Sino Grandness

Sino Grandness: UOB Kay Hian caught up with management to get an update on Garden Fresh’s listing. Investment bankers and auditors have started the IPO process since Nov 13. To date, the house estimate the application is 80-90% completed. Although the like SGF for its high-growth business, inexpensive valuation and possible unlocking of value through Garden Fresh’s listing, risk-adverse investors should accumulate only when the listing is more apparent. Maintain BUY. Target price: $1.02. Management said the sponsors are still working on minor verifications and documentation but they remain non-committal on the dates of application and listing. UOB Kay Hian was 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, the house reckon SFGI would have the capability to pay but may require bank financing for its working capital needs subsequently. 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. The house scenario analysis suggests the valuation of SGF at $1.02-1.45, where $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.