Valuation Case Study on Sino Grandness

Valuation Case Study on Sino Grandness

Disclaimer and Declaration

The objective of the presentation is for educationalpurposes. The full content of the presentation is forillustration purposes only and should not be used asinvestment recommendations. AB Maximus and itspresenters are not responsible for all investment activitiesconducted by the participants and cannot be held liablefor any investment loss.

The company and presenters may have personal interestin the particular shares presented.

Agenda

Company Background1

Industry Analysis2

Valuation3

Risk4

Company Background

Sino Grandness is in the production and sale business of canned/bottled fruits and

vegetables and beverage products

Company Background

Farmers

DistributorsValue Chain

Fresh fruits & vegetables

Canned foods & beverages

Seeds

FertilizerPesticidesStandard

Cans & Glass Containers

External Suppliers

Company Background

Source: Company’s Annual Report 2011

Canned Vegetables• Long Beans*• Asparagus*• Mushrooms***• Sweet Corn• Artichoke• Bamboo Shoots

Canned Fruits• Lychees• Pineapples• Peaches• Apricots• Mandarin Oranges

Fruits and VegetablesBeverage

Herbal Beverage

*1st Mover Advantage Top exporters GFHK SFGI

Company Background

�Network of Distributors*

� 4 continents with long-term strategic relationships

� Large Cross selling opportunities

Source: Company’s Annual Report 2011

Globally renowned supermarkets and distributors

*HACCP, IFS, BRC, ISO certifications

Rebrand

Company Background

*Close to Raw Material Suppliers

Source: Company’s Annual Report 2011

Country Distributed

Production Plants*

External Suppliers (Beverage)

Mexico

Germany

France

Netherland

Czech Rep

Spain

Turkey

Singapore

Russia

Australia

8%

39% 27%

16%10%

53%

Others

Beverage

Asparagus*

Mushrooms*

Long Beans*

Company Background

�Revenue by Segment (FY 2011)

Exports and Beverage made up 92%

Source: Company’s Annual Report 2011*One of the Top Market Exporters

Exports

Company Background

�Revenue by Geography (FY 2011)

Mainly in Europe and China

Source: Company’s Annual Report 2011

51%42%

3%4%

Europe

China

America

Others

Company Background

cents 2009 2010 2011

Dividend per share 5.4031 4.4088 0^

Earning per share 36.1 46.9 57.1

Dividend Payout 15% 10% 0%

Dividend Yield based on latest dividend and current price

= $0.0086* / $0.49 = 1.76%

Please note that company is not obliged to give dividends!

*RMB/SGD = 0.1959 using 2010 Dividend

^No Dividend probably till 2014 due to GFHK project

Company Background

�Since 2009, Revenue Growth is 45.6% CAGR

�Increasing Revenues requires :-

� Increase SKU* in both beverage and canned food

� Increase Market Share in Domestic and Exports

� Raise prices of selective core products

� Expand Distribution Network

Aggressive A&P^ with increasing SKUtargeting Domestic Market

*Store Keeping Unit (Distinct Product)^Advertising and Promotions

Industry Analysis

�China retail sales growth steadily @14.4% during first half of 2012

�Rising disposable income

� per capita disposable income for urban residents increased by 14.1% to RMB21,810 in 2011

�Increasing urbanization

� cities urbanization rate exceeded 50% to approximately 51.3% in 2011

Source: China’s National Bureau of Statistics

Demand is likely to increase

Industry Analysis

�Increasing health awareness and food safety

� driving demand for ready to drink juices; carbonated drinks growth slowing down

�Limited product range in high juice concentration

� higher growth potential for high juice concentration products due to the low base effect.

Source: Company Oct 12 Presentation

Optimistic Outlook for Fruits/Vegetables Beverages

Industry Analysis

�Huge growth potential in PRC’s fruit and vegetable juice market

� per capita fruit juice consumption in China est. < 1kg/yr in 2009 vs 45kg (US), 16-19kg (SGP)

� China’s consumption should be 9.1 m tons/yr(Population 1.4b => 6.75kg/yr)

Source: Euromonitor

High Potential Growth for Fruits and Vegetables beverages

Industry Analysis

�Majority of Europeans under consume fruits and vegetables (≥ 400 g per day)*

�A priority for international organizations and national governments to increase consumption

� 5-a-day campaign initiative

� School Fruit Scheme

Source: European Food Information Council

Europe pushing for more fruits and vegetable consumption

*WHO recommendation

Valuation

�Methodology

� Sum Of The Parts (SOTP)

