Sino Grandness Food

UOBKayhian on 15 Aug 2013

Valuations

• Maintain BUY on Sino Grandness (SGF) with a higher target price of S$1.84. Our target price assumes that the listing will go through in 2014, assuming a holding company discount of 20% to SGF’s Garden Fresh (GF) stake and a 5.0x 2014F PE valuation for its remaining businesses. 

What’s New

• The company remains positive on its products’ outlook, after having seen the robust demand from end-customers. The company has also signed up with leading convenience store Hongqi（红旗）that has more than 1,400 retail points in Sichuan for the sale of its beverage products, and also signed up at the same time with Meiyijia (美宜佳) that has 4,600 retail points in China for the sale of its own-branded canned fruit products. 
• On expansion plans, the company will be installing equipment in the new Hubei plant come October and will be conducting trial production in 4Q13. As highlighted previously, the group has completed the procurement and pureeing its own raw materials instead of subcontracting it out to a third-party. Thus, we believe its overall gross margins for the drinks segment is set to improve.
• The company has also announced that they have received a noobjection letter from the SGX-ST for the proposed spin-off and listing of its GF subsidiary and looks on track to carry out this exercise by 2014.

Our View

• We believe SGF is diligently building up its distribution network, increasing the production capacity and improving the gross margins for its beverage segment so that they would be able to achieve a higher valuation during the spin-off and listing process. The next milestone for this exercise is the appointment of investment bankers which we expect to be within this year.
• The company has also recently reported strong earnings for 2Q13 with net profit rising 24.0% yoy to Rmb103.0m, driven by increased sales in both its beverage (+48.3% yoy) and canned food businesses (+4.9% yoy). Gross profit rose 22.3% yoy to Rmb212.8m despite gross profit margins narrowing by 1.2% to 35.8% as SGF recorded higher raw material costs for its canned food products and a change in product mix for its beverage products. As at 1H13, this set of results formed 45.3% of our 2013 net profit forecast.