Excerpts from analyst's report

Worthy of Consideration at Current Share Price 

NRA Capital analyst: Liu Jinshu

huangdrink10.15Huang Yupeng, CEO of Sino Grandness, chatting with Singapore analysts during a company visit. NextInsight file photo.Still trading at unchallenging levels. The share price of Sino Grandness has fallen by 30.6% from the high of S$0.785 on 6 June to S$0.545 as of 8 August.

Our analysis shows that Sino’s share price is potentially still trading below fair value even IF the spin-off of its beverage unit Garden Fresh Group Holding Co., Ltd on the Hong Kong Stock Exchange is protