Sino Grandness

UOBKayhian on 28 Feb 2014

Valuation

• Maintain BUY with a higher target price of S$1.06. The company is still trading at an undemanding 4.2x 2014F PE, vs Hong Kong-listed peers’ 25.6x. We see potential upgrade in our target price as the Garden Fresh listing gets closer, and if the listing comes with a lower-than-expected dilution or a higher valuation obtained during the book building process.

Financial Highlights

• Sino Grandness Food’s (SGF) reported 2013 net profit of Rmb401.1m, +38.5% yoy, driven by strong sales in the beverage and canned food segments. Revenue jumped 38.5% yoy to Rmb2.3b as sales of its Garden Fresh bottled juices gained59.5% yoy to Rmb1.4b, while sales of canned products also expanded 14.6% yoy to Rmb879m. Gross profit increased 39.3% yoy to Rmb885.2m with gross margin improving slightly to 39% due to increased contribution from the higher-margin beverage segment.
• Sales and distribution costs escalated to Rmb228.4m, +31.1% yoy, due to increased transportation costs and A&P expenses. Administrative costs also soared 89.1% yoy to Rmb101.6m as the company had to record an additionalRmb10m in depreciation for the new Hubei plant, Rmb10m in IPO expenses andabout Rmb19m in forex losses.

Our View

• We believe the listing of Garden Fresh remains on track With this set of results, the company has also fulfilled the third year of a profit guidance of Rmb250m for Garden Fresh, which signifies that the Rmb370m of convertible bonds (CB) will be converted to a 24.7% (pre-IPO) stake in Garden Fresh. The company targets to complete the listing by October this year and has reclassified these CBs from noncurrent liabilities to current liabilities. But having said that, SGF has to budget another Rmb50m this year as IPO expenses.
• We also expect top-line and bottom line of its exports and snack businesses to continue to grow as its European customers recover from the economic downturn and new products are introduced into the market. The company is working on a new range of beverage products to be launched in the Chengdu trade fair in Mar 14.