Valuations
· Maintain BUY on Sino Grandness (SGF) with a higher target price of S$1.66. We expect its beverage segment to achieve a higher profit of Rmb230m that will result in a lower dilution from CB holders. Our target price assumes the listing to go through in 2014, assuming a holding company discount of 20% to SGF’s GF stake and a 5.0x 2014F PE valuation for its remaining businesses.
What’s New
· The group took part in the recent trade exhibition inChengdu and has announced indicative orders of Rmb290m for Garden Fresh juices, as compared with Rmb200m last year, and Rmb70m indicative orders for domestic canned products.
· In addition, it has secured new distributors for northeastern and northwestern provinces in China, in tandem with its expansion strategy.
Our view
· We view the news as being very positive for the group as it will support earnings growth in 2013. We forecast sales from the Garden Fresh segment to grow to Rmb1.4b from Rmb873m in 2012 due to stronger demand and a wider distribution network. The company has also introduced a new soft-pack and tin-can loquat juice that we believe will broaden the target market, catering more to school children and young adults.
· It appears also that the domestic canned fruits segment has been receiving healthy demand from theChina market, after receiving an indicative order of Rmb70m, already 64% of last year’s full-year sales. We see potential in the domestic canned food segment as the group can partially leverage on Garden Fresh’s 10,000 strong point of sales through 60 distributors in 6 provinces to grow its sales exponentially. We thus adjust our sales forecast higher to Rmb166m from Rmb144m previously.
· Operationally, we understand from management that with the funds raised from the placement exercise, the equipment installation for the new Hubei plant looks on track and they would be able to conduct trial production in 3Q13. The group has also started to procure and puree more loquat fruits as raw materials in this harvest season in order to improve margins. By doing so, the group is able to save up to 35% per tonne of loquat puree instead of sub-contracting it out to a third party. Gross margins for the drinks segment are likely to be maintained at 42%.
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