Successful reinvention. Sino Grandness is a China-based integrated manufacturer and distributor of bottled juices as well as canned fruits and vegetables. Since listing on the Singapore Exchange in 2009, the company has successfully diversified its business model, transforming itself into a canned vegetable exporter focused on both the overseas and domestic markets. At home, its beverage business has grown rapidly to become the group’s main revenue growth driver. We believe that Sino Grandness is still in the early stage of a multi-year growth cycle, especially for its beverage business.

Substantial upside if beverage subsidiary is listed. Sino Grandness is eyeing a separate listing of its beverage business under Garden Fresh HK on the Hong Kong Stock Exchange in 2014. Our recent visit to the company in China indicated that it is on track to achieve its target profit following several initiatives by management, including the setting up of a new production base, opening of new distribution channels and several rounds of fund-raising. There is much value in its beverage business waiting to be unlocked. A back-of-the-envelope calculation suggests that Sino Grandness’s holding in Garden Fresh could be worth SGD383m if Garden Fresh were successfully listed in Hong Kong vs only Sino Grandness’s current market cap of SGD126m.

Huge penalty if listing fails to take off. In 2011 and 2012, Sino Grandness issued convertible bonds totaling CNY370m to Sun Hung Kai Investment and Goldman Sachs. The bondholders are allowed to convert the CBs into shares of Garden Fresh based on a predetermined PE multiple. The main risk for Sino Grandness is that it could bear a substantial penalty if Garden Fresh fails to get listed in Hong Kong.

Ideal only for investors with a big risk appetite. Sino Grandness is trading at a steep discount of 2.6x FY13 PER, based on Bloomberg estimates. Apart from the substantial return in the event of a successful listing of Garden Fresh, a PER of 2.6x seems too cheap for a company with over 40% annual growth. But investors beware: this is not a company fit for everybody; it is ideal only for those with a big risk appetite.

Source: Maybank Kim Eng Research - 19 Nov 2012