SINO GRANDNESS: Insights into marketing, Thai investors, IPO, etc

 This is Part 2 of a Q&A with Sino Grandness. Part 1 was: SINO GRANDNESS: Insights Into Success Drivers Of Its Loquat Drinks
 

» Popularity of Garden Fresh

Many investors have not seen Garden Fresh products in Beijing and Shanghai, and have jumped to the conclusion that the brand may not be popular. What are your comments?   

A: Shanghai and Beijing are not our key selling zones at the moment.  Our product penetration at this moment is still in selected provinces and selected channels as reflected by our relatively small annual sales when compared to other larger F&B companies. The top 5 provinces in terms of sales contribution for Garden Fresh in FY13 were Guangdong, Heilongjiang, Zhejiang, Sichuan and Shaanxi.

» Surge in 3Q2014 sales

Garden Fresh recorded very high sales of RMB 434m in 3Q 2013. Many investors were pleasantly surprised that in 3Q 2014, sales hit an even higher level of RMB 622m, a 43% rise. Was the RMB 188m increment mainly from new markets?  

A: Yes, the sales growth in 3Q14 was mainly due to an expansion of the distribution network in the PRC.   

» Advertising

1) The micro-movie, 幸福的味道 , which you produced on motherly love, has touched many viewers.  The movie does not come across as promotional. The efficacy of loquat fruit, in helping the girl who aspires to sing well, was conveyed well, and Garden Fresh loquat drinks show up subtly in three scenes. What prompted you to produce this micro movie?

A: Brand building initiatives are constantly evolving and expanding.  Our management has taken notice of the growing viewership of micro movies by Chinese consumers through the internet in recent years. After our internal evaluation, we decided the cost involved is reasonable when compared to traditional TV commercials.  As such, we made the decision to invest in this additional mode of brand endorsement in addition to our other on-going advertising efforts.

2) Garden Fresh sponsored the TV serial  兰陵王 in Shenzhen Satellite TV last year. Our local Channel 8 is planning to screen this serial weekly. What are your criteria in sponsoring 兰陵王? 

A: TV commercials on CCTV in China usually come in “package” form ie a specific sum for specific timelines and advertisements run on specific content. In the previous advertisement, we took one of the packages which gave us exposure during peak hours. Such advertisements run con-currently with our other advertisements.

» Supply of loquat

Loquat is not a juicy fruit nor is it as widely cultivated as oranges, for example. If loquat beverages gain further popularity, will there will be enough supply of loquat fruits for your business?

A farmer carrying his loquat harvest to a market to sell. Photo: XinhuaA: Yes, based on the current market supply, we do not anticipate any major supply issues over the next 5 years.  But we have to plan beyond that, which is why we are working closely with local authorities to encourage farmers to continue to increase loquat plantation bases in various parts of China.

» Hubei factory

The Hubei beverage factory started operations in Oct 14, and I saw a video depicting it as highly automated. How much higher will your gross profit margin be for beverages produced in-house compared to those produced by OEMs?

A: Generally speaking, we expect the gross margin for internally produced juices to be better than that of OEM.  But because the new plant in Hubei commenced mass production in Oct 2014, it will take some time for it to ramp up to an optimal level before we can see the full impact on margins. 

Further, the key intention of setting up internal production capacities is to diversify our supply sources so that we are not completely reliant on third parties. Sales volumes tend to be volatile during peak periods and in such periods we can easily adjust our production volume compared to third parties.

» Thai investors

1) Sino Grandness has issued 86m placement shares to two Thai companies controlled by Mr Prayudh Mahagitsiri. One of the companies, PM Group, is known for its partnership with Nestle as the sole supplier of Nescafe since 1989. The background of PM Group is taken from its website http://www.pm-groups.com/pmgroups/consumer.php

What benefits will PM Group bring to Sino Grandness, and vice versa?

Prayudh Mahagitsiri has become Honorary Chairman of Sino Grandness.A: Both parties shall work on the development of new products and new markets.  Additionally, PM Group Chairman Mr Prayudh Mahagitsiri has also become the Honorary Chairman of Sino Grandness. Our company can leverage on his business contacts and global network, such as his partnership with Nestle, in order to expand our business beyond the PRC market.

For PM Group, it represents an opportunity to invest in an industry with a positive outlook. These were Mr Mahagitsiri's comments in a previous announcement:

“The F&B industry in China continues to fuel exciting growth and offers growth opportunities for companies like Sino Grandness that has established a strong competitive edge. I am particularly impressed with Sino Grandness’ beverage products positioning targeting increasingly health conscious consumers through offering juices with mid-high juice content which are perceived to be more nutritional and comprising unique fruits such as loquats and hawthorns. I believe the future remains bright for Sino Grandness and I am pleased to assist them in their future journey.”

2) The PM Group is the sole processor of Nescafe 3-in-1 instant coffee in Thailand and is responsible for supervising Thai farmers growing coffee trees, and harvesting coffee beans which are processed into coffee powder in accordance with Nestle's specifications. You perform a similar role for European supermarket chains such as Lidl of Germany. You inculcate in Chinese farmers good farming practices so that the harvested vegetables are fit for export to the EU. You can the vegetables under the house brand of Lidl. Did this common expertise play a role in bringing you and PM Group together?

A: There are various factors which led to the final decision to work together, and the experiences of the senior management teams is one of these factors.

3) There have been suggestions that the placement money from the Thai investors is to pay for the possible redemption of the two convertible bonds next year. Can you comment on this? (It will be relevant for the company to deal with the contingency plan in the event that IPO of Garden Fresh does not materialise.)

A: Use of the placement proceeds is clearly defined and any change of the use of proceeds will have to be approved by SGX. The current use of proceeds are: 60% for capital expenditure and distribution network expansion and 40% for working capital.

4) The Thai investors agree to lock up 47 million Sino Grandness placement shares for 10 years. This is unusual for placement shares. Were you surprised?

A: We are naturally pleased with the offer to have an extended lock up period as it demonstrates the investors’ decision to work together for the long term with our company.

5) Sino Grandness has agreed to pay out at least 10% of its net profit as annual dividends. Why did you agree to this? 

A: Paying dividends is one of the direct ways for our company to share the fruits of our success with shareholders.  Over the past few years, the company was not able to pay dividends due to relatively high capital expenditure (investments in Sichuan and Hubei plants) as well as working capital needs. Going forward, as and when our cash outflow permits, we hope to be able to reward our shareholders again through dividends.

6) Business opportunities introduced by PM Group: You have mentioned before that it will be a strategic partner. Are there concrete business proposals from PM Group?

A: Although there are no concrete proposals at this point in time, both parties intend to work closely in areas of product and market developments.  We shall provide updates as and when there are any material developments.

» Short-seller ‘Newman9’

1) The report of Newman9 has slashed Sino Grandness’ market capitalisation and sowed seeds of doubt among investors with regard to the accounts of Sino Grandness. What is your reaction to that?

A: In the near term, our company is focusing on matters which are within our control such as :

a.Strengthening corporate governance through inviting Thai investors to come onto the board of Sino Grandness in addition to the Honorary Chairman role given to Mr Prayudh Mahagitisiri.

b.Strengthening our balance sheet through completion of the placement as well as increasing credit lines.