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Sino Grandness Summary

Core Content

Sino Grandness is an integrated manufacturer and distributor of canned fruits and vegetables, as well as bottled juices. The company is currently trading at SGD0.975 with a target price of SGD1.60, implying a 64.4% upside potential, based on a 6x FY13F PER valuation. The analysis initiates coverage with a BUY recommendation, highlighting the potential for significant value creation through the planned spinoff of its juice subsidiary, Garden Fresh, in Hong Kong by October 2014.

Main Growth Catalyst

The most important catalyst for Sino Grandness is the planned listing of Garden Fresh in Hong Kong. This spinoff is expected to significantly increase the company's value, as HK-listed F&B companies trade at much higher valuations (20-30x PER) compared to Sino Grandness's current 4x PER. The company's beverage segment, which is the main growth engine, already contributes over 50% of total sales and is projected to grow to 65% by 2015.

Key Financials

• Market Cap: SGD228 million
• Shares Issued: 293.7 million
• 3-mth Avg Daily Turnover: SGD2.2 million
• Free Float: 55.6%
• ROE (annualised): 31.2%
• Net Gearing: 24.8%
• BV/shr (SGD): 0.57
• Interest Cover: 36.3

Earnings Growth

• FY11 Revenue: RMB1,019.7 million
• FY12 Revenue: RMB1,640.3 million
• FY13F Revenue: RMB2,427.7 million
• FY13F Net Profit: RMB392.2 million
• FY12 Net Profit: RMB289.1 million
• EPS Growth (FY12 vs FY11): 90.9%
• EPS Growth (FY13F vs FY12): 35.7%
• Recurring Dilutive EPS (RMB): 1.3 in FY13F

Valuation Metrics

Investment Appeal

• The company's share price has doubled since 2012, driven by strong earnings growth and progress toward the Garden Fresh listing.
• The current valuation of 4x PER is considered undervalued, especially when compared to the potential for a successful spinoff.
• The spinoff could unlock substantial value for shareholders, with the potential for a 158% upside in the best-case scenario and a 34% upside in the base-case scenario.
• Even in the worst-case scenario, a 20% downside is expected, but the company believes this is manageable.

Main Risk

The primary risk is the failure to list Garden Fresh by the deadline, which would result in substantial penalties for Sino Grandness. The CB holders have set strict conditions for the listing and profit targets, which Garden Fresh has already met for the first two years. If the listing fails, the company may have to redeem the bonds at a significant premium, ranging from RMB492m to RMB723m.

Convertible Bonds

• Garden Fresh issued two tranches of convertible bonds: RMB100m to Sun Hung Kai and RMB270m to Goldman Sachs, raising RMB330m in net funds.
• The bonds were issued at discounts of 10% and 13%, with zero coupon and a maturity date of 19 October 2014 and 30 June 2015.
• Conversion into shares is based on a FY13 PER of 5-6x, with dilution effects less than 25% if the profit target of RMB250m is met.

Competitive Positioning

Sino Grandness has adopted a unique market positioning strategy by focusing on niche products, such as loquat (pipa) juice, rather than competing directly with larger players in popular beverages like orange or apple juice. This strategy has allowed it to capture significant market share and gain strong brand recognition.

Market Outlook

• The Chinese F&B sector has experienced strong growth, with companies like Huiyuan and Wanglaoji becoming large industry players.
• Sino Grandness is still in the early stages of a multi-year growth cycle, with significant upside potential if it can expand its market presence and successfully list Garden Fresh.

Institutional Interest

The company has attracted new institutional investors, including Asdew Acquisitions, which participated in a recent share placement at SGD0.82 per share. This indicates growing confidence in the company's future prospects, particularly the spinoff of Garden Fresh.

Conclusion

Sino Grandness is positioned for significant growth, primarily driven by the successful spinoff of Garden Fresh. The current valuation is seen as attractive, especially given the potential for a 158% upside in a best-case scenario. While there are risks, particularly from the CB redemption, the company believes the rewards outweigh these, making it a compelling investment opportunity.