The 4Q2011 results are out and throws a big question mark on their expansion strategy
1/ Lower gross profit margin in 4Q2011 with increasing sales driven by aggressive marketing campaign
2/ Lower net profit in 4Q2011 due to increase in distribution and selling expenses
3/ Higher accounts receivable in 4Q2011, which may be a direct result of increase in sales.
All these point to 1 important question: is the company aggressive expansion strategy working?
The expansion is funded by a convertible loan issued by the coy's HK subsidiary and guaranteed by the company. One of the conditions says that HK subsidiary has to achieve net profit after tax of RMB140 M in FY2012 and RMB250 M in FY2013. THese are very aggressive targets in my mind, given the net profit after tax for 4Q2011 is only RMB20 M (that assumes all profits are attributable to the HK subsidiary). In the event that the conditions are not met, the redemption will require another cash call at the coy level.
Trade with care.
Lately, I took an interest in Sino Grandness after meeting a few 'in-the-know" people who suggested that I accumulate the stock. One of them said he has been recommending the stock on a 12-month investing time frame to enjoy a likely re-rating when the IPO of its beverage division takes place.
As for comments & laments by investors regarding the 4Q2011 results, I quote UOB Kay Hian report of April 2012:
"Share price took a hit after SGF announced lower-than-expected 2011 results. However, we think that this has been unjustified considering that the company had to include many one-time expenses such as fees on the convertible bond issue of Rmb7.4m, taxation of land use rights of Rmb5.2m and lastly additional employee benefit cost of Rmb4.0m by the auditors.
"Adjusting for these items, net profit would have increased 37.6% yoy to Rmb161m instead of the reported Rmb151.7m (+29.0% yoy)."
yes indeed! Sino Grandness needs more capital for its biz. It has just sold RMB270m Zero
Coupon Convertible Bonds Due 2015 To Goldman Sachs And A Co-Investor!
Mr Huang Yupeng (“é»è²é¹”), Chairman and Chief Executive Officer (“CEO”) of Sino Grandness said, “We are extremely delighted to have a world renowned investor such as Goldman Sachs to be our long-term partner. I consider Goldman Sachs’ investment as an endorsement of the management of the Group as well as the growth prospects of our beverage business which have grown at a phenomenal pace over the past two years. In addition to funding support, I believe we will be able to leverage on Goldman Sachs’ global network and extensive knowledge in the capital
markets which will add value to our future development, including future plans to list Garden Fresh HK.”
Maybank KE seems to like Sino Grandness . The beverage segment is the largest contributor to Sino Grandness’ revenue (56% in 1Q12) and its fastest-growing business (98% YoY in 1Q12) in terms of revenue.
It also enjoys a higher gross margin (41%) than the rest of the company’s business (around 30%).
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