06 June 2013

Sino Grandness - Summary - FY2012 Annual Report

Corporate Profile:

Headquartered in Shenzhen China, Sino Grandness is an integrated manufacturer and distributor of canned fruits and vegetables as well as bottled juices. Since its establishment in 1997, the Group has rapidly grown to become one of the leading exporters of canned asparagus, long beans and mushrooms from the PRC. The Group serves globally renowned customers across Europe, North America and Asia, such as Lidl, Rewe, Carrefour, Walmart, Huepeden, Coles and Metro.

With stringent quality control and procedures implemented in its manufacturing processes, Sino Grandness' manufacture and sale of canned products are compliant with international standards, including Hazard Analysis and Critical Control Point ("HACCP") food safety system, British Retail Consortium ("BRC"), International Food Standard ("IFS") and International Organization for Standardization ("ISO") certifications. As such, Sino Grandness is able to export its canned products to customers globally including the European Union, which has enforced import restrictions (commonly known as "Green Barriers") since 2000 on the grounds of environmental and food safety issues.

Sino Grandness' six production plants are strategically located in five provinces in the PRC, namely Shandong, Shanxi, Yunnan, Hubei and Sichuan all of which are key agricultural belts in the PRC. The production bases straddle different climatic regions so that production activities can be carried throughout the year.

In March 2010, the Group successfully launched its own-branded bottled juices, 鲜绿园, comprising mixed-fruit juice and vegetable-fruit juice to target the huge domestic consumer base in the PRC. As a percentage to Group revenue, sales from the PRC market have surged from 41.9% in FY2011 to 60.0% in FY2012 due to strong sales growth of the own-branded beverage segment.


Looking ahead, despite the unfavourable economic climate faced by Western countries, the PRC economy seems likely to remain on a growth path in the new year, fuelled by the government’s domestic demand stimulus.

Social trends also augur well for the Group. As urbanisation increases, city dwellers tend to become
more affluent and make more health-conscious lifestyle changes. The rise in disposal income per capita, as well as increasing awareness of nutritional products in the PRC creates opportunities for growth in the food and beverage industry.

Leveraging on this trend, Sino Grandness is confident that its products, such as its Garden Fresh house brand juices and house brand canned products, are well positioned to meet the demands of the market. In this respect, the Group has been focusing on advertising and promotional activities to further develop the brand identity of Garden Fresh juices, as well as sales and marketing initiatives to extend its distribution network in the PRC market.

Over the year in review, concentrated brand-building efforts through advertising and promotion events as well as media sponsorships (for example, the 2012 Youth Idol Chinese Presenter Competition) have increased the brand presence of our Garden Fresh juices. In fact, our Garden Fresh juice has achieved a breakthrough in sales performance in FY2012.

Not resting on our laurels, we have plans to expand the Group's production capacity so as to enable us to meet and secure larger orders. We also plan to engage in research and development efforts to expand our range of juices in order to widen its appeal among consumers.

Source: Sino Grandness FY2012 Annual Report

My View: During the trip to China last week, I still cannot find any of its products (Garden Fresh) in 2-3 tier cities like Jie Yang, Feng Shun and Chao Zhou etc. So I can safely to say that we can foresee another wave of growth in smaller cities in China. Nonetheless, I am not quite comfortable with the increase of receivables, and do not rule out any impairment of bad debts in coming futures when it expands the distribution networks to smaller cities. With latest private placement in place (about 10% of new outstanding shares), we will see a dilution of EPS in coming financial reports. Another growth engine would be the domestic canned fruits products as the management may take steps to further improve its market shares in China.

My forecast of FY2013 EPS would be around 26-28C if the revenue and profit can increase further for another 40%. There would be a PE re-catalyst if its subsidiary Garden Fresh can be listed successfully next year. Nonetheless, I prefer a stable dividend policy after Garden Fresh get listed in Hong Kong / Taiwan.

However, I believe it would be a tough competition with other big boys like Wahaha or WangLaoJi if Sino Grandness wish to diversify its product base and compete against them. So let's see how CEO Mr. Huang Yu Peng can lead the group to another level.

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