CHINA STAR FOOD - 0.25 x BOOK VALUE .P/E :1.7 . Cash : $25 m . Debt :$2m

THIS COMPANY IS VERY UNDERVALUED NOW

SELLS SWEET POTATOES SNACK FOOD ACROSS CHINA WHICH INCLUDES CANDIES , BAKED FOOD , PRESERVED FOODS , CRISPS AND PASTRIES ETC .

THE AMOUNT OF CASH BALANCE IT HAS IS VERY HEALTHY WITH ALMOST NEGLIGIBLE DEBT .

OBTAINED DISTRIBUTION RIGHTS TO SELL ACROSS ALL THE 419 WALMART STORES IN CHINA IN FEB 2017

IT IS OVERSOLD NOW .

CHINA STAR FOOD's expansion strategy may be summed up in the following areas.

Exciting product pipelineMore sales promotion and advertisingNew distribution channelsExpansion in production capacityReliable supply of quality raw sweet potatoes


China Star Food's Executive Chairman Liang Cheng Wang spoke with NextInsight on 14 February (Tuesday) about the Group's expansion plans.

1. Exciting product pipeline

"Next month, we will begin rolling out our two latest products from our new factory: frozen sweet potatoes and nougats. We intend to roll out 2 new products every year. Our product pipeline will include popular Taiwanese-style baked confectionery," said Mr Liang.

Other products in the pipeline include rice cakes, baked sweet potato with cheese, jelly, fried dough twist, Japanese-styled mochi, batter biscuit, sweet potato stick, and honey baked sweet potato.

 

2. More sales promotion and advertising


We hope to increase sales contribution from e-commerce from less than 5% currently to over 10% by FY2018. 

- Liang Cheng Wang
Executive Chairman
(Photo: Company)

"We drive sales mainly through sales promotion and advertising. Recently, we offered a 2 for 10 promotion, which was more attractive than our usual one for 1o.

"We are also placing our products on WeChat's in-app consumer e-commerce platform and producing a WeChat video ad," said Mr Liang.

The Group's products are already available on leading consumer e-commerce platforms such as T-Mall, yhd.com, and JD.com.



3. New distribution channels

"Roasting of frozen sweet potatoes at our specialty stores is a novel way of appealing to consumers' sense of smell and sight. Our frozen sweet potatoes will be roasted at specialty retail stores operated by our franchisees, at convenience grocery stores operated by other third-parties, as well as by independent street side hawkers," said Mr Liang.

The Group currently has more than 10 franchised specialty retail outlets. Franchised retail outlets are part of the Group's branding strategy whereby it undertakes the cost of shop renovation while rental and labour overheads are subsequently borne by the franchisee.

"We are targeting to open another 30 franchised specialty retail outlets this year," he said.

The Group has been expanding its distribution network. Distribution stores carrying wholesale inventory for the Group's products are now also found in Yiwu, Hefei, Shenyang, Jinan, Shenzhen, and Xi'an. As at 31 March 2016, it already had a strong network of close to 400 distributors in Fujian, Shandong, Guangdong, Zhejiang, Jiangsu, Liaoning, Hunan, Jilin, Guangxi, and other provinces.

Yeo Choon Tat, who was appointedDeputy CEO on 30 Nov 2016, spearheads the Group's sales expansion regionally.
The push for more widespread market recognition resulted in a year-on-year increase of 89.2% in marketing and distribution costs to RMB 32.9 million for 3QFY2017. 

As a result, the Group posted a 28.3% decline in net profit year-on-year at RMB 12.1 million for 3QFY2017.

 

For its 3QFY2017 financial results for the 9 months ended 31 December 2016, click here.

 

4. Expansion in production capacity

In FY2016, the Group had 2 factories in Liancheng, Fujian with a total capacity of 28,800 tons of sweet potato snacks a year. Utilisation rate was 88.7%. 

