Sino Grandness Food

UOBKayhian on 10 Jul 2014

FY14F PE (x): 4.0
FY15F PE (x): 3.2
IPO process updates. Management said the sponsors are still working on minor
verifications and documentation but they remain non-committal on the dates of
application and listing. To recap, Sino Grandness Food (SGF) is spinning off Garden
Fresh to raise funds for the fast-growth beverage segment as well as to unlock value
for investors in the subsidiary. We were expecting the IPO application by June and the
IPO book-building to be completed in October, but seemingly, there is increasing
probability that this may get delayed.

Plan B if Garden Fresh's listing is delayed. Under the terms of the first convertible bond
(CB) offer document, holders have the option to extend the redemption for another
eight months to Jun 15 or redeem the bonds fully. If the holders redeem the bonds at
the predetermined rate, we reckon SFGI would have the capability to pay but may
require bank financing for its working capital needs subsequently. In fact, we
understand management is in the process of securing new credit lines as we issue this
report.

Operationally, sales outlook remains positive with the company targeting 25-30%
growth for the juice business and high-single-digit growth for its canned food business.
The company reported a lower 1Q14 net profit of Rmb68.6m, -2.8% yoy, despite
stronger revenue and gross profit, partly due to increased A&P expenses right before
the Chengdu trade show. This amounted to an additional Rmb25m on CCTV
commercials but we do not expect this expense to recur again. Its Hubei’s 200,000-
tonne production capacity will only be ramped up in 2H14 as the company has to
reapply certain certifications under Garden Fresh instead of Sino Grandness.

Our scenario analysis suggests the valuation of SGF at S$1.02-1.45, where S$1.04 is
the case where SGF has to raise Rmb175m in equity to redeem the two CBs and the
listing of Garden Fresh is completed beyond 2015. Otherwise, SGF will have the
capacity to redeem the first tranche of CB due in Oct 14, via cash or bank borrowings, if
the holders choose to redeem.