14 August 2014

Sino Grandness Quarterly Report Summary - August 2014

Performance Review

The company reported a stellar quarterly report. 1H14 Revenue improved 34% to RMB1,294 million from a year ago, with net profit increased 32% to RMB230 million, mainly due to the increase of beverages and domestic can food division as well as the higher average selling price, with exported can food remains on par with last year performance. Current product mix is now 67% beverage, 24% oversea canned, and 9% domestic canned.

Gross Margin Analysis across Divisions (2011 - 1H2014)



Balance Sheets: 

Current Assets increased 27% to RMB1,346 million mainly due to the increase of receivables and inventories thanks to the increase of business activities. Non Current Assets increased 7% to RMB 853 million mainly due to the increase of purchase of PPE in Hubei new plant offset by the depreciation. Current liabilities increased 23% mainly due to the increase of payables in tandem of the increase of business activities. Non current liabilities remain on par at RMB 20 million. NAV per shares is 53.9 SG cents. PB ratio is at around 1.3 - 1.4 X (before the listing of Garden Fresh - beverage division).

Cash conversion cycle is now at 112 days for 1H14 compared to 110 days for 1H13, mainly due to the increase of receivables turnover days and increase of payables turnover days offset by the decrease of inventory turnover days. In another word, it took company about 3 - 4 months to turnover the cash flow.

Company Comments on Outlook

The company focus is now on China domestic market, as they will be intensifying sales & marketing activities, ongoing R&D, sales & distribution network expansion and production capacity expansion. Although CAPEX is increased, but it maybe offset by higher gross profit margin as the average cost of production would be reduced by own factories instead of through third party business partners.

The company introduced new products - aloe vera juice & snacks - dried meat & crispy mushrooms & cakes that cater to the demand of domestic end users. The company also in early stage of discussion with potential partners to export beverage products to oversea market. The company is now trying to leverage on its distributors to reduce the cost of holding inventories and none of the distributors accounts for more than 4% currently.

Some statistics of Loquat Juice Market in China: It is expected to have compound annual growth rate of around 40% for next 3 years until 2017, with share of fruit and vegetable juice attribute to 3.2% of total market, with changes of end user behavior towards healthier products. Garden Fresh (subsidiaries of the company) is now the market leader with more than 70% market stake in loquat juice, followed by its competitors - Furenyuan, China Minzhong, Tianhai Dongfang and Kagome.

The company is projected to ramp up juice production at new Hubei plant with newly installed 240,000 tons per annum capacity and is optimistic about its operating performance in FY2014.

My Notes

Sino Grandness is one of my favorite counters as it enjoys a good ROE mainly due to the transformation of the company from export oriented to domestic consumer oriented after its listing in Singapore Stock Exchange.

Risk: 

It is one of the S-Chip, that accounting standard / audit level may not be as high as Singapore local companies. You have to be very patient in investing in S-Chip, as it is still lacking confidence among local investors.

Besides that, the longer time to get the beverage division listed may increase higher required rate of return for the bond holders which may reduce the equity value of the company. As the redemption of the convertible bonds approaching on October 2014, there is still no concrete news from the management on the detailed information of beverages division listing in Hong Kong Exchange.

As long as the company could manage its cash flow wisely (for 1H14, the free cash flow is still negative partly due to the increase of CAPEX in Hubei new plant offset by the net operating cash flow from operating), I believe it can be another Straco that enjoyed a rise from around 40cents to current 80 cents).



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