During the Chinese New Year, the Group received a local government directive requiring sweet potato factories in the county that do not meet pollution control requirements to halt production.

As the Group's 2 existing factories fall into this category, it decided to relocate its all of its production to its new facility at Liancheng Industrial Park, Food Processing Area. The new plant has a total capacity of 30,000 tons. Mr Liang expects the new plant to commence operations next month when all necessary approvals are received.

The Group is constructing a second new plant adjacent to its new facility. The second new plant will be four times as large, and is scheduled for completion next year.

It expects 4QFY2017 production volume to be affected by the relocation and by the Chinese New Year holidays.



5. Reliable supply of quality raw sweet potatoes

Stock price 16.4c52-week range16.8c - 42.5cMarket capS$43.2mPE2.79 xPrice-Book0.55 xDebt/EBITDA0.12 xSource: StockFacts

The Group is finalising talks to increase its 2,000 mu of farmland leased from local agricultural cooperatives by 4 times to 8,000 mu for a 15-year period.

Once this kicks in, uncertainties over procurement will be eliminated for as much as 60% of its raw sweet potato needs. About 10% of its raw sweet potato is already produced on farmland owned by cooperatives and leased by the Group.

"We station our people at these leased cooperatives farmlands. This arrangment ensures that the quality of our raw sweet potato will be up to expectations," said Mr Liang.

Cultivation of sweet potato on these farmlands will continue to be undertaken by the local cooperatives that are more experienced and have dedicated resources.

Some volume and accumulation these 2 days

THIS GEM HAS STARTED TO WAKE UP

BULLISH TECHNICALS

CHECK IT OUT NEXT WEEK

In this article, Shares Investment has identified 3 S-chips in the small cap category. When we screened for these counters, we want to identify businesses that have strong value propositions that are profitable with solid financial health yet easy to understand. Businesses that are easy to comprehend helps to alleviate the inherent scepticism investors hold and, therefore, making them more palatable.

Like Benjamin Graham once said, “The market in the long-run is a weighing machine.” We like to iterate that our selection here is not meant for speculative plays but for the long haul. Investors should also carry their own due-diligence further before committing to an investment.


China Star Food Group listed on Catalist of the SGX not too long ago in April 2016, via a reverse takeover deal of Brooke Asia. The company primarily produces and sells sweet potato snack food products in China and currently operates two factories that have an annual capacity to produce 28,800 tonnes of sweet potato food snacks. Its third factory, with an estimated capacity of 30,000 tonnes, has been completed and the company has attained the operating license in March 2017. However, operations of the new factory were halted due to the delay in completion of Lian Cheng County’s wastewater treatment plant.

Owing to the unexpected delay and halt in operations, China Star Food expects its FY17 revenue and net profit to be impacted significantly, with operations of the new factory expected to resume only by September 2017.

In the year of its listing, China Star Food generated rather respectable results for FY16 where revenue was Rmb470.9 million and net profit was Rmb16.3 million. In the latest 9M17 results, revenue rose to Rmb359.8 million and net profit increased to Rmb51 million. However, for FY17, we believe that the company would record some impairment charges on unfinished products due to the operations halt in the third factory which will negatively impact the bottom line.

Notwithstanding that, the company has a robust balance sheet and as of 9M17, China Star Food has a cash balance of Rmb123.8 million and total debt of Rmb12.8 million. As it is, the company has a net cash position of Rmb111 million or about $23.1 million in Singapore dollars, higher than its market capitalisation of $21.3million!

Apart from that, China Star Food’s current share price of $0.083 seems rather “cheap”, at P/E of just 1.6 times and P/B of 0.3 times. Meanwhile, local listed peers, China Kangda Food trades at 124.3 times P/E and 1.2 times P/B while Sino Grandness Food Industry Group change hands at P/E of about 2.9 times P/E and 0.4 times P/B.

Whilst China Star Food has a shorter operating record since listing compared to others in the industry, we think this S-chip offers a rather good risk-to-reward argument.