SINO GRANDNESS reaches another milestone on way to IPO: Repayment agreement on bonds

Saw Wei Jie contributed this article to NextInsight

Repayment terms 

Of the RMB 350.5m (RMB 80.5m for 2011 CB and RMB 270m for 2012 CB) in principal due, Sino Grandness will redeem (ie, repay in cash) 40% while the remaining 60% will be held by the CB holders and converted into Garden Fresh shares upon the latter's listing in Hong Kong.

The 60% will be converted into an approximately 14.72% stake in Garden Fresh.

As Sino Grandness will redeem 40%, it is subject to the interest rates accrued as stated in the initial CB agreements in 2011 and 2012. This means that Sino Grandness would have to pay the 2011 and 2012 bondholders RMB 80.5m and RMB 205m respectively.

This means that Garden Fresh will be responsible for the principal sums of RMB 32.2m for 2011 bonds and RMB 108m for 2012 bonds as well as the accrued interests.

The payment terms are structured as follows:

» For the 2011 bondholders, RMB 30.1m is due on 31 May 2016. The remaining RMB 50.4m will be due in 12 months time with a 10% interest per anum charged.

» For the the 2012 bondholders, RMB 76.8m is due on 31 May 2016. The remaining RMB 128.2m will be due in 12 months time with a 10% interest per anum charged.

There are two key points. Firstly, the total amount due on 31 May 2016 is RMB 106.9m (RMB 30.1m + RMB 76.8m).

This amount is manageable for Sino Grandness given that its net cash generated from operating activities in 1Q 2015 alone was RMB 230m.  Even though cash on hand as at end-2015 was RMB 143m, the company has 5 months in FY2016 to generate the required amount.

Secondly, the total amount of RMB 178.6m (RMB 50.4m + RMB 128.2m) due in 12 months time is charged at a very low 10% per anum interest. This shows that the CB holders are willing to defer a large amount of payment until after Sino Grandness raises funds from the Garden Fresh IPO.

A 10% interest suggests that the risk associated with lending to Sino Grandness has greatly decreased since 2011 when it was charged 25% interest.

Bond holder identity

Hon Chuan Holdings is listed as one of the holders of the 2012 CB. What's interesting is Hon Chuan is a manufacturer of bottling and packaging lines.

Having a vested interest in Sino Grandness and the expertise to assess its capex, Hon Chuan Holdings must have kept a close watch on Sino Grandness’ capex. Therefore, skeptics who argue that Sino Grandness’ capex is fake are wrong. Its capex is real and has been closely monitored -- and no alarm bells have been heard from Hon Chuan.

The announcement on the repyament terms of the CB last night not only provides a much-needed update and relief to shareholders, it also shows that Sino Grandness is indeed in a good state.

This paves the way for the IPO process to continue and chairman Huang Yupeng appears confident of it succeeding. The future of Sino Grandness and Garden Fresh is bright.