A shareholder of Sino Grandness has emailed to NextInsight his astute analysis, as follows:
The run-up of share price of Sino Grandness, a S-chip, has caught many by surprise.
Many investors have doubts about the brand equity of Garden Fresh for the beverage business is keenly competitive. When signs emerged that Garden Fresh is selling well, and mainly through big supermarket chains, concern turned to the hefty penalty that has to be paid to bondholders if Garden Fresh fails to list in HKSE by Oct 2014.
Judging by the rising sales of Garden Fresh juice, the money from bondholders has been put to good use.
Garden Fresh is selling in more provinces, gradually, and the company plans to reach lower-tier cities in existing provinces. Moreover, the company initially relied on OEMs.
Only after sales had picked up, it decided to have its own juice factory in Sichuan, which is now operating, and another one in Hubei, scheduled to start operations several months from now. In-house production lowers costs and the geographical spread of its own factories and OEMs reduces transportation cost.
Initial concern about failure to list Garden Fresh in HKSE revolved around not being able to fulfil the following profit targets:
2011 RMB 70m
2012 RMB 140m
2013 RMB 250m.
Garden Fresh turned in a profit of RMB 87m in 2011. Indications are that there is no difficulty in crossing the required RMB 140m in 2012, going by the strong performance in the first 9 months of last year.
The penalty that becomes payable if Garden Fresh is not listed in HKSE in time amounts to RMB 560m, against the nominal value of RMB 370m.
With rising profit from Garden Fresh, the company should be in a position to pay this off. The original business of being the OEM of canned vegetables for overseas supermarket chains is doing well as poor economies in Europe drive many to shop for cheaper foods from China.
Being the OEM that cans vegetables under the labels of big overseas supermarket chains also provide Chinese consumers food safety assurance as Sino Grandness expands sales of non-beverage products domestically.
he nascent canned fruit business seems to has prosper, earning high margins.
It may sound odd that failure to list in HKSE may not be bad after all. A successful listing will result in the bondholders having a 25% stake in Garden Fresh valued at six times of RMB250m. It will not be unrealistic to expect a higher price earnings ratio of 15 times.
Moreover, the likelihood of Garden Fresh exceeding RMB 250m in 2013 is not far-fetched, and the juice company should have a much higher valuation.
Placement of up to 28,500,000 new ordinary shares @ S$0.82
per share. Several reputable institutional investors have
indicated interests to subscribe for the Placement Shares, one of which is Asdew Acquisitions Pte Ltd. Asdew will emerge as a substantial shareholder of Sino Grandness upon completion of the placement exercise.
My view: This is a very strong vote of confidence from Asdew.
Several analysts and fund managers are saying the drinks are nothing sensational. How come the earnings of Garden Fresh have been sensational? It's possibly because of the company's ability to penetrate the international chain supermarkets like Carrefour and Walmart in China.
I know some friends who have thrown caution to the winds and bought Sino Grandness at above S$1.00. So far so good. Stock is at $1.25. The analysts are saying it's still dirt cheap, at only 5X PE this year. It is truly cheap if the accounts are real, the earnings are real. We will only know with the passage of time.
Lim & Tan Securities had a note this morning:
Sino Grandness’s wholly owned subsidiary
“Garden Fresh” juices received orders that topped
Rmb290mln, up 45% compared to last year’s
Rmb200mln. The orders were received after the
completion of the trade exhibition held in Chengdu,
Sichuan Province in the last week of Mar’13.
Another Rmb70mln of indicative orders were
received for “Grandness” canned products.
The above new order wins comes on the back of the
company’s recent introduction of new products such
as loquat-mango juice, soft-pack loquat juice, tin-can
loquat juice, hawthorn fruit, mushrooms, asparagus
targeting consumers in China.
The above good response also come after “Garden
Fresh” was accorded the prestigious title of the “Top
100 Brand in China” earlier this year.
After the Chengdu trade fair, the company has secured
multiple new distributors to market the company’s
own-branded products in new areas such as northeastern and north western provinces in China.
The new order wins are expected to drive a 25% net
profit growth this year to Rmb361mln, giving an
undemanding forward PE of 5x.
While valuations continue to remain undemanding
relative to growth prospects, given the recent sharp
run-up in share price, we would prefer to BUY on price
pull-backs below the $1.20 level.
NextInsight
a hub for serious investors
