Sino Grandness Food (SFGI SP)

Strong earnings growth + catalyst = BUY

BUY

Price/Target

Mkt. Cap/ F. Float

+64.2%

S$0.475/S$0.78

S$126.0m/56%

Fundamental View Technical View

Source: Nextview

The stock appears to be supported at above $0.455 and it

could move towards its potential resistance at S$0.525.

Financials

Year to 31 Dec

(Rmb m) 2010 2011 2012F 2013F 2014F

Net turnover 645.1 1,019.7 1,666.3 2,315.7 2,466.8

EBITDA 166.2 227.0 396.7 510.0 543.7

Operating profit 155.9 210.5 370.5 477.6 510.0

Net profit 117.2 151.7 272.6 347.2 372.8

EPS (RMB cent) 44.1 56.9 102.5 130.6 140.3

Net margin (%) 18.2 14.9 16.4 15.0 15.1

Dividend yield (%) 1.8 0.0 0.0 0.0 2.9

P/E (X) 5.4 4.2 2.3 1.8 1.7

P/B (X) 1.5 1.1 0.8 0.5 0.4

ROE (%) 27.8 27.2 32.8 29.5 24.0

Source: Company, UOB Kay Hian

Valuation

•

2012F PE (ended Dec 12) and 0.135x PEG (2012-14F).

Currently, the fast-moving consumer goods (FMCG) peers in

Hong Kong are trading at an average of 33.2x FY11 PE.At the current share price of S$0.475, it is trading at 2.3x

•

2013F PE, pegged to Singapore-listed peers’ average. We

note the potential upside of S$1.12/share if GF obtains

approval from an exchange to list assuming a holding

company discount of 20% to SGF’s Garden Fresh stake and

a 3.0x 2014F PE valuation to its remaining business.We have a target price of S$0.78 which translates into 3.0x

Financial Highlights

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on higher revenue, and stronger gross profit margins

despite greater operating costs. Revenue increased 68.1%

yoy to Rmb1.23b, boosted by yoy growth of 130.2% and

30.6% in sales for the beverages and canned food segments

respectively.SGF reported a 72.4% leap in 9M12 net profit to Rmb224m

•

stronger than expected as SGF managed to leverage on the

current beverage distribution network to sell their ownbrand

bottled fruits. This segment’s Rmb85.3m sales also

enjoyed a higher gross margin of more than 40% that lifted

the group’s gross margin to 39.2% in the same period from

34.4% in 9M11. However, selling and distribution expenses

and administrative costs rose 116.2% yoy and 39.5% yoy

respectively as higher sales volume resulted in higher labour

costs and transportation expenses.Domestic sales of the canned food segment performed

•

Fresh bottled juices output capacity to 280,000 tonnes p.a.

from 70,000 tonnes p.a. a year ago by securing new

capacities based in Zhejiang, Beijing and Sichuan provinces.

The strategically-located supply points will also assist SGF in

extending their distribution network to north and west China

without incurring higher transport costs. Assuming that SGF

fully utilised the capacity and sold juices at an ASP of

Rmb5000/tonne, the group can record potential sales of

Rmb1.4b and Rmb245.0m using historical net profit

margins.The group had announced that it had quadrupled its Garden

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increasing its A& P activities through advertisements, trade

shows, sponsorship programmes as well as new TV

commercials for Garden Fresh juices.The group will also boost its sales and marketing efforts by

Risks

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accounted for more than 80% of total in-house production

cost for canned F& B segment manufacturing. Any sharp

movements in raw material prices would erode SGF's GPM if

the group is unable to adjust the ASP accordingly.Volatility in raw material prices. Raw agricultural products

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both CB1 and CB2 were issued on the premise for GF’s

eventual listing, SGF would have to redeem the bonds at an

effective interest rate of more than 24% if the beverage

business is unable to complete the IPO process.

Sino Grandness is an integrated manufacturer and

distributor of bottled juices as well as canned fruits and

vegetables. Since its establishment in 1997, the group has

rapidly grown to become one of the leading exporters of

canned asparagus, long beans and mushrooms from China.

The group serves globally renowned customers across

Europe, North America and Asia, such as Lidl, Rewe,

Carrefour, Walmart, Huepeden, Coles and Metro.

In 2010, the group successfully launched its own-branded

bottled juices,

juice and vegetable-fruit juice to target the huge

domestic consumer base in China. As a percentage to group

revenue, sales from the Chinese market have surged from

4.8% in 2008 to 41.9% in 2011 due to strong sales growth

of its own-branded bottled juices.Failure to launch an IPO listing of Garden Fresh (GF). As鲜 绿 园 (“Garden Fresh”) comprising mixedfruit

JUICES AND CANNED FRUITS

·

Garden Fresh bottled juices3Q12 beverage segment sales jumped 147.3% to RMB244.2m on strong orders for

·

orders for Grandness canned fruits3Q12 domestic canned products sales surged to RMB31.7m from RMB0.4m on higher

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canned products and positive shift in product mix3Q12 gross profit margin rose to 39.2% from 34.4% on higher selling prices for

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channels such as 7-Eleven convenience storesGarden Fresh juice distributors continued expanding network in new locations and new