Sino Grandness (“SFGI”) has dropped 19% since its results release on 10 May 2011. This was sharper than the 5.3% corresponding decline seen in the FTSE ST China Index. What has happened and will SFGI continue its decline on the back of souring sentiment on the entire S chips sector?
First, a snapshot on its 1QFY11 results
Revenue rose 131% from RMB76.9m in 1QFY10 to RMB177.6m in 1QFY11. NPAT surged 374% from RMB6.6m in 1QFY10 to RMB31.3m in 1QFY11. EPS rose 346% from 2.6 RMB cents in 1QFY10 to 11.6 RMB cents in 1QFY11. To put the numbers in perspective, I have compiled a list of analysts’ FY11F top and bottom line estimates (on a best effort basis). Do refer to Appendix 1 and the respective analysts’ reports for more information on SFGI.
Table 1: SFGI’s actual 1QFY11 earnings vs analysts’ full year estimates
| FY11F Estimates | DBS | UOB | DMG | Phillip | Amfraser |
| Sales (RMB m) | 781.0 | 845.9 | 877.8 | 849.1 | 812.6 |
| Net Profit (RMB m) | 136.0 | 147.6 | 149.4 | 141.4 | 138.8 |
| 1QFY11 actuals as a % of analysts’ sales estimates | 23% | 21% | 20% | 21% | 22% |
| 1QFY11 actuals as a % of analysts’ net profit estimates | 23% | 21% | 21% | 22% | 23% |
| PE (x) | 6.0 | 7.3 | 6.0 | 7.0 | 7.5 |
| Analysts’ estimated target price (SG cts) | 60.0 | 79.0 | 68.0 | 75.0 | 74.0 |
Source: Ernest, analyst reports. 1Q is typically the weakest quarter.
What has happened since its result release?
Some noteworthy events have happened since its result release which may have contributed to the weakness in its share price.
Firstly, the recent accounting problems on the various Chinese firms (not limited to our S chips here) sparked a “risk-off” attitude on the Chinese companies. For example, HongKong listed Chaoda Modern Agriculture Holdings Ltd., supplier of fruit and vegetables, slid as much as 25% on 26 May 2011 after a report by Next Magazine citing that the company exaggerated the amount of land it controls. Another high profile company – Sino Forest, a timber company plunged 71% in the two days after a Muddy Waters’ (it’s a firm which researches primarily on Chinese companies) report citing overstatement of assets. According to Bloomberg, the market value of the Chinese companies trading in North America shrank almost US$5 billion since Muddy Waters’ reports were released. Such negative publicity, coupled with the recent memories of S chips debacles have an adverse impact on the S chip sector as a whole, which consequently affected SFGI.
Secondly, some investors may be worried about the impact on the drought which affected parts of China such as Anhui, Jiangsi, Hubei etc. However, according to management, SFGI is entering into the peak production period and there seems to be no disruption to its business.
Thirdly, in mid May 2011, there was a food scare in Taiwan over the illegal use of DEHP as a food additive in fruit juice, jelly and sports drink. DEHP is a chemical found in plastics. According to Wikipedia, DEHP is carcinogenic and increases the risk of infertility in couples. For SFGI juice products, according to a Philip Securities report, it mentioned that SFGI confirmed that their fruit juices do not contain such products. Furthermore, although SFGI outsources its production of juice to an OEM manufacturer, it maintains its quality by stationing one staff at the OEM site to monitor the production process.
Management cites robust outlook
In the 1QFY11 results presentation, management is bullish on several fronts. Firstly, its export business is likely to see stronger seasonal performance going into the 2HFY11. Secondly, the juice segment is likely to gain further traction as company is signing up more distributors (16 distributors in Aug 2010 vs 40 distributors in Mar 2011) after their Chengdu trade fair held in March 2011. It typically takes a few months to sign up the distributors after the trade fair. Besides securing more distributors, SFGI also expanded its point of sales rapidly from smaller convenience stores to large scale supermarkets such as Walmart, Carrefour etc in China.
Capex plans going forward despite no agreement reached on TDR
According to DMG report, they expect SFGI to invest RMB110m in capital expenditure (“capex”) this year. RMB30m is targeted to add capacity to its export business. Another RMB 30m is to construct a juice production line on their existing Chengdu facility. For the balance RMB50m, it would be spent on construction of its new Hubei plant.
In addition to its capital expenditure, it is noteworthy that as of 31 Mar 2011, SFGI has RMB22.4m short term loan which is payable within less than a year. This, coupled with their working capital requirements and the aforementioned capital expenditure, is likely to put a strain on their cashflow, especially since their Taiwan Depository Receipts (“TDR”) may be delayed or cancelled as there have been no updates since the last announcement on 16 Feb 2011. Management is cognizant of this and highlighted during the 1QFY11 presentation that the company is able to draw down a loan of about RMB50m from the banks, if necessary.
Nevertheless, in my opinion, readers should be prepared that SFGI may do equity financing (such as placement) if the opportunity arises as they are growing quickly.
Re-rating possible if SFGI continues to deliver results
According to Table 2 below, SFGI trades at a FY11F PE of 4.5x. Although this is low (considering the growth that it is likely to be having this year), it is noteworthy that Chinese firms continue to face weak sentiment and negative news flow. Nevertheless, SFGI has been very active in reaching out to the investment community by doing road-shows not only in Singapore but in Malaysia, Hong Kong etc. so as to create more awareness in the company and increase transparency. Re-rating is likely if SFGI can continue to deliver on its results and expansion plans.
Table 2: Comparison of SFGI vis-à-vis its peers
| Short Name | Cur | Last Px | Analyst TP | Change in TP | 1 Yr high | 1 Yr low | Adj Mkt Cap (S$m) | FY10 PE | FY11F PE | ROE (%) | Fwd Div Yield (%) |
| Sino Grandness | SGD | 0.48 | 0.72 | 52.3 | 0.61 | 0.28 | 126.0 | 5.3 | 4.5 | 33.9 | 2.2 |
| Cerebos Pacific | SGD | 4.98 | NA | NA | 5.33 | 3.83 | 1,577.5 | 13.6 | 13.1 | 27.2 | 5.0 |
| Hsu Fu Chi Inter | SGD | 4.00 | NA | NA | 4.35 | 1.99 | 3,180.0 | 23.6 | 21.1 | 22.5 | 2.2 |
| China Essence | SGD | 0.29 | NA | NA | 0.36 | 0.21 | 113.7 | 3.6 | 2.7 | 13.2 | 1.9 |
| Yamada Green | SGD | 0.26 | 0.37 | 42.3 | 0.41 | 0.24 | 105.7 | 1.6 | 4.0 | 41.6 | 3.9 |
| China Minzhong | SGD | 1.52 | 2.15 | 41.3 | 1.90 | 1.17 | 847.3 | 7.0 | 7.9 | 22.4 | 0.2 |
| Average ex Sino Grandness | 9.9 | 9.8 | 25.4 | 2.6 | |||||||
Source: Bloomberg (as of 28 Jun 11)
Appendix 1 – Description of SFGI
Source: Bloomberg (as of 28 Jun 11)
*This writeup is an abridged version which was sent out to my clients yesterday.
Disclaimer
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