Sino Grandness

Sino Grandness gapped down 16% to $0.36 this morning, after swinging to 4Q14 net loss of Rmb64m (4Q13 net profit: Rmb32.5m), bringing full year net profit to Rmb233.4m (-18.9%).

Revenue for the quarter fell 8.3% to Rmb503.6, dragged by decreases in overseas canned products (Rmb70.4m, -48.2%) due to weak demand in Europe.

The above was partially offset by increases in the beverage segment (Rmb384.9m, +4.9%). Growth beverage segment was below par, possibly due to a high base effect last year. Gross margin grew 2.9ppt 43.6%.

Bottom line weighed by increases in operating expenses, increased finance costs (Rmb55m), and fair value loss from options derivatives from convertible bonds (Rmb34.9m).

The Rmb34.9m provision for convertible bonds was booked on the back of redemption pressure over the next few months. Recall, 80.5% of the first tranche is due Jun ’15 while second tranche is due Jul ’15. The obligations are worth Rmb722.1m.

With the Garden Fresh IPO deadline of Jul ’15 inching closer and uncertainties still looming, Maybank-KE opines Sino Grandness may need to issue at least 30% more equity to repay convertible bond holders, assuming no alternative funding source.

Maybank-KE also cuts beverage sales growth rates by 5% for each of FY15-16. With that, the house slashes TP to $0.45 from $0.76 previously.

Sino Grandness is currently trading at 2.2x forward P/E. Investors should be reminded that though this appears cheap, it has not factored into account above mentioned dilution risks.