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Sino Grandness: Will Its Garden Fresh IPO Be Boosted By Rival’s Rising Valuation?
Corporate Digest | 11 October 2013
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This article is written by Senior Investor, from Next Insight and is republished on Shares Investment with permission. Senior Investor is a shareholder of Sino Grandness.

In his article two days ago on Sino Grandness, Ernest Lim pointed out that Garden Fresh, which is aiming for listing in Hong Kong, may benefit from the improving prospects of China Huiyuan Juice Group and the high valuation that it fetches on the Hong Kong bourse.

I have dug up some financial data and made a comparison between Huiyuan and Garden Fresh, which should be interesting to investors (see table below).

Despite its longer history, Huiyuan trails Garden Fresh in gross profit margin as well as net profit. There are two possible reasons for this. Firstly, orange juice, which Huiyuan mainly sells, fetches a lower price than Garden Fresh’s loquat juice, which has yet to face significant competition.

Secondly, Huiyuan’s extensive network of 43 factories are running at low utilisation rates. In contrast, Garden Fresh, whose sales were a quarter of Huiyuan’s, produced from only four factories, of which three are OEM. Most notably, Huiyuan was a bottling concern, buying orange concentrate from the firm owned by Huiyuan’s Chairman. That, however, changed dramatically in May when Huiyuan announced that it would acquire the concentrate business.

Chart Source: Bloomberg

Huiyuan’s stock price started rising sharply about two months after the company announced it would acquire the concentrate business from its chairman. The stock rose from HK$3.20 at the start of Aug to hit HK$5.26 recently for a gain of 64.4 percent. During the same period, the Hang Seng Index rose only 4.9 percent.

In Huiyuan’s announcement to the HK Stock Exchange, the concentrate business’ sales to parties other than Huiyuan in 2012 was said to amount to Rmb286 million and it reaped gross profit of Rmb88 million, or a gross margin of 30.8 percent.

The net profit of the entire concentrate business was Rmb358 million. The sharply rising share price of Huiyuan is testament to the value that the concentrate business is expected to bring it. Huiyuan’s chairman was paid in new Huiyuan shares and convertible preference shares at an issue price of HK$3.10 apiece.

Clean slate for Garden Fresh
Garden Fresh initially relied on OEM, which buys concentrate from third parties to produce its juice drinks. In-house production of juice and concentrate started in Sichuan only after Sino Grandness was certain of market acceptance of its loquat juice.

The production of concentrate, which is an important part of the value chain, is carried out by a business unit within Garden Fresh. Thus, Garden Fresh has started on a clean slate, without interested party transactions, and this should enhance its investment merits.

It is also going further upstream.

During the recent EGM, in response to a shareholder’s question on whether Garden Fresh might face a shortage of supply of loquat as its beverage business expands, the CEO of Sino Grandness replied that Garden Fresh will explore the possibility of owning loquat plantations, making Garden Fresh a fully-integrated group.

Sino Grandness is an old hand at upstream activities, having had long-standing relationships with farm cooperatives which supply vegetables for it to process for export to Europe, Mexico and Australia in the past 20 years or so.

Huge market potential awaits
Garden Fresh is a 4-year-old start-up. Its main markets are now in Zhejiang, Guangdong and Sichuan provinces. The company intends to grow its business in Hubei, where its second juice factory is located.

Even in the three existing provinces, Garden Fresh has not reached the third-tier cities. Its growth potential is therefore huge as the brand becomes more entrenched and Garden Fresh is closely identified with loquat in the same way Coca Cola is associated with the cola drink.

Photo: Parry Ng/Sino Grandness.

If Garden Fresh achieves sales of Rmb1.4 billion this year, and continues to enter new territories, it won’t be too far behind Huiyuan.

If Garden Fresh fulfills the Rmb250 million profit target in 2013 set under a convertible bond agreement, and reaches Rmb300 million in 2014, it will be on par with Huiyuan in profit.

I share Ernest Lim’s optimism that Garden Fresh may be able to fetch a PE valuation (based on estimated 2014 earnings) close to Huiyuan’s 30x.

(Ernest has pointed out that Huiyuan’s estimated net profit for 2014 is around Rmb317 million and the stock is trading at an estimated 2014 PE of around 30x.)

Even if Garden Fresh manages to garner a much lower PE of, say, 17x, its valuation just before the issue of new IPO shares will be Rmb5.1 billion (=17 * Rmb300 million).

In theory, Sino Grandness’ 75.3 percent stake will then be worth Rmb3.84 billion ($768 million), or $1.31 per post-split share.

(When Garden Fresh is cleared for a listing in Hong Kong, bondholders who lent to Garden Fresh will exercise their rights to convert their lendings into an aggregate stake of 24.7 percent in Garden Fresh.)

Sino Grandness Food Industry Group  0.044 -0.002 -4.35%   
Business: Integrated manufacturer & distributor of own-branded Garden Fresh juices as well as canned fruits & vegetables. [FY17 Turnover] Beverage (72.4%), canned pdts (27.6%).

Insight: Aug-18, 1H18 revenue jumped 10.6% to Rmb1.7b mainl... Read More

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