Sino Grandness - FY14 Result Summary

Sino Grandness released a poor FY14 result recently. Although the revenue grew by 25% to RMB2.9Billion, the net profit dropped by 19% to RMB233M as compared to previous year. The main reasons contributed to the drop of net profit were the increase of distribution & selling expenses (mainly advertising cost) and increase of finance costs well as changes in fair value of option derivatives in relation to convertible bonds.

The breakdown of the revenue by segments of Sino Grandness is oversea canned products RMB635M, domestic canned products RMB308M and beverages RMB1,877M. Gross profit margin improved due mainly to commencement of Hubei plant.

Balance sheet wise, total shareholder funds grew 34% to RMB1,572M, partly due to the RMB158M new placement to new investor. The number of outstanding shares increased to 673M from 587M previous year. NAV is about S$0.50, with EPS about 7.4 cents. ROAE is about 15% - 20%.

Company made an adjustment to the fair value of the convertible bonds liability for FY2013, from RMB349M to RMB524M. The current value of convertible bonds liability for FY2014 was RMB722M. This means that the company would need to get additional cash ready to settle the convertible bonds if IPO of Garden Fresh is not listed successfully before the maturity date of convertible bonds by June / July 2015. Worse comes to worst, the company may need to raise the fund from private placement which will further dilute the earning per shares and net asset value per shares.

I would not be surprised if Sino Grandness stay at the distress price level until the issue of IPO of Garden Fresh could be resolved. I would recommend risk adverse investors to stay away from this counter, as the probability of the delay of Garden Fresh IPO listing is getting higher now.