Sino Grandness – Once bitten, twice shy?

April 19, 2012 el15

It has been some time since I last published write-ups on my blog as I have been extremely busy since February. I have been running around for company result briefings in February. In March, I have arranged several 1-1 follow up meetings. Thereafter, I went to China to visit a company in April.

Finally, I am able to set aside some time to do some writeups. Below is a writeup on Sino Grandness. I have attached many pictures but I am unable to put it on my blog. Readers can email me directly if they want the pictures.

Since the start of the year, Sino Grandness (“SFGI”) has underperformed the market. As at 18 Apr 2012, it registered a year to date gain of 7.8% vis-à-vis 13.3% and 15.6% from the STI and FTSE Strait Times China index respectively. Much of the loss occurred immediately after their 4QFY11 results. What happened then? Any noteworthy developments since then?

SFGI’s drop in 4QFY11 net profit caught the market by surprise

With reference to Table 1 below, despite a 36% increase in SFGI’s 4QFY11 revenue, it reported a 46% drop in net profit after tax for that period. According to the management, this was mainly attributable to a 78% increase in distribution and selling expenses and 67% increase in administrative expenses. Management took pains to explain that the expenses are necessary as they had intensified advertising and promotion activities such as new TV commercials on CCTV in 4QFY11 to promote their Garden Fresh juices. Furthermore, higher distribution expenses were incurred due to growing business volume, compounded by the fact that SFGI only has one juice supplier in Fujian Province to support its rapidly growing end markets in different provinces in China. (However, this changed from 2012 onwards – see point 2B). In addition, more export billing on cost and freight were also incurred. There were also some non – recurring expenses such as the one off convertible bond issue costs of around RMB7.4m (booked under administrative expenses) for its Garden Fresh subsidiary.

Table 1: Financial highlights 4QFY11 vs 4QFY10

Rmb m	4QFY11	4QFY10	% chg
Sales	285.2	209.4	36%
Gross Profit	94.5	75.4	25%
Distribution & selling expenses	-30.1	-16.9	78%
Administrative expenses	-31.4	-18.8	67%
Net profit after tax	20.3	37.6	-46%

Source: Company & Ernest’s compilations

Noteworthy developments since its 4QFY11 results release

1. 8 Mar 12: SFGI established strategic tie-up with China National Research Institute of Food & Fermentation Industries (“CNIF”) for food & beverage products

CNIF is the oldest and largest national research institution engaged in the food, bio-engineering research and development work in China. SFGI, together with CNIF, will jointly set up a new research and development (“R&D”) center under a five year agreement to focus on research work on loquat juices and establishing national standard sand specifications for loquat juices. In other words, SFGI would combine its in house R&D and that of CNIF, so as to further expand the product range and regularly introduce more products into the China market.

For readers who are interested to know more about CNIF, they can refer to this website http://www.cnif.cn/,

2. 17 Apr 12: SFGI made one announcement but there are several positive developments embedded

2A) Secured additional distributors to expand into new provinces and launched new juices during Chengdu Trade Exhibition

SFGI held a successful Chengdu Trade Exhibition in March (refer to Figure 1). In line with their practice of launching new products every year (they introduced icy loquat and loquat pear in Mar 2011), SFGI launched loquat peach and loquat strawberry in their trade fair this year. (Figure 2) Also, at the trade fair, SFGI announced that they have secured new distributors to market Garden Fresh juices in existing, as well as, in new provinces in the PRC. The number of new distributors and the provinces which they are serving are not disclosed. However, based on their aggressive expansion plans to augment their production capacity for their juices (refer to point 2B below), it is likely to be a good number for them to do so.

Figure 1: Pictures taken from Chengdu Trade Exhibition

Source: Company

Figure 2: Loquat peach (left) & Loquat strawberry (right)

Source: Company

2B) Expanding output capacity at strategic locations in PRC to improve delivery time and cost management

Ever since SFGI embarked on their beverage business in 4Q2010, SFGI only had one external juice supplier based in Fujian Province to support its rapidly growing end markets in different provinces in China. Against the backdrop of increasing demand for its Garden Fresh juices, SFGI wanted to better manage its delivery time and costs, thus it had started construction and installation of machineries at their internal production facilities in Sichuan Province. This was opened officially in Mar 2012. (See Figures 3A & 3B). Till date, they have commenced trial production and expect to ramp up in the coming months.

Besides their internal production facility, SFGI continued to source for new external suppliers for their Garden Fresh bottled juices as demand and sales continue to rise. Besides securing the second external supplier in Zhejiang Province in Jan 2012, they also announced that they have secured a third external supplier in Beijing to support potential new markets in northern China. All in, the annualised combined production capacity for Garden Fresh bottled juices is expected to jump from 70,000 tonnes to 280,000 tonnes.

Figure 3A: Official opening of its Sichuan production facility by City Major in March 2012

Source: Company

Figure 3B: Automated production line commenced trial run in March 2012

Source: Company

Nevertheless, mixed response from analysts

Notwithstanding the recent developments, SFGI is drawing mixed response from the analysts. Here are my personal compilations from the various analyst reports.[1]

	FY11A	FY12F	FY12F	FY12F
Brokerage house		DMG	UOBK	Philips
Date of report		24-Feb-12	19-Apr-12	18-Apr-12
Sales	1,019.7	1,119.2	1,461.3	1,394.0
Net profit after tax	151.7	122.1	202.5	186.0
Recommendation		Sell	Buy	Accumulate
Target Price		0.37	0.60	0.49

Source: Ernest’s compilations, analyst reports

Although the recent developments are positive, after the earnings disappointment in 4QFY11, the investment community may require some time to regain their confidence in SFGI.

Disclaimer
The information contained herein is the writer’s personal opinion and is provided to you for information only and is not intended to or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

[1] The reports are as per what I have and may not be updated though.