Sino Grandness

Kim Eng on 9 May 2014

• Downgrade to HOLD with lower TP of SGD0.76, based on the average value derived from our two-scenario analysis.
• Inactive Hong Kong IPO market and tougher listing rules heighten risk of a delay in Garden Fresh IPO and we see share price increasingly coming under pressure.
• 1Q14 results largely in line with revenue/gross profit up 27.5%/24.4% YoY to CNY477.5m/CNY150.6m.

What’s New
Sino Grandness reported a 27.5% YoY increase in 1Q14 revenue to CNY477.5m and a 24.4% YoY rise in gross profit to CNY150.6m, largely in line with our expectations. The bottom line slipped 2.6% YoY to CNY68.4m, dented by higher A&P costs. Total distribution and selling expenses amounted to CNY70.7m, of which about CNY25m were used for CCTV advertising, an expense we think would not recur for the rest of the year. The key growth driver was the beverage segment, with revenue up 35.8% YoY to CNY334.6m.

What’s Our View
Operations-wise, we believe Sino Grandness is still progressing well. But we are becoming increasingly concerned about a potential delay in Garden Fresh’s IPO. Progress has been slower than expected owing to the more stringent listing rules laid out by the Hong Kong Exchanges and Clearing. We understand Sino Grandness has yet to officially submit the A1 form for IPO application. Another worry is the inactivity in the Hong Kong IPO market since January this year and the recent postponement of the WH Group’s listing is evidence of the weak market sentiment.
We would recommend investors to be mindful of the downside risks to Sino Grandness’s share price in the event of a delay in Garden Fresh IPO. We downgrade the stock to HOLD (from BUY), with a lower TP of SGD0.76 (from SGD1.06), based on the average value derived from our analysis of the best- and worst-case scenarios.