This article first appeared in The Edge Malaysia Weekly on September 16, 2024 - September 22, 2024

FOUNDER and CEO of 99 Speed Mart Retail Holdings Bhd (KL:99SMART), Lee Thiam Wah, and his wife Ng Lee Tieng, attribute the success of their minimarket empire to the simple value propositions of offering a complete range of daily necessities, locating its stores close to residential areas and amplifying these advantages through a high-volume, low-margin game.

Speaking to The Edge, the Lees showcased a strong hands-on management style, adopting the Chinese proverbial “it’s perfect, but it needs to be better” (ºë¯q¨Dºë) approach of constantly improving the business.

One business improvement undertaken by the Lees was the introduction of bulk sales in September 2023 with the aim of resolving several pain points, such as fulfilling the needs of large-volume shoppers while ensuring stock availability to continue serving small-basket shoppers, as both are accretive to inventory turnover.

“From our observation, typically, if one restaurateur were to come into our store to buy a single item in bulk, very likely that SKU (stock-keeping unit) will run out because of space availability in our stores,” Ng explains.

Lee adds: “This [bulk sales] idea was formed when I was constantly thinking of how to ensure my customers get the items they need. Because of space limitations in our stores, we need to strike a good balance between the quantity and variety of SKUs in our stores.”

The bulk sales model is essentially an e-commerce channel for customers with a minimum order value of RM500 where margins are typically smaller compared to sales of individual items in-store. The fulfilment of the order is done directly by 99 Speed Mart’s warehouses either via free delivery to customers or self-pick-up from outlets, depending on the size threshold at half a cubic metre.

Lee explains that the average transaction size of bulk sales is about RM1,000 or 30 times the basket size of in-store shopping. The main customers using this channel are food and beverage outlet operators, offices and party organisers. “The huge transaction size, coupled with lower operating costs involved, means this kind of sales may sometimes be more profitable,” he says.

For the next three years, Lee expects same-store sales growth (SSSG) of 2% to 5%, if Malaysia’s economic growth and consumer spending remain intact.

Some 46% of 99 Speed Mart’s customer mix is the middle-income cohort, while 39% is the low-income B40 and 15% the high-income T20.

Lee says the company’s new store openings at 250 outlets per year or close to 10% of its current total of 2,651 over the next three years would add to the growth factor, but without sacrificing the SSSG of existing stores.

“The radius [between stores], population density and accessibility are factors taken into account when deciding on new store openings. At the moment, we are focusing on greenfield openings in new townships, the east coast of Peninsular Malaysia and Sabah and Sarawak,” Ng explains.

Based on five sell-side analysts’ forecast, SSSG of 1%-2% and new net store openings of 250 per year in 2026, 99 Speed Mart’s revenue and net profit are expected to reach RM12.427 billion and RM628.8 million respectively in FY2026. These figures work out to a three-year compound annual growth rate (CAGR) of 10.5% for revenue and 16.3% for net profit with analysts believing that 99 Speed Mart will enjoy better margins due to operational efficiency and economies of scale.

Based on forward price-earnings ratio (PER) multiples of 29 to 30 times ascribed to the forecast 2025 earnings, analysts have derived fair values ranging from TA Securities’ RM1.71 to Macquarie’s RM2.50 for the minimart chain or an average of RM2, according to Bloomberg.

When asked whether investors should see 99 Speed Mart as a growth stock or a dividend yield play, Lee says it should be a combination of both. For one, the company is still growing, and also, it is committed to a dividend payout of approximately 50%.

On whether there is still meat on the table for prospective investors following the company’s debut last week that saw its share price rise close to 14%, Lee cites 99 Speed Mart’s growth plans as justification for investing in it.

Meanwhile, based on 99 Speed Mart’s market valuation of RM15.79 billion, the prospective dividend yield stood at about 2% based on forecasts for FY2026.

For now, 99 Speed Mart will remain focused on its operations in Malaysia and will only expand into other Southeast Asian countries via synergistic collaboration should suitable opportunities arise.

Lee also says the company has no plans to start its own labels because most of its fast-moving consumer goods (FMCG) suppliers are capable of managing their brands and product quality. “Consumers are already confident with the current products; our job is to make sure the items move.”

Meanwhile, the company has set up Yiwu Speed Mart Import and Export Co Ltd and Yiwu J-Jade Trading Co Ltd in China for the procurement of household goods like hardware and durables. This segment was started in late 2023 and the company does not expect it to exceed 5% of its total product categories.

99 Speed Mart gets half of its money from other operating income, with the bulk of it coming from fees earned from product display, target incentives and distribution. Lee explains that these fees are a function of suppliers’ marketing fund allocation, demand for prominent display space, as well as 99 Speed Mart’s space availability. Suppliers’ willingness to pay such fees hinges on 99 Speed Mart’s ability to move the products.

“We have more than 2,600 stores. To get on board and list in all our stores and have a 10% buffer in our warehouses is a huge commitment for the vendor, so ensuring the items are movable is an important task,” Ng explains, pointing out that Lee is the one in charge of filtering out new vendors. “Every new item, before listing with us, has to go through him. He knows whether the products are sellable or not.”

The streamlined selection of roughly 3,000 SKUs, resulting in the large sales volumes achieved by 99 Speed Mart stores prove their ability to move products, according to Lee.

The waiver on 99 Speed Mart’s 25% minimum public shareholding spread is indefinite, Lee says. He has no intention of trimming his stake in the company in the near future and will maintain his current 79.7% shareholding even if revenue hits the RM20 billion mark.

It is worth noting that a six-month moratorium has been imposed on the shares held by Lee and his wife.

Prior to the listing exercise, 99 Speed Mart declared a total dividend payout of RM1.176 billion for the financial years ended Dec 31, 2021 (FY2021), FY2022 and FY2023 up to 1QFY2024 compared with an aggregate net profit of RM1.279 billion made during the period.

The IPO of 99 Speed Mart involves the sale of 1.03 billion existing shares by the Lee couple for RM1.69 billion. In a nutshell, the couple would have made roughly RM2.87 billion upon the completion of the IPO.

Based on the selection rules of FBM KLCI constituents, there is a minimum free float of 15% where typically excluded are long-term holdings of founders, their families and/or directors, restricted employee share schemes, government holdings and portfolio investments subject to a lock-in clause.

99 Speed Mart’s estimated 17% free float is marginally above the minimum free float threshold.

Lee says the intention was to garner better credibility through the institutionalisation of the 99 Speed Mart empire as opposed to a family business structure. Furthermore, this would lead to the professionalisation of its core management team that would be answerable to more supervision.

The other reason for the IPO was to fast-track the company’s ESG compliance where a large number of equipment like air conditioning, refrigeration and lorries needed to be upgraded. “We typically refurbish our outlets when they reach eight years, but now with the funds raised, we can do it now and it can achieve economic and environmental benefits.

“For example, a lot of people complained it is very hot when standing in front of the refrigerators in our stores, but now people realise it is not any more because we have introduced heat waste removal features that make our fridges more efficient,” Lee adds.

Currently, about a third of the company’s outlets have gone through a replacement cycle, and Lee expects the remaining to be completed in a time frame of 24 to 36 months. 

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