• Core earnings below expectations. Sino Grandness Food's (SGF) reported 2014 adjusted net profit of Rmb451.0m, +7.8% yoy, driven by stronger revenue and improved gross margins. However, this was below our estimate of Rmb501.8m due to a drop in sales of exported canned products and lower-than-expected growth of domestic beverage products in 4Q14.
• Revenue for 2014 grew 24.7% yoy to Rmb2.82b as sales of Garden Fresh bottled juices continued to register strong growth of 35.8% yoy to Rmb1.88b while sales of canned products grew 7.3% yoy to Rmb942.7m.
• 2014 gross profit increased 28.9% yoy to Rmb1.13b with gross margin improving slightly to 40.0% from 38.7% in 2013 due to stronger contribution from the highermargin beverage segment. Sales and distribution costs in 2014 escalated to Rmb378.7m, +73.5% yoy, due to increased transportation costs and advertising and promotional activities.
• However, net profit slumped due to non-cash revaluation charge on convertible bonds. The auditors had required SGF to revalue the convertible bonds with its embedded option value on either conversion or redemption in 2015. This resulted in the company having to charge a non-cash adjustment of Rmb130.5m in 2013 and Rmb217.6m in 2014. Accordingly, reported net profit in 2013 and 2014 were lowered to Rmb287.7m and Rmb233.4m respectively.
• Kneejerk reaction to headline profit numbers. We do expect the market to react negatively to the 2014 profit numbers and the restated profit statement and balance sheet for 2013. But we also understand that it is inevitable that this figure had to be recorded either on conversion (Garden Fresh listing is successful) or redemption (Garden Fresh listing is not successful). The total non-cash charge of Rmb348.1m is on an option valuation methodology and is a function of redemption at various interest rates and conversion at different valuation of Garden Fresh.
• That said, there is no major P&L and balance sheet impact going forward but could see cash flow impact if the Garden Fresh listing process goes beyond 30 Jun 15 and bond holders redeem at the highest interest rate. CEO Huang reiterated that with the current cash of Rmb223.6m, internally generated cash flow in 1H15 and potential funding of various banks, the company has the resources to pay back the bond holders if the worst scenario occurs.
• 2015 will be an important juncture for SGF. While we are hopeful of Garden Fresh completing its listing in 2015, we think SGF’s cash position will be tight if the repayment takes place. On the positive note, SGF can now start on a clean slate with no share price overhang while listing works on Garden Fresh is taking place concurrently. Without the dilution from the CB holders, SGF will also own a higher stake of Garden Fresh post spin-off, which will boost its valuation eventually.
• Maintain BUY with a lower target price of S$0.63. SGF should not fail as a company with the support of the PM Group after they pumped in cash at S$0.40/ share two months ago. The reduction in target price is purely a conservative stance as we peg the valuation to its 3-year average PE of 4x as we assume the Garden Fresh listing does not occur before 30 Jun 15. (Read Report)
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Source : UOB KayHian Research