Excerpts from analysts' report dated 6 Jan 2016
CIMB analysts: William Tng, CFA & Ngoh Yi Sin
|No.1 loquat juice brand in China
■ We visited SFGI’s Hubei factory recently, mingled with distributors at its Nanjing trade show and conducted channel checks in HK.
■ Increased production capacity to 240k tons pa will reduce its outsourcing, possibly improving gross margins and supporting growth, according to management.
■ Garden Fresh’s HK listing still in progress; convertible bonds in limbo pending that.
■ Potential growth drivers include product innovation and overseas expansion.
■ Trading below 3x historical P/E; potential dividend payout.
Attended company visit in Hubei
We visited SFGI’s Dangyang factory in Hubei recently, met with distributors at a Nanjing trade show and did channel checks at selected retail points in Hong Kong. We were also joined by the Thai representatives from Thoresen Thai Agencies (TTA) and PM Group, SFGI’s substantial shareholders.
More production capacity to facilitate growth
With the construction of new plants in Sichuan and Hubei, production capacity for beverages and canned food increased to 240k and 60k tons respectively, lowering SFGI’s dependence on 3rd party manufacturers, which the company expects to result in better gross margins. An upcoming facility in Anhui will further boost production capacity to support growth (estimated completion: end-2016), according to management.
Still on track for Garden Fresh spin-off
The redemption deadlines for the convertible bonds (CBs) issued in 2011 and 2012 (Rmb350.5m outstanding) have been extended, taking a toll on SFGI’s financials in the form of interest and redemption expenses. Management believes a successful spin-off of Garden Fresh in HK (in talks since 2013) may unlock value for SFGI and remove the share price overhang; while failure to do so will result in a hefty penalty of c.Rmb700m.
Despite core EPS having grown at 28.5% three-year CAGR, SFGI currently trades at only 2.7x CY14 P/E vs. Singapore-listed peers’ average of 10.5x CY14 P/E. Possible rerating catalysts, according to management, are potential dividend payout and successful listing of Garden Fresh." -- William Tng, CFA (photo) and Ngoh Yi Sin"Trading below 3x historical P/E:
Strategic investment by “the Coffee King of Thailand”
Mr Prayudh Mahagitsiri is known as the “Coffee King of Thailand”. Of the 60.6m SFGI’s shares purchased by him, 47.1m shares will be locked-up for 10 years. Management guided that there could be cross-selling opportunities for SFGI with Nestle via Mr Prayudh Mahagitsiri’s joint venture, Quality Coffee Products.
Continual product innovation to drive growth
Every year, SFGI aims to introduce 1-2 new drink flavours. We noted that yogurt drinks and more healthy snacks were launched at the Nanjing trade fair. With the Thai investors on board, some of SFGI’s future plans include extending its product offering and venturing into the ASEAN market, with Thailand as its first stop.
View video of analysts' visit to the Hubei plant -->
Full report here.