Sino Grandness Food (SFGI SP) BUY UOBKH

Share Price S$1.05

Target Price S$1.84

Upside +75.2%

Company Description

Sino Grandness Food Industry Group Ltd.

processes food. The Company cans fruits and

vegetables including asparagus, long beans,

mushrooms, bamboo shoots, sweet corn,

chillies, lychees, pineapples, and peaches.

GICS sector Consumer Staples

Bloomberg ticker: SFGI SP

Shares issued (m): 293.7

Market cap (S$m): 308.4

Market cap (US$m): 240.2

3-mth avg t?over (US$m): 1.6

Fundamentals remain intact- reiterate BUY

Valuations



listing of Garden Fresh will go through in 2014, and a holding company

discount of 20% on its stake in Garden Fresh (GF) and a 5.0x 2014F PE

valuation on its remaining businesses.Maintain BUY and target price of S$1.84. Our target price assumes the

What?s New



days after a sell report was issued on one of SGF?s competitors. The

sell-down was also broad-based in the S-chip realm with the FTSE ST

China falling 2.2% over the same period.Sino Grandness?s (SGF) share price has fallen 24.5% in the last two



fundamentals of the company. The company remains positive on its

earnings outlook and has widened its distribution network recently by

signing up with leading convenience store Hongqi and Meiyijia to sell its

beverages and own-brand canned fruit products respectively.We have checked with management and see no change in the



Stock Exchange for the proposed spin-off and listing of GF and looks on

track to carry out this exercise by 2014. The next milestone for this

exercise is to appoint investment bankers, which we expect it to be

done this year.The company has also received a no-objection letter from the Singapore

Our View



the near term following the general weakness in the stock market and

contagion effect from a sell report on one of its competitors, we do see

value emerging with the company, which is currently trading at 3.8x

2013F PE.Although we expect further downside pressure on SGF?s share price in



production capacity and improving the gross margin for its beverage

segment so as to achieve higher valuation during the spin-off and listing

process for GF. Unlike peers, SGF?s beverage products have been

largely visible in major supermarkets and convenience stores in several

tier-1 cities in China.

Yupeng, who owns a 40.1% stake, has not sold a single SGF share since

its IPO. In fact, he accumulated 50,000 shares in yesterday?s sell-down.SGF is diligently building up its distribution network, increasingWe also note that SGF?s Chairman Mr Huang



conducted on SGF and GF in the last two years when the company

issued two tranches convertible bonds.We also understand there had been several due diligence exercises

Price Chart

Source: Bloomberg

Analyst

Brandon Ng, CFA

+65 6590 6615

brandonng@uobkayhian.com

Key Financials

Year to 31 Dec (Rmbm) 2011 2012 2013F 2014F 2015F

Net turnover 1,019.7 1,640.3 2,334.1 2,934.5 3,680.2

EBITDA 231.9 428.9 582.7 732.8 1,348.9

Operating profit 215.0 399.6 528.8 677.7 872.3

Net profit (rep./act.) 151.5 289.1 382.7 490.6 631.6

Net profit (adj.) 151.5 289.1 382.7 490.6 631.6

EPS (fen) 57.1 109.0 130.5 167.2 215.2

PE (x) 9.3 4.8 4.0 3.1 2.4

P/B (x) 2.5 1.6 1.3 0.9 0.7

Dividend yield (%) 0.0 0.0 0.0 0.0 0.0

Net margin (%) 14.9 17.6 16.4 16.7 17.2

Net debt/(cash) to equity (%) 48.7 55.5 40.9 32.5 17.6

Interest cover (x) 36.6 24.9 13.9 17.3 28.7

ROE (%) 27.1 34.3 31.2 28.6 26.9

Consensus net profit 395.0 495.0 601.5

UOBKH/Consensus (x) 0.97 0.99 1.05

Source: Bloomberg, UOB Kay Hian

Sino Grandness (Maybank)

Ready, Willing and Able

A reassuring conference call yesterday.

shortseller?s attack on China Minzhong, Sino Grandness? management

has been very responsive and open in dealing with investors? concerns

and readily agreed to hold a conference call with our clients yesterday

despite the extremely short notice given to them. In all, the concall was

organised within 90 minutes and 20 clients participated. We think the

information shared by management was helpful and informative, and

should go a long way to calming investor concerns. We maintain our

BUY call and target price of SGD1.89 on Sino Grandness.In the light of the recent

Sino Grandness does not use distributors extensively.

visibility of its products is a lot higher with Sino Grandness and

customer demand cannot be manipulated as it sells its products directly

to the end-customer.

Although both are involved in the vegetable export business, China

Minzhong uses many local distributors to deal with the end-customers

either overseas and domestic, while Sino Grandness sells directly to

customers such as Cole Supermarkets in Australia or Tesco in the UK.

With customers where it has to use distributors, such as with the chain

of 7-11 convenience stores in China, the distributors function more as

logistics and fulfilment agents as there are just too many stores for Sino

Grandness to make sure each store is fully stocked. However, the

orders still come directly from the end-customer and not from the

distributor.Channel

Solid progress has been made with Garden Fresh IPO in Hong

Kong.

Hong Kong and things are definitely on track for a favourable

conclusion. SGX?s approval for Sino Grandness to execute on the

planned spinoff was the main hurdle and that was received on 1 July.

The next few stages will be more within the company?s control. Three

big international investment banks have already been shortlisted and

the final selection will be made soon.Sino Grandness is currently working on the Garden Fresh IPO in

Sino Grandness ? Summary Earnings Table

FYE Dec (CNY m) 2011A 2012A 2013F 2014F 2015F

Revenue 1019.7 1640.3 2427.7 2997.2 3522.1

EBITDA 231.9 427.8 564.7 692.0 796.8

Recurring Net Profit 151.5 289.1 392.2 483.5 556.2

Recurring Diluted EPS (CNY) 0.5 1.0 1.3 1.6 1.9

EPS growth (%) 29.2 90.9 35.7 23.3 15.0

DPS (CNY) 0.04 0.00 0.09 0.12 0.13

PER 10.5 5.2 4.0 3.3 2.8

EV/EBITDA (x) 6.7 3.9 2.9 2.0 1.6

Div Yield (%) 0.8 0.0 1.7 2.3 2.5

P/BV(x) 2.7 1.8 1.2 0.7 0.6

Net Debt/(Cash) 76.7 238.0 209.6 -181.1 -335.4

ROE (%) 31.2 41.3 36.4 28.4 23.7

ROA (%) 21.4 26.7 24.3 22.4 20.7

Consensus Net Profit (CNY m) 392.3 482.7 601.5