And once again, I note that my own questions are sidestepped neatly…
Anyway, skeptic, there are several flaws in your argument.
FIRSTLY, it’s highly unlikely that at the point of issuance of the bond, assuming a total market cap of SGD100m for Sino-Grandness, implied value of Garden Fresh is only worth SGD30m. Why? I will use 2011 figures found here:
infopub.sgx.com/Apps?A=COW_CorporateAnno...G_FY2011_Results.pdf
1. LARGEST business segment
2. FASTEST growing segment, at 124%, almost FOUR times as fast as the other business segments
3. HIGHEST gross margin out of all the other business segments (40%!!)
4. STRONGEST brand of Sino-Grandness “In July and September 2011, the Group’s wholly-owned subsidiary Garden Fresh (Shenzhen) Fruit & Vegetable Beverage Co., Limited was accorded the prestigious title “10 Best InHouse Brands In Guangdong Province For 2010” (“2010 年度广东省十佳自主品牌”) and “Excellent Value Of Chinese Brand” award (“中国品牌价值冠军”) separately. Subsequently in October 2011 during the Food and Beverage Trade Exhibition held in Shenyang, Liaoning Province PRC, Garden Fresh brand was accorded the “Most Competitive Brand For Retail Market” award (“最具市场(终端)竞争力品牌奖”).”
As a percentage of total gross profit, Garden Fresh already makes up 47%. Clearly, as the single most promising business segment of Sino Grandness, value of Garden Fresh can easily make up more than half of Sino-Grandness’s total market cap. 60-70% would not be unreasonable, rather than the paltry 30% you mentioned.
SECONDLY, the RMB 370m convertible bond with a net dilution of 24.7% that you pointed out is the very, very BEST-CASE scenario.
In fact, assuming that profits aren’t so good, but Garden Fresh still managed a listing and all the bonds are converted at the maximum amount, “the Company’s effective shareholding interests in the HK Issuer will be diluted from 100% to 50.1%”. That gives an implied value of 370/0.499=RMB 741m, or SGD 148m market cap for Garden Fresh.
50% dilution in exchange for a mere doubling of market cap. Ouch, not such an attractive deal after all, is it?
It gets even worse if Garden Fresh is not listed, as the redemption amount is substantially higher than principal. I guess you are familiar with that and I don’t have to go into that now.
The ONLY REASON you can paint such a positive picture of the Sino Grandness bond deal in the first place is because, credits to the management, they DID execute well. It’s clearly a very risky deal that will harm shareholders substantially if management failed to live up to expectations.
If I were to use your analogy in the case of Eratat, I would just list out the very best-case scenario which is 14.8% dilution with exercise of warrants, giving Eratat an implied market cap of SGD0.25*82.5m/0.148=SGD140m. Compare with current market cap of 57m. Wow, a 2.5 times doubling of market cap at only 14.8% dilution, WITHIN a span of only two years!! Such an attractive deal!!
And again, I would like to point out as to how SHK and Goldman protected their downside in this Sino-Grandness deal. Even if Garden Fresh did not earn good profits or failed to list, they made sure their downside is sufficiently protected, in the form of a large chunk of the company or absurdly high redemption price of bonds.
Why didn’t SHK do the same with Eratat?