08 May 2014

Sino Grandness 2014Q1 Result - May 2014

Sino Grandness 2014Q1 Result Highlights:

  • 1Q14 beverage segment sales surged 41.3% to RMB334.6m from RMB236.9m  
  • 1Q14 Group gross profit increased 24.4% to RMB187.4m from RMB150.6m due to strong order momentum for beverage and domestic canned products segments  
  • 1Q14  distribution and selling expenses jumped 122.0% to RMB70.7m due to   intensified advertising  and promotional activities ahead of Chengdu Trade   Exhibition  
  • Indicative orders received for “Garden Fresh” juices after conclusion of Chengdu Trade   Exhibition in late March 2014 surged 34.5% to approximately RMB390m  
  • Successfully secured new distributors and introduced various new products during Chengdu Trade Exhibition  
  • Planning to commence export business for beverage segment

For details, you may refer to the link here.

My Opinion

  • Net Operating Cash Flow returned to positive cash flow as receivables was reduced while offset against increase of inventories and reduce in payables. It seems that the company is working harder to control the level of receivables although I am not too sure whether it is related to trade / non-trade receivables. Things to note is that the company is going to build another plants starting this year as they have bought the land from the municipal government last year (you can check it from the other receivables in their FY2013 annual report). So I think the operating cash flow cannot be simply distributed as dividends to shareholders, instead, it would likely to be retained and used for CAPEX requirement later on. 
  • Convertible bonds of RMB353.8M to be redeemed by the bond shareholders / converted to the shares largely depends on the successful listing of IPO in Hong Kong stock exchange. I believe it is still in the midst / early stage of the preparation so the management did not announce it in the news release from SGX. 
  • As the company is trading at Price/Book ratio of 1.4X, I treat it as a trust from public towards such as a good S-Chip counter despite scandals such as Eratat. 
  • A spike of A&P expenses (nearly double up) in 2014Q1 brought to my attention here. If we look at the past records, this is the first time the A&P expenses achieved nearly 15% of total revenue on 2014Q1 result, although I understood that this is due to management's intensified campaign to promote brand awareness across the mainland. According to the management, indicative orders received for “Garden Fresh” juices after the conclusion of Chengdu Trade Exhibition in late March 2014 surged 34.5% to approximately RMB390 million compared with approximately RMB290 million of indicative orders secured during the same event last year. So it leaves to you to justify whether it is good enough to attract higher orders by double up the A&P expenses. Anyway, to my understanding, normally the company would spend most of the A&P budgets on 1Q as they participated aggressively in Chengdu exhibition.
  • Another concern to me is the slightly drop of exported canned food division (notwithstanding it is still a better result compared to its peers - China Minzhong). As the company is going to spin off the beverage division (hopefully cant be completed by this year), the remaining division such as exported & imported canned food division may not attract high valuation as compared to beverage division. So I believe the company would remain in single PE ratio still. 
  • The company also mentioned in the news that they were in the ongoing discussion with potential distributors for export market of beverage products. I hope that they can keep their business busy while controlling working capitals closely. 
  • With annualized EPS of around 9.75cents, the annualized Price/Earning ratio of the company is around 7.2X. I believe the estimated EPS could be better than 9.75 cents as the net profit margin of full year result would be higher than current quarter result due to normalization of the A&P expenses ratio against the total revenue.


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2 comments:

  1. You forgot to mention that q1 is also usually the lowest revenue quarter for the company historically as the orders for the new year only really start being reflected in the revenue from q2 on-wards. So to annualize q1 results would be heavily understating expected annual EPS.

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    1. Hi Comentator,

      Ya you are right to add on to this. What I understand is that the group is normally having huge sales for 3Q as the mgmt mentioned to me that it is due to seasonality effect as they wish to stock up on 3Q for year end and new year sales. For 2Q inventories normally will be higher as this is the harvesting season.

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