Sino Grandness Food

UOBKayhian on 27 Jul 2012

Valuation
· We re-iterate our BUY recommendation on Sino Grandness Food (SGF) with a higher target price of S$0.64. This translates into 3.0x 2013F PE, pegged to Singapore-listed peers’ average.
· We note the potential upside of S$1.12/share if Garden Fresh (Garden) obtains approval from an exchange to list assuming a holding company discount of 20% to SGF’s Garden stake and a 3.0x PE valuation to its remaining business.
What’s New
· Garden will issue Rmb270m of convertible bonds (CB2) due 2015 to Goldman Sachs Investments Holdings Asia Limited and its co-investor (GS) at a subscription price of 90% of the principal amount to fund its beverage business.
· The financial performance requirement benchmark set for Garden by GS is similar to the Rmb100m zero coupon convertible bonds (CB1) issued by Garden as announced on 28 Sep 11. The group intends to use the net proceeds for working capital, capital expenditure and expansion by M&A of its beverage business.

· The best-case scenario will be the listing of the beverage business at a valuation of at least 12x 2013F NPAT and the issue of 30% new shares in Garden. This will add Rmb1.7b to the equity of SGF after the two CB conversions, assuming SGF will hold 58% of the Garden post-listing with GS and CB1 holders owning 13.9% and 5.2% respectively. F&B companies listed in HKEX are already trading at an average PE of 38x.

Our View
· With the additional funds, SGF can continue to expand its distribution network and increase its advertising and promotion (A&P) activities to boost its revenue for the eventual listing of the beverage business. SGF has also recently announced that they have made inroads into Beijing and 7-11 convenience stores in Guangdong.

Earnings Revision
· We increase our 2012 revenue and net profit forecast to Rmb1.54b and Rmb210.0m respectively. This is due to the faster-than-expected ramp-up of the production facilities despite the increase in expenses relating to the Rmb270m CB issue and the amortisation of its interest costs.