Sino Grandness Food Industry

Kim Eng on 11 Apr

Background: Sino Grandness Food Industry is a Shenzhen-based integrated manufacturer and distributor of bottled juices, as well as canned fruits and vegetables, such as asparagus, long beans and mushrooms. Its products are mainly exported to Europe and the United States.

Recent development: Earlier in the year, Sino Grandness signed up a second external supplier, thereby doubling its production capacity for bottled juices from 70,000 tonnes to 140,000 tonnes. The group is also in the process of building a factory each in the provinces of Sichuan and Hubei. The Sichuan factory is scheduled to start operations this month. This will boost capacity by another 70,000 tonnes per annum, in effect, raising total capacity by threefold.

Issues RMB100m convertible bonds, sets profit targets. Last October, through its Hong Kong subsidiary, Garden Fresh HK, Sino Grandness issued RMB100m zero-coupon rate convertible bonds due 2014. It raised net proceeds of RMB80m and will use RMB70m to purchase equipment for the expanded production capacity of bottled juices and the rest on advertising and promotional activities. The group has set performance targets for its beverage segment and has indicated net profit of RMB140m for FY12 and RMB200m for FY13. To-date, it has provided an indicative net profit of RMB70m for FY11. With the  capacity ramp-up, we estimate that the beverage segment alone would be able to chalk up sales of more than RMB1b pa, allowing the group to comfortably meet its profit targets.

Expense spike parallels change in product mix. Sino Grandness saw its share price decline following the release of its 4Q11 results. Net profit fell by 46% YoY to RMB22m due in part to the one-off expenses for the issuance of convertible bonds, taxation of land use rights and payment of employee benefits. Operating and promotional costs are expected to stay high to support growth of the beverage segment.

No dividend payout anytime soon. After paying out 20% of its net profits in FY09-10, Sino Grandness did not declare any dividends for FY11. As its cash pile will begin to dwindle under high working capital usage and free cash flow remains in negative territory, the group may have to take on additional financing. Valuations are cheap, with historical PER of 3.7x and P/BV of 1.0x.