Sino Grandness

 UOBKayhian on 29 Oct 2013


We hosted Sino Grandness’s VP of Investor Relations to a roadshow in Europe. Most clients were impressed by the company’s strong earnings track record and outlook, coupled with specific share price catalysts, such as its Garden Fresh listing. Other positive developments include the introduction of a new line of snack foods under its non-beverage division, which could be a positive long-term catalyst.

Valuations

• Maintain BUY with a higher target price of S$1.02. Our target price assumes the listing of GF will go through in 2014, and a holding company discount of 20% on its stake in GF and a 5.0x 2015F PE valuation on its remaining businesses. We believe there could be further upside after the re-rating of its close comparable Huiyuan Juice.

Investment highlights

• Roadshow’s positives. Funds that were new to SGF were impressed with its earnings track record of the company and the execution of the growth initiatives for GF. SGF recorded a net profit CAGR of 49.4% in 2008-12, driven by strong sales and improving margins. The company has also evolved from being a pure export OEM producer for overseas hypermarkets to a FMCG bottled juice producer for domestic sales. Funds that have invested in SGF are eagerly waiting for the development of GF’s listing on an approved exchange. We expect the listing of GF by Oct 14, which coincides with the maturity date of the Rmb100m convertible bonds issued in 2011.
• Trade show reinforces our belief in the company. We also visited one of the tradeshows in Wuhan, China and saw no direct competitor to its core loquat juice products. The company also introduced the new packaging for its loquat juices in canned and tetra packs. While SGF has also ventured into snack products such as dried mushrooms, lotus seeds and red dates, we remain conservative and have not factored in any upside from this venture is still very preliminary. Nevertheless, prospects could be interesting if SGF can leverage on its strengthening distribution network to grow the snacks division.
• We now expect earnings to exceed our initial forecast. We have increased our net profit forecasts for 2013 and 2014 by 4.4% and 7.5% respectively, having seen the growth potential of the company as it expands its distribution network, creates new packaging to cater to different markets and improves margins by producing the juices using internal facilities rather than using external OEMs.
• We also raised our target price by 10.9% as we now expect GF’s earnings to exceed Rmb250m for 2013. This would result in SGF’s stake in GF becoming higher due to lower dilution from the conversion of the two outstanding CBs. Currently, the company is still trading at an undemanding valuation of 5.1x 2013F PE, vs Hong Kong-listed peers’ at 30.7x.