 Net Profit

FY15

FY16

1QFY17

Net Margin

Source: Company, DBS Bank

Page 116

Regional Equity Explorer Bison Consolidated

Key Assumptions FY Oct Net additions of stores Sales per store (RM,m) Gross margin (%)

Sensitivity Analysis 2014A

2015A

2016A

2017F

2018F

2019F

37.0 0.93 33.1

41.0 0.95 34.2

70.0 0.88 35.8

70.0 0.91 36.4

70.0 0.94 36.8

70.0 0.96 36.9

2017 GP margin +/- 1%

Improving margins due to better product mix

Income Statement (RMm) FY Oct Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)

Net Profit +/11%

2014A

2015A

2016A

2017F

2018F

2019F

182 (122) 60.4 (44.1) 16.3 0.0 0.30 (0.4) 0.08 16.3 (3.9) 0.0 0.0 12.4 12.4 19.4

218 (143) 74.4 (57.0) 17.4 0.0 0.73 (0.5) 0.0 17.7 (4.2) 0.0 0.0 13.5 13.5 21.8

264 (170) 94.5 (71.4) 23.1 0.0 1.11 (0.1) (0.5) 23.6 (5.5) 0.0 0.0 18.1 18.6 28.7

336 (214) 122 (90.9) 31.4 0.0 1.11 0.03 0.0 32.6 (7.6) 0.0 0.0 25.0 25.0 38.1

411 (260) 151 (113) 38.6 0.0 1.11 0.03 0.0 39.7 (9.2) 0.0 0.0 30.5 30.5 47.0

490 (309) 181 (135) 46.1 0.0 1.11 (0.3) 0.0 47.0 (10.9) 0.0 0.0 36.1 36.1 55.9

15.5 7.1 2.7 5.5

19.3 12.5 6.9 9.5

21.4 31.8 32.4 37.6

27.2 33.0 36.1 34.4

22.3 23.2 22.8 22.0

19.2 19.0 19.5 18.2

33.1 8.9 6.8 33.4 16.8 24.3 87.9 39.6

34.2 8.0 6.2 27.6 14.9 21.2 3.7 38.2

35.8 8.7 6.9 17.4 11.9 16.0 25.6 209.8

36.4 9.4 7.4 15.4 11.3 14.4 18.6 NM

36.8 9.4 7.4 16.4 11.9 15.5 15.2 NM

36.9 9.4 7.4 16.8 12.2 15.9 12.9 173.2

Margins Trend 10.0% 9.5%

9.0% 8.5% 8.0%

7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 2015A

2016A

Operating Margin %

2017F

2018F

Net Income Margin %

Source: Company, DBS Bank

Page 117

2019F

Regional Equity Explorer Bison Consolidated Revenue Trend 72.5 (46.7) 25.8 (20.1) 5.66 0.0 0.10 0.03 0.0 5.79 (1.5) 0.0 4.31 4.31 7.04

76.2 (48.8) 27.4 (19.7) 7.76 0.0 0.41 (0.1) 0.0 8.05 (1.7) 0.0 6.36 6.36 9.51

nm nm nm nm

4.1 (15.3) (21.7) (30.7)

1.3 (14.2) (16.4) 1.3

11.3 11.5 16.0 6.2

5.2 35.0 37.1 47.7

38.0 12.1 9.3

34.8 9.1 6.2

34.3 7.5 6.2

35.6 7.8 5.9

36.0 10.2 8.3

2014A

2015A

2016A

2017F

2018F

2019F

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets

42.7 0.34 0.01 8.68 15.8 12.6 1.76 81.9

46.7 1.57 0.01 7.02 21.8 21.2 1.26 99.5

65.3 2.68 8.64 17.8 29.8 25.4 54.9 204

85.7 3.79 8.64 7.83 39.6 36.5 54.9 237

99.5 4.90 8.64 30.5 39.4 36.2 54.9 274

112 6.01 8.64 45.9 46.9 43.2 54.9 317

ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.

1.45 25.2 1.14 9.67 1.97 42.5 0.0 81.9

1.46 31.1 0.59 8.75 2.11 55.5 0.0 99.5

1.55 40.4 0.15 7.31 2.59 152 0.0 204

1.55 45.0 7.66 7.31 2.59 173 0.0 237

1.55 54.6 9.32 7.31 2.59 199 0.0 274

1.55 65.0 11.0 7.31 2.59 230 0.0 317

Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%)

3.80 (2.4) 23.4 70.2 41.1 2.5 1.4 0.8 0.1 0.1 80.9

12.5 (3.2) 28.3 73.6 49.1 2.4 1.5 0.9 0.1 0.1 75.3

69.5 8.93 32.2 79.0 57.0 1.7 3.0 1.0 CASH CASH 266.4

78.3 (1.0) 33.6 75.0 60.9 1.5 2.6 0.8 0.0 0.0 293.2

66.5 21.6 32.3 72.0 57.1 1.6 2.5 1.0 CASH CASH 238.8

68.9 37.0 29.6 72.7 52.4 1.7 2.5 1.1 CASH CASH 238.8

Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)

