sino grandness - undervalued stock

I'd like to share Maybank's initiation report published in 1Q this year.



Sino Grandness could be worth up to SGD2.52 (158% upside) on our best case scenario and SGD1.31 (34% upside) on the worst case scenario, with potential 20% downside even if the listing does not take place.

The shares have doubled since 2012 as the market factored in good progress toward a successful spinoff but the odds are still good as a recent share placement drew in new institutional investors.

We initiate coverage with a BUY and target price of SGD1.60 pegged to 6x FY13F PER. Sino Grandness is still in the early stages of a multi-year growth cycle and the impending listing of its main growth engine will see it valued higher as a separate unit, unlocking substantial value for shareholders.

Multi-bagger in the making. The biggest catalyst for Sino Grandness is its plans to list wholly-owned juice subsidiary Garden Fresh in Hong Kong by October 2014.

Sino Grandness is a potential multi-bagger given the huge valuation mismatch between its current single-digit valuations and comps in Hong Kong that trade at 20-30x earnings.

Sino Grandness has put in huge efforts to achieve that goal by October 2014, including the setting up of two new production bases, the opening of new distribution channels and several rounds of fund-raising from strategic investors Sun Hung Kai and Goldman Sachs (convertible bonds) and Asdew Acquisitions (new shares at SGD0.82 a share).

Tapping into a “juicy” market. The food & beverage sector in China has been one of the greatest beneficiaries of the country’s dramatic economic growth over the past two decades. Sino Grandness has chalked up profit growth of 63% p.a. since its IPO, mainly driven by its three-year old juice business.


Loquats

However, it is still in the early stages of a multi-year growth cycle. The fact that the juice business now accounts for half of sales in just three years underlines its boom potential. We believe the best is yet to come.

Its astute market positioning and low base will enable it to continue to drive strong double-digit top and bottomline growth.

When will the 3Q results be released?

Ahead of its 3Q results release, Sino Grandness has risen to 76 cents. ($1.52 pre-split price)

Bear in mind there is growing optimism around this stock & possibly fund buying. It's increasingly priced for near-flawless performance & will be vulnerable to negative news. Hopefully there is none of this.... and it could go on to levels such as 90 cents.

The results should be out today or tomorrow as the previous year's result was announced on nov 6. I think there should be good upside since they commenced distribution to the chain stores during this qtr. let's keep our fingers cross.

There are two uncertainties.

First, will Garden Fresh get listed on the HK bourse before Oct 2014, and with a good PER?

Second, will Garden Fresh current year profit exceed RMB250m for Sino Grandness to forgo the minimum stake (24.7%) in its wholly-owned Garden Fresh?

With a net margin of 19%, juice sales in the current year should reach RMB1,316m to give rise to a profit of RMB250m.

In the first half of the current year, juice sales were RMB585m (with RMB346m in 2Q). To hit the sales target for the whole year, sales in the second half should not be lower than RMB731m, or RMB366m per quarter. This (RMB366m) is not a daunting goal as it is only slightly higher than the 2Q sales of RMB 346m.

In fact, two recent developments may suggest that quarterly juice sales are set to rise.

First, in Aug 2013 Garden Fresh gained access to Hongqi, which runs 1,400 convenience stores in Sichuan. Hongqi is growing further following its listing on the Shenzhen bourse in Sep 2012.

Second, Garden Fresh received indicative orders amounting to RMB290m from visitors to the Chengdu trade fair in late March. It is likely that some of the orders will materialise in the third and fourth quarters of the current year. (Sino Grandness has not announced the outcome of the Wuhan trade fair concluded in Oct, which is smaller in scale than the Chengdu trade fair.)

In financial performance, Garden Fresh is comparable to Hui Yuan, an established juice brand owner with a PER of more than 30 times. Garden Fresh may be able to cross the hurdles for a listing in HK.

BNN's caution is timely now that the price of Sino Grandness share is fast approaching the target prices (clustering around 90c) set by various analysts.

Investors will be well served by studying the basis of the target prices and assess whether there is enough buffer to cater for any imponderables

Yesterday Sino Grandness announced that its in-house beverage products has a brand value of RB3,500m, based on the analysis by Asia Brand Association and Asia Brand Research Centre. This figure provides a perspective for valuing Garden Fresh, the brand owner.

Needless to say, one has to recognise the fact that quantification of brand value is inherently imprecise as it invariably involves some subjective considerations.

As at 31 Dec 2012, Garden Fresh retained earnings amounted to RMB280m. If it earns RMB250m in the current year and RMB300m in 2014, retained earnings will grow to RMB830m.

Garden Fresh has borrowed RMB370m, and this amount may be swapped into Garden Fresh shares when Garden Fresh is cleared for a listing in Hong Kong in 2014. If this happens, Garden Fresh shareholders' funds will become RMB1,200m (=830m + 370m).

Adding the RMB3,500m beverage brand value to RMB1,200m will give rise to Garden Fresh group being valued at RMB4,700m.

As Sino Grandness' 100% stake in Garden Fresh group will drop to 75.3% when the lenders opt for Garden Fresh shares, Sino's residual interest in Garden Fresh will amount to RMB3,539m (=75.3% of RMB4,700m), or $722m. This is $1.22 per Sino share.

Canned food products, the other business segment of Sino Grandness, has been previously valued at around RMB700m, or 24c per Sino share.

Each Sino share is therefore worth $1.46, if the RMB3,600m is a good gauge of the brand value of the beverage products.