SINO GRANDNESS: Fair value revised to 69 c with rights issue

Excerpts from NRA Capital's report

Analyst: Liu Jinshu

Testing Shareholders’ Loyalty
Huang Yupeng, CEO of Sino Grandness, has deposited about S$24 million with the rights issue manager. File photo: Company♦ Owner invests S$23.25m in company. Sino Grandness has announced a rights issue to raise minimum net proceeds of about S$66.4m – a less extreme version of one of the scenarios painted by us previously. In reaction, its share price fell by 6.5 cents to open at S$0.370 this morning.

Bearing in mind the risks of this counter, we argue that Sino currently presents some bargain hunting opportunity for new investors, with potential downside to the rights issue price S$0.310, versus upside from any re-rating in the future. The controlling shareholder Mr. Huang has deposited not less than S$23.25m with the rights issue manager and underwriter to subscribe for his entitlement after renouncing about 6% of his rights shares to Mr. Ben Goi an investor. We see Mr. Huang’s participation as a signal of his commitment and confidence in Sino Grandness.

♦  Adds one more high profile investor to list of shareholders. Mr. Ben Goi (left) is the son of Sam Goi of global frozen foods manufacturer Tee Yih Jia Group. Mr. Ben Goi will be subscribing for 4.75m rights shares at a cost of S$0.310 or S$1.47m in total. Based on the theoretical ex-rights share price of S$0.404, Mr. Ben Goi will be sitting on gains of about S$0.45m, which will be a sweetener for Mr. Ben Goi to acquire more shares if he chooses to.

♦  Net gearing to drop to 16% post-rights issue. According to the announcement, about 60% of the minimum net proceeds or S$39.8m will be used to invest in the Group’s non-beverage business, likely to acquire equipment for the new Anhui facility. The remaining 40% or S$26.6m will be used for distribution network expansion and general working capital. As of 30 June 2016, Sino Grandness has net gearing of about RMB504.7m. Adding the S$26.6m (RMB129.5m) to cash, Sino Grandness’ net gearing may fall to 16.1% of common equity or RMB375.2m post-rights issue. The risk associated with Sino Grandness’ borrowings of RMB1,092m will thus fall substantially post rights issue.

♦  Indicative fair value revised to S$0.690. In this note, we updated our preliminary workings and derive an indicative fair value of S$0.690 for Sino Grandness after factoring in the additional shares to be issued. On balance, we are encouraged that the management is calling for a rights issue and investing more funds in the company (as opposed to an outright placement). As such, fund raising risk is lower going forward.

♦  Higher upside if re-rated, but next few months may be crucial. To conclude, we remind that the company has outstanding bonds that will be due around March 2017 while also highlighting that the upside can be substantial once the overhang in relation to these bonds is lifted. This upside is now even higher as Sino now trades at just 3.8x recurring FY16 P/E. If the overhang is lifted, we may even see Sino re-rate to S$0.985 (10x P/E).

Full report here.