A shareholder of Sino Grandness contributed the following article (while feeling very pleased that the stock price gained 15 cents to close at $1.43 yesterday):
Sino Grandness' loquat juice, in particular, has proven to be a runaway success. Photos: Company
The proposed spin-off is required by bondholders, including Goldman Sachs, who had lent Sino Grandness a total of RMB370 million as principal.
They intend to swap their loans for listed Garden Fresh shares, which will translate into much higher returns for them.
I will outline what happens if Garden Fresh gets the approval for listing.
First, it will lead to the bondholders owning 24.7% of Garden Fresh before IPO, if Garden Fresh achieves a profit in excess of RMB 250m this year. (The bond deals were structured such that the percentage of Garden Fresh shares to be held by the bondholders will vary with the 2013 profit levels of Garden Fresh).
A successful IPO will therefore result in Garden Fresh not having to redeem the bonds, and it will be debt-free.
Analysts seem to think that this profit threshold of RMB250 million is achievable and Garden Fresh can fetch a PER of 20 (which is not unreasonable as some of its peers trade at about 30X PE). Garden Fresh will then be worth RMB 5,000m.
If Garden Fresh issues 10% more new shares for its IPO at a PER of 20, it will raise about RMB 500 m cash.
This amount is much larger than the net proceeds of RMB 323m from the bond issues, and is set to enable Garden Fresh to grow further.
Sino Grandness indicated in yesterday's announcement the likelihood of it selling some of its Garden Fresh shares at the IPO.
If it reduces its 75.3% stake to 65.3% prior to the issue of new IPO shares by Garden Fresh, the vendor shares will be worth RMB 500 m, and Sino Grandness still owns 58.6% of Garden Fresh post-IPO (after taking into account a 10% issue of new shares by Garden Fresh).
This leads to the question: Will the RMB 500 m from the sale of vendor shares be paid out as a special dividend or will it be retained by Sino Grandness to grow its other business segments?
Before I offer my answer, consider that Sino Grandness' debts are the RMB 370m bonds (incurred by Garden Fresh) and modest bank loans of less than RMB 50m.
Its canned vegetables segment is slow moving and does not require much funding.
However, its canned fruit segment is rated to have strong growth potential. In my view, it is well capitalised after receiving RMB 110m in March this year from a share placement to funds such as Asdew Acquisitions.
All this suggests, at least to me, that Sino Grandness can afford to pay a hefty special dividend to the tune of 34 Singapore cents per Sino Grandness share (ie RMB 500 m divided by 294 million Sino Grandness shares outstanding). I do not consider this a far-fetched proposition.
Click on the above visual for a short video of Sino Grandness' production plant in Sichuan.
Recent NextInsight story: SINO GRANDNESS: Aiming to stay No.1 in loquat juice market
Comments
Sino Grandness' 75.3% stake in Garden Fresh (after bondholders take up 24.7% for not redeeming their lending) is worth RMB2,824m.
The value of this stake (RMB2,824m) will not change if new IPO shares are also issued at the same price earnings ratio of 15 times 2013 profit.
Maybank's valuation of Sino at $1.89 per share is based on Sino Grandness' 55% stake in Garden Fresh valued at RMB2,063m.
It is obvious that Maybank has excluded the potential sale proceeds from vendor shares received by Sino during Garden Fresh's IPO.
Sino's portion in Garden Fresh of RMB2,063m as assessed by Maybank is RMB761m lower than the RMB2,824 stated at the start of this post.
The difference of RMB751m is 51c per Sino share.
Adding this 51c to Kim Eng's $1.89 gives rise to $2.41, which happens to be the Sino share value implied in the Investor Central video.
Do fellow forummers agree that $2.41 ought to be the theoretical value of Sino share before shares of Garden Fresh are traded?
As for Sino Grandness, the 711 SGD valuation translates into $2.41 per share. ie, 711 divided by 295 million shares outstanding of Sino Grandness = $2.41 per share.
This is again not comparable to Maybank's recent valuation of $1.89 for Sino Grandness.
Special dividend from Sino Grandness?
The kweilo presenter from Investor Central said t Garden Fresh will be valued at S$2 billion at IPO and Sino Grandness at S$711 million, if "the most recent coverage is to be believed."
His source of info is vague. Was there any analyst report on this valuation?
I checked the NextInsight article and it doesn't give the S$2 billion figure. Instead: "Analysts seem to think that this profit threshold of RMB250 million is achievable and Garden Fresh can fetch a PER of 20 (which is not unreasonable as some of its peers trade at about 30X PE). Garden Fresh will then be worth RMB 5,000m."
Who is right?