Sino Grandness

Kim Eng on 8 June 2012

Background: Sino Grandness is a food and beverage company based in Shenzhen, China. It is principally involved in the production and sales of canned fruits and vegetables (OEM basis), as well as fruit juices (in-house brand). Canned food is its traditional business and the company is one of China’s largest canned food exporters for vegetables such as long beans and mushrooms. Its beverage business is new, albeit rapidly growing.

Why are we highlighting this stock? In our view, the effort that Sino Grandness is making right now to boost their in-house branded beverage business is worth monitoring. The company now is expanding its production capacity of loquat juice in China. Loquat (pipa in Chinese) is a relatively exotic fruit whose juice is not commonly consumed by the majority of the population. But if this new product should become a hit with consumers, Sino Grandness would have a huge first-mover advantage and a market share that competitors would find hard to match.

Fast-growing beverage business. 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%). In our view, boosting its own-brand beverage business should help the company enjoy greater pricing power and hence, higher margin in the long term.

Aggressively expanding loquat juice capacity in China. We think that the aggressive expansion of its loquat juice capacity is worth monitoring because if this strategy turns out well, Sino Grandness has the potential to multiply its size from current level. The key issue is whether loquat juice can be accepted by the majority of consumers in China because the fruit is usually eaten fresh rather than consumed in juice form. Moreover, it is not a well-known fruit in northern China where Sino Grandness is trying to tap into.

Possible listing of Garden Fresh brand in HK. If this eventuates, it will be positive for the shareholders given that the beverage sector commands higher multiples and valuations in Hong Kong are also higher than in Singapore (average PER of 17x for beverage sector vs only 3.5x for Sino Grandness).

Negative cash flow poses concern. Rapid expansion and burgeoning advertising costs have caused Sino Grandness to post negative free cash flow for the past four quarters.