IT LOOKS LIKE a regular notice for an EGM and it's heavy with legalese -- but the story goes deeper and the market has recognised it by sending the share price of Sino Grandness up 11.8% this morning (from 34 cents to 38 cents) on heavy volume.

Sino Grandness last night called for an EGM on 23 Feb to seek shareholders' approval for a dilution of 20% or more of its shareholding interest "in the ListCo resulting from the issue by the ListCo of the new ListCo Shares in connection with the Proposed Listing."

The listco referred to is its 100%-owned beverage division called Garden Fresh, which commanded about 86% of the market for loquat juice in China in 2014, according to a Euromonitor study.

hinsang7.15While China is the main market, Sino Grandness' loquat juice drinks are also sold in HK's 7-Eleven stores.Calling for the EGM to seek shareholders' approval is a necessary step for the IPO of Garden Fresh. Such a step typically takes place not too long before the submission of IPO documents to the target stock exchange.

Thus the EGM is a concrete sign that the IPO is just a couple of months away. 

The EGM notice says that Garden Fresh is seeking a listing on a stock exchange "including but not limited to the HK Stock Exchange".

While it's well known that Garden Fresh has been working on its IPO since end 2013, this is the first time that, officially, the HK Stock Exchange has been named.

Again, likely, the IPO work is coming to completion, hence the stock exchange can be named.  

The "20% or more dilution" referred to by Sino Grandness likely relates to the issue of new Garden Fresh shares for:

1) Redeeming partially or completely the convertible bonds that helped fund Garden Fresh's stunning growth in recent years.

2) The public tranche of the IPO.

Aside from those new shares, it is possible that Sino Grandness would sell some of its vendor shares to pay a special dividend to its own shareholders and to fund its future growth.  

♦ Unlocking value of Garden Fresh

nanjingtrio10.15Top executives of Sino Grandness' strategic partners from Thailand were @ Nanjing trade fair in 2015 (L-R): Kamolsut Dabbaransi, Executive VP, Head of Food & Beverage, at Thoresen Thai Agencies (TTA) | Huang Yupeng, CEO of Sino Grandness | Joseph Chia, a director of TTA. NextInsight file photo
The IPO will unearth the real worth of Garden Fresh. The IPO valuation of Garden Fresh is likely to be based on its (as yet unannounced) net profit of 2015. 


It's likely to be a strong figure: In 9M2015, Garden Fresh's revenue was RMB1.68 billion, compared to RMB1.49 billion in 9M2014. 

For now, what we can use is Garden Fresh's FY14 net profit of about RM335 million.   

If Garden Fresh is listed at a conservative 15 times PER of its 2014 earnings, it will be valued at RMB4.9 billion.  

Assuming Sino Grandness' diluted stake in Garden Fresh is 70%, that stake will be worth RMB3.4 billion, or S$1.07 per Sino Grandness share.

It follows that Sino Grandness' current share price of 38 cents (and a PE of 4.5X) has yet to factor in the impending unlocking of the value of Garden Fresh. 

Understandably so, because the broader stock market has been mauled by bears and, specific to Sino Grandness, because of a short-seller report in Oct 2014. (See: SINO GRANDNESS: CEO flies to S'pore, assures analysts and investors)

Not helping things has been the drawn-out IPO process, which led some investors to think that serious issues had been discovered.

Assuming Sino Grandness' diluted stake in Garden Fresh is 70%, that stake will be worth RMB3.4 billion, or S$1.07 per Sino Grandness share.  It follows that Sino Grandness' current share price of 38 cents (and a PE of 4.5X) has yet to factor in the impending unlocking of the value of Garden Fresh.

As we understood it all along, the long work duration was mainly due to the due diligence/verification/interview involving Garden Fresh’s customers. 

HK Stock Exchange requirements now target 40-50% of the customers, instead of the top 10. Garden Fresh has about 250 distributors based in more than 20 provinces in China. Thus, over 100 of these distributors were subject to scrutiny by the relevant professional parties who visited them.  

The protracted period of time has seen Garden Fresh further establish itself as the crown jewel of Sino Grandness, accounting for 68% of its revenue in 9M2015.

And Garden Fresh has solidified its competitiveness by completing its second juice production factory in Hubei and starting on the construction of factory No.3 in Anhui. This not only reduces its reliance on OEMs but also enhances its quality control and gross margins. 

Assuming that the HK Stock Exchange and relevant authorities approve the IPO of Garden Fresh, Sino Grandness is left with two other core businesses involving canned products for domestic and overseas markets. They contributed RMb780.9 million in revenue in 9M2015.

P/S: The stock traded 12.5 million shares on Friday (5 Feb), ending up 19.1% at 40.5 cents. 

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Comments  

+2 #2 YCK 2016-02-10 18:21
All or a portion of the CBs will be converted into shares. But ALL the debt will be gone. Sino Grandness will be debt free after that
#1 KCY 2016-02-09 15:07
I have a question.

The total compounded bond value of the cbs (778rmb as at 31 mar 2015) is used to calculate the company's gearing ratio in their previous report.

Does it mean that this amount will totally be converted into shares of listco or a new any new combination package, whereby this total compounded bond value will no longer exists as debt in sino's book?

Thnx in advance for verification from any informed person.

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