Loquat Fan contributed this article to NextInsight. He highlights a German development bank which Sino Grandness's beverage subsidiary is seeking a loan from to fuel its growth. In the meantime, Sino Grandness is demonstrating better management of its trade receivables, resulting in an enhanced balance sheet.
On page 177 of its draft IPO prospectus, Garden Fresh stated: "... we expect to obtain a project loan of USD25 million from Deutsche Investitions-und Entwicklungsgesellschaft mbH ("DEG") with guarantee provided from Sino Grandness in April 2016."
During last Thursday evening's 2Q16 results briefing, Mr Huang Yupeng, the CEO of Sino Grandness, was asked about the progress of the project loan.
He said that loan negotiations are still on-going.
DEG is a development bank founded by the German government (for more, click here) Mr Huang shared that the loan is part of a package offered by DEG to the Chinese government.
Because of its contributions to the agriculture sector of China, Garden Fresh is in the running.
The loan is for seven years with an interest rate which is half the average lending rate charged by Chinese banks.
Development banks such as DEG recognise that young companies in emerging economies are often hampered by lack of access to commercial loans.
Winning loans from development institutions such as DEG will lower Garden Fresh's funding cost.
It would also be testament to the developmental role played by Sino Grandness.
Just as important, subjecting itself to evaluation by DEG demonstrates Sino Grandness' willingness to undergo scrutiny by a wider range of stakeholders.
Trade receivables management is an important issue, particularly for fast-growing companies such as Sino Grandness. Slow settlement by customers increases collection risk, and strains cashflow as well.
Garden Fresh, Sino's beverage arm, grew its sales phenomenally by about 13 times, from RMB 180m in 2010 to RMB 2,319m in 2015.
|♦ Managing trade receivables well|
|The draft prospectus offers clues on Garden Fresh's good trade receivables management.
First, the company weeds out sub-par distributors. Second, Garden Fresh has up-to-date information about retail sales as its serving distributors cannot appoint sub-distributors.
Third, serving distributors have to appoint staff designated by Garden Fresh to enable Garden Fresh to know how the distributors are faring.
Lastly, Mr Huang shared on Thursday that Garden Fresh is giving more business to serving distributors to incentivise them to promote the Garden Fresh brand.
It piled on another 28% increase in the first half of this year.
2Q 16 sales of RMB 794m was a sweet surprise as it overtook the quarterly peak of RMB 653m in 4Q15 by a wide margin.
Grandness, Sino's arm that markets canned fruit in China, is also growing its sales steadily.
It is also a surprise that at end-2Q16, Sino Grandness' cash level was as high as RMB 587m (against RMB 324m a year ago) despite much higher working capitals needed to support the sales surge.
One important contributing factor is good trade receivables management.
Sino's 2Q sales of RMB 1,129m (RMB 937m local sales and RMB 192m exports) gave rise to trade receivables of RMB 1,043m.
As trade receivables attributable to domestic sales include 17% VAT, the amount of sales that were unpaid at the end of 2Q was not more than RMB 919m.
This implies that distributors took 73 days, on average, to pay up, when the credit period is 90 days.
Another indication that distributors were prompt in payment was that in July, RMB 401m, against RMB 1,043m at end-June 16, was collected.
With RMB 587m at end-2Q16, Sino Grandness will be in a better position to redeem the convertible bonds in full for RMB 731m on 28 Feb 2017, if the planned initial public offering of Garden Fresh on the Hong Kong Stock Exchange does not materialise.