10%

70 60

8%

50

6%

40 30

4%

20

2%

10 0

Revenue

1Q2017

65.1 (42.8) 22.3 (17.4) 4.88 0.0 0.27 (0.1) 0.0 5.02 (1.0) 0.0 4.06 4.06 6.32

4Q2016

64.3 (41.9) 22.4 (16.6) 5.84 0.0 0.48 0.07 (1.2) 5.23 (1.2) 0.0 4.00 5.15 7.37

12%

80

3Q2016

61.7 (38.2) 23.5 (16.0) 7.45 0.0 0.27 (0.1) 0.0 7.58 (1.8) 0.0 5.77 5.77 8.70

Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA

90

2Q2016

1Q2017

1Q2016

4Q2016

4Q2015

3Q2016

3Q2015

2Q2016

2Q2015

1Q2016

1Q2015

FY Oct

4Q2014

Quarterly / Interim Income Statement (RMm)

0%

Revenue Growth % (QoQ)

Healthier margins due to better product mix

Source: Company, DBS Bank Balance Sheet (RMm) FY Oct

Asset Breakdown (2017) Debtors 21.2%

Net Fixed Assets 49.7%

Assocs'/JVs 2.2%

Inventory 23.0%

Bank, Cash and Liquid Assets 3.9%

Source: Company, DBS Bank

Page 118

Regional Equity Explorer Bison Consolidated Cash Flow Statement (RMm) FY Oct

Capital Expenditure

2014A

2015A

2016A

2017F

2018F

2019F

16.3 2.74 (27.4) (0.3) 0.32 20.6 12.2 (9.0) 0.0 0.0 0.0 0.23 (8.8) (10.9) 1.31 0.0 5.32 (4.3) (0.3) (1.2) 544 147

17.7 3.59 (0.6) (0.7) (8.6) (2.9) 8.50 (7.7) 0.0 (0.5) 0.0 0.13 (8.1) (0.5) (1.0) 0.0 (0.6) (2.1) (0.3) (2.0) 5.51 0.26

23.6 4.48 (0.5) (1.1) (56.6) 49.7 19.7 (23.6) 0.0 0.0 0.0 (61.9) (85.5) (4.7) (1.6) 88.7 (7.0) 75.5 0.0 9.66 24.6 (1.3)

32.6 5.60 (0.1) (1.1) (16.3) 0.0 20.7 (26.0) 0.0 0.0 0.0 0.0 (26.0) (4.7) 0.0 0.0 0.0 (4.7) 0.0 (10.0) 11.9 (1.7)

39.7 7.29 (7.6) (1.1) 10.1 0.0 48.5 (21.2) 0.0 0.0 0.0 0.0 (21.2) (4.7) 0.0 0.0 0.0 (4.7) 0.0 22.6 12.4 8.80

47.0 8.67 (9.2) (1.1) (4.1) 0.0 41.2 (21.2) 0.0 0.0 0.0 0.0 (21.2) (4.7) 0.0 0.0 0.0 (4.7) 0.0 15.4 14.6 6.47

Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (sen) Free CFPS (sen)

RMm 30.0 25.0

20.0 15.0 10.0 5.0 0.0 2015A

2016A

2017F

2018F

2019F

Capital Expenditure (-)

Stores and CDC expansion

Source: Company, DBS Bank

VALUATIONS No formal dividend policy. Despite not having a formal dividend policy, Bison had declared 1.5sen DPS (26% payout) to shareholders in FY2016. We assume that the group will maintain 1.5 sen/share DPS going forward, on the back of strong cashflows, strong balance sheet and bright growth prospects. This translates to 0.7% dividend yield for FY17.

Fair value at RM2.02. We pegged Bison’s fair value at 25x FY17F PE, a 20% discount to the industry average given its smaller size. Although we are positive on the group’s growth prospects, we believe that the stock is fairly priced at this juncture. Risk Assessment: Moderate Category Risk Rating 1 (Low) - 3 (High) Earnings 2 Financials 1 Shareholdings 1 Overall

Wgt

Wgtd Score

40% 20% 40%

0.8 0.2 0.4 1.4

Low free float, key stakeholders control two-thirds of the company. Shares in Bison remain tightly held, with a free float of 26%. The Dang family effectively owns 74% - mostly through its family private vehicle, D&D Consolidated Sdn Bhd.

Regional peer comparison Company

Rat ing

TP

M ark et Cap (S$m)

Px Last

PE (A ct )

PE (Y r 1)

PE(Y r 2)

P/BV (x)

P/Sales (x)

ROE (%)

Operat ing M argin (%)

Net M argin (%)

Div idend Y ield (%)

Sout h East A sia Ret ailers DairyFarm Intl CP ALL

BUY BUY

9.96 75

17,262 21,455

9.02 59.00

26.6x 32.1x

25.4x 26.5x

23.5x 22.0x

7.2x 8.0x

1.1x 1.1x

30% 33%

4.1% 6.6%

4.2% 4.1%

2.5% 1.9%

Big C Supercntr Siam Makro Puregold Robinsons Retail Sumber Alfaria Matahari Putra PSC Sheng Siong Hero Supermarket Bison Cons 7 Eleven Modern Internasi Midi Utama ID

HOLD Not rated BUY BUY Not rated Not rated Not rated BUY Not rated Not rated Not rated Not rated Not rated

210 n/a 49.50 92.00 n/a n/a n/a 1.13 n/a n/a n/a n/a n/a

6,787 204.00 6,484 33.50 3,474 44.00 3,052 76.50 2,310 530.00 632 1,120.00 2,108 165.00 1,428 0.94 580 1,320.00 134 2.12 530 1.69 36 75.00 278 920.00 Regional av erage

26.3x 29.7x 22.2x 22.2x 36.6x n/a 66.6x 22.8x 36.3x 35.4x 30.6x n/a 13.5x 30.1x

21.3x 26.2x 20.0x 19.6x 27.4x 87.1x n/a 21.1x n/a 26.7x 29.2x n/a n/a 29.8x

19.0x 25.3x 17.9x 17.1x 22.5x 34.2x n/a 19.8x n/a 21.9x 25.0x n/a n/a 22.7x

3.3x 10.2x 2.6x 2.1x 4.3x 2.5x 16.8x 5.5x 1.0x 3.9x 34.7x 0.3x

1.4x 0.9x 1.0x 0.9x 0.4x 0.4x 2.8x 1.8x 0.4x 2.3x 0.7x 0.4x 1.0x

7.0% 4.1% 6.9% 5.4% 2.3% 1.9% 6.6% 8.9% 1.6% 9.4% 3.7% 6.7% 5.0% 5.3%

5.5% 3.1% 4.8% 4.7% 1.1% 1.3% 4.5% 8.5% 1.1% 7.4% 2.6% -4.8% 2.3% 3.3%

0.9% 2.5% 0.7% 0.9% 0.8% 2.9% 0.3% 4.3%

6.8x

16% 45% 14% 11% 14% 9% 39% 27% 3% 15% 148% -3% 31% 27%

Source: DBS Bank, Thomson Reuters

Page 119

0.7% 3.0% 1.6% 1.8%

Asian Insights SparX ASEAN Grocery Retail

DBS Bank, DBSVI, DBSVTH recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends DBS Bank, DBSVI, DBSVTH Equity Explorer return ratings reflect return expectations based on an assumed earnings profile and valuation parameters: 1

(>20% potential returns over the next 12 months)

2

(0 - 20% potential returns over the next 12 months)

3

(negative potential return over the next 12 months)

The risk assessment is qualitative in nature and is rated as either high, low or moderate risk. (see section on risk assessment) Note that these assessments are based on a preliminary review of factors deemed salient at the time of publication. DBSV does not commit to ongoing coverage and updated assessments of stocks covered under the Equity Explorer product suite. Such updates will only be made upon official initiation of regular coverage of the stock. Completed Date: 18 Jul 2017 12:46:22 (SGT) Dissemination Date: 18 Jul 2017 13:15:38 (SGT) Sources for all charts and tables are DBS Bank unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd, PT DBS Vickers Securities (Indonesia) (“DBSVI”), DBS Vickers Securities (Thailand) Co Ltd (“DBSVTH”). This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd, DBSVI, DBSVTH. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report. This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on

ASIAN INSIGHTS

VICKERS SECURITIES Page 120

Asian Insights SparX ASEAN Grocery Retail which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein. Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate 1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests 2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group. COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), DBSV HK or their subsidiaries and/or other affiliates have proprietary positions in Sheng Siong Group, CP ALL, as of 30 Jun 2017. 2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report. Compensation for investment banking services: 3.

DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

1

An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.

2

Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.

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Asian Insights SparX ASEAN Grocery Retail Disclosure of previous investment recommendation produced: 4.

DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

RESTRICTIONS ON DISTRIBUTION This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or General located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia

This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”). DBS holds Australian Financial Services Licence no. 475946. DBSVS is exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. DBSVS is regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong

This report has been prepared by a person(s) who is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong and is attributable to DBS Vickers Hong Kong Limited, a licensed corporation licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report has been prepared by an entity which is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong and is attributable to a licensed corporation licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected]

Indonesia

This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.

Malaysia

This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

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Asian Insights SparX ASEAN Grocery Retail Singapore

This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand

This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.

United Kingdom

This report is produced by DBS Bank Ltd which is regulated by the Monetary Authority of Singapore. This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom. In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.

Dubai International Financial Centre

This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United Arab Emirates

This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent.

United States

This report is prepared by DBS Bank Ltd, PT DBS Vickers Securities (Indonesia) (“DBSVI”), DBS Vickers Securities (Thailand) Co Ltd (“DBSVTH”). DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions

In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank Ltd 12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel. 65-6878 8888 e-mail: [email protected] Company Regn. No. 196800306E

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