Sino Grandness Food

UOBKayhian on 4 Apr 2012

Investment Highlights

·         We re-iterate our BUY recommendation on Sino Grandness Food (SGF) with a target price of S$0.60. This translates into 4.0x 2012F PE, pegged to Singapore-listed peers’ average. SGF is trading at an undemanding valuation of 3.6x 2011 PE and 3.2x 2012F PE vs an earnings CAGR of 26.1% between 2011-14F (PEG of 0.14).

Our View

·         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).

·         We also visited the new production plant in Sichuanrecently as well as the Chengdu’s F&B trade fair, solidifying our positive outlook for the company. SGF will ramp up in-house production of Garden Fresh fruit juice to 70,000 tonnes. Coupled with the 140,000 tonnes from OEM producers, the group can sell up to 210,000 tonnes this year, possibly raking in over Rmb1b in revenue.

·         SGF also participated in Chengdu’s F&B trade fair, showcasing its bottled juices and bottled cut fruits. This, in our view, can increase the brand equity of its products to engage newer, stronger distributors.

Earnings Revision

·         We maintain our 2012 revenue forecast of Rmb1.46b but reduce our net profit forecast by 9.0% to Rmb202.4m to account for the higher-than-expected advertising and promotional expenses. 

Share Price Catalyst

·         SGF had issued Rmb100m of convertible bonds (CB) due 2014 last year and the main objective is to list the subsidiary Garden Fresh HK at any approved exchange. The bonds come with certain profit targets for the beverage segment which includes Rmb140m and Rmb200m NPAT for 2012 and 2013 respectively. We expect share price to enjoy a re-rating once SGF is able to achieve these targets or as it indicates to the public on any possible appointment of corporate finance consultants.