� Price to Earnings Ratio (PER)

Valuation (SOTP)

0

100

200

300

400

500

600

700

2008 2009 2010 2011 2012

Millio

ns

Domestic Exports

26%12%

34%

13%

-15% 60% 23%74%

Reve

nues

Export to Europe likely to slow down but Likely offset by demand in Domestic market

*Domestic refers to only the Canned Fruits segment

Valuation (SOTP)

�Assumption (Base Case)

�Canned Fruits and Vegetables

� 2012 Revenue Growth

• Export @12.6%

• Domestic @74%

� Export Revenue Growth (FY13/14F) = 12.6%

� Domestic Revenue Growth (FY13/14F) = 2%

�Beverages

IPO + FY12 NP > RMB140m + FY13 NP of RMB190m

� 2013 GFHK* IPO listed @7x

*Garden Fresh Hong Kong

Valuation (SOTP)

CB2*: Value by Share Conversion CB2: Value by Redemption

25%

Source : OSK-DMG

At atleast 7x, CB2 holders will prefer Share Conversion*2nd Convertible Bonds (CB1=100m,CB2=270m)

Valuation (SOTP)

�GFHK Assumption

� IPO + FY12 net profit > RMB140m + FY13 net profit of RMB190m

� IPO valuation @7xGFHK Worth (C11iii) 5x190m 950m

CB% stake in GFHK 370/950 39%

Estimate Pre-IPO shares 20%

Estimated SFGI’s* GFHK shares (C19.14) 41%

Total 100%

Value of SFGI’s in GFHK 7x190mx41% 545m

Value/share of SGFI’s GFHK 545/265 2.06

Source : SGFI’s 1st Convertible Bonds for GFHK in SGX*Sino Grandness

�Revenue/Net Profit projection

Valuation (SOTP)

RMB mil 2009 2010 2011 2012F 2013F 2014F

Export Rev 360 403 541 626 705 793

Domestic Rev 39 62 77 135 137 140

Canned Net Profit* 114 126 140

EPS^ 0.48 0.53

Canned Value/share @ PE 3x

1.43 1.59

SFGI’s GFHK Value 2.06

Total Value 3.65

*Net Profit @15% of Revenue^Number of Shares = 265m

Valuation (SOTP)

Risk Free Rate 2.5%

Market Required Return 10.0%

Risk Premium (Small Cap) 2.0%

Risk Premium (S-Chip) 5.0%

Beta 1.2

Cost of Equity (CAPM) 18.5%

Valuation (SOTP)

�SOTP Valuation

SGFI’s Value @Oct 2014 (S$) 0.72

SGFI’s Value @FY12 (S$)* 0.53

Current market value per share(as at 16 Nov 2012)

$0.49

*Discount @18.5% for 1.75 years

Valuation (P/E Comparison)

Company P/E

Sino Grandness (SGFI) 4.24 x

Yamada Green (YGR) 1.83 x

China MinZhong (MINZ) 3.12 x

Average P/E 3.06 x

Est. Forward EPS for SGFI $0.196*

Fair Value of Sino Grandness using P/E $0.60

Source: bloomberg.com

P/E rather high compared with other industry

*FY12F Growth 65% YoY

Trading Data

52 Weeks Trading Range $0.325 - $0.50

Avg Volume (3 mths) 270,000

Market Cap $130 mil

Source: bloomberg.com

Main Risks

�Increase in raw material cost<

�Inability to source for sufficient labor<

�Product liabilities, complaints and negative publicity

�Failure to comply to new licenses or permits

�Macro uncertainty in main export country and domestic

Europe is still a concern

Source: Company Reports and Prospectus

Main Risks

�Non-reply from relevant stock exchange for GPHK’s IPO application<

�Exposure to Currency Risk

�Default Risk - Low

� Current ratio = 3.53x

� Interest coverage = 25 x

� D/E ratio = 0.55

� Loans maturing this year = RMB76 mil

� Cash = RMB240 mil

END

Competitors

China MinZhong Food

� Farmlands and Industrial Farm

� Fresh or Processed

� Champignon M.rooms (25%)

� Black Fungus (12%)

� Brocolli (5.9%)

� Celery (5.2%)

� King Oyster M.rooms (4.7%)

� Revenue � 83% PRC

� 11% Asia, 4.2% US, 1.5% Europe

Yamada Green Resources

� Farmlands

� Fresh or Processed

� Shiitake M.rooms (81%)

� Processed (19%)

� Revenue � 80% PRC

� 20% Japan