Saw Wei Jie contributed this article to NextInsight

EVER SINCE Sino Grandness’ convertible bonds (CBs) matured on 25 July 2015 and no resolution was announced, some shareholders feared the worst -- the future of the company looked uncertain and its ability to operate as a going concern was in doubt. This has contributed to the stock trading at depressed levels.

nanjing10.15Loquat juice is the mainstay of Garden Fresh, the subsidiary of Sino Grandness that is headed for an IPO in Hong Kong. Its spectacular growth in recent years has been supported by funds raised through the issue of covertible bonds. NextInsight file photo
This overhang was finally removed when Sino Grandness announced an update on the CBs last night (1 March 2016).  With this and the passing of the EGM resolution on 23 Feb 2016, Sino Grandness has crossed two major hurdles on its way to listing its beverage subsidiary, Garden Fresh.

 

Repayment terms 

Of the RMB 350.5m (RMB 80.5m for 2011 CB and RMB 270m for 2012 CB) in principal due, Sino Grandness will redeem (ie, repay in cash) 40% while the remaining 60% will be held by the CB holders and converted into Garden Fresh shares upon the latter's listing in Hong Kong.

The 60% will be converted into an approximately 14.72% stake in Garden Fresh.

As Sino Grandness will redeem 40%, it is subject to the interest rates accrued as stated in the initial CB agreements in 2011 and 2012. This means that Sino Grandness would have to pay the 2011 and 2012 bondholders RMB 80.5m and RMB 205m respectively.


This means that Garden Fresh will be responsible for the principal sums of RMB 32.2m for 2011 bonds and RMB 108m for 2012 bonds as well as the accrued interests.

The payment terms are structured as follows:


» For the 2011 bondholders, RMB 30.1m is due on 31 May 2016. The remaining RMB 50.4m will be due in 12 months time with a 10% interest per anum charged.


» For the the 2012 bondholders, RMB 76.8m is due on 31 May 2016. The remaining RMB 128.2m will be due in 12 months time with a 10% interest per anum charged.

There are two key points. Firstly, the total amount due on 31 May 2016 is RMB 106.9m (RMB 30.1m + RMB 76.8m).

This amount is manageable for Sino Grandness given that its net cash generated from operating activities in 1Q 2015 alone was RMB 230m.  Even though cash on hand as at end-2015 was RMB 143m, the company has 5 months in FY2016 to generate the required amount.

Secondly, the total amount of RMB 178.6m (RMB 50.4m + RMB 128.2m) due in 12 months time is charged at a very low 10% per anum interest. This shows that the CB holders are willing to defer a large amount of payment until after Sino Grandness raises funds from the Garden Fresh IPO.

A 10% interest suggests that the risk associated with lending to Sino Grandness has greatly decreased since 2011 when it was charged 25% interest.

Preserving great value for shareholders

huang10.14Sino Grandness chairman Huang Yupeng has regularly updated investors on the company's business. NextInsight file photo.By agreeing to redeem 40%, Sino Grandness will deliver great value to shareholders.

If there were no redemption, bondholders would end up with 23.37% of Garden Fresh upon IPO. But through a 40% redemption, the bondholders stake will instead be 14.72%.

Sino Grandness will hold the difference of 8.65% (23.37% - 14.72%).

This 8.65%, which Sino Grandness will eventually spend approximately RMB 285.5 (RMB 106.9m + RMB 178.6m) to redeem, will be worth RMB 515.1m if Garden Fresh is listed at a valuation of 15x 2015 earnings of RMB 397m.

In other words, Sino Grandness will pay in cash RMB 285.5 m to the bondholders instead of giving them Garden Fresh shares that theoretically (at this juncture) could be worth RMB 515.1 m.

(The earnings for Garden Fresh was derived by “portuser” in Valuebuddies.com as such: “Sino Grandness has proposed a dividend payout of RMB 12.1m (at RMB 0.018 per share), which is 10% of the profit canned products business.

Deducting RMB 121m from Sino's adjusted group profit of RMB 518m gives rise to RMB 397m as the adjusted profit of Garden Fresh.”)


Bond holder identity


Hon Chuan Holdings is listed as one of the holders of the 2012 CB. What's interesting is Hon Chuan is a manufacturer of bottling and packaging lines.

Having a vested interest in Sino Grandness and the expertise to assess its capex, Hon Chuan Holdings must have kept a close watch on Sino Grandness’ capex. Therefore, skeptics who argue that Sino Grandness’ capex is fake are wrong. Its capex is real and has been closely monitored -- and no alarm bells have been heard from Hon Chuan.

The announcement on the repyament terms of the CB last night not only provides a much-needed update and relief to shareholders, it also shows that Sino Grandness is indeed in a good state.

This paves the way for the IPO process to continue and chairman Huang Yupeng appears confident of it succeeding. The future of Sino Grandness and Garden Fresh is bright.


Comments  

+13 #5 KCY 2016-03-09 19:09
burbing contest after drinking a "gassie" version of loquat juice:

http://www.weibo.com/p/2304446e4f3152328e5dfd8fc055133b056d79

I did not know they have such gassie loquat juice! is there?
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+19 #4 Crubs 2016-03-02 22:41
The next announcement we should look out for is the revised valuation of the CBs. On page 12 of the FY2015 financial statement under (I) it says "The Board will announce the revised valuation of the CB once the terms have been finalised"
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+20 #3 Huathuatleo 2016-03-02 18:04
Blue, you abit bodoh la. How many times must they tell you that they are not ready? You think IPO is so easy. Want to ipo can just Ipo. To IPO in HKEX, there are many conditions and restrictions. Do you know what they are? Do you know what they have to do to IPO?
Talk is easy,,like the crap coming out of your mouth.

Without the bond, Huang will not succeed. There will be no IPO. They have to thikn win win. Hello, people are not so ungrateful like you la. Your kind is the chow kah kind.
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+22 #2 KCY 2016-03-02 13:02
The gangs are having a hard time covering their shorts. Can understand why you are feeling the blues.

Here is something for you... Expect more announcements soon.. (Those attended the meeting would know!)

Mr. Huang has been true to his words.. Advice you and your gang to change side
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-23 #1 bluekelah 2016-03-02 11:34
If really can IPO, IPO would have happened already long time ago.

Say until so good, keep more IPO proceeds, why don't they pay back all the bonds and keep all the future mega IPO proceeds for themselves, better rite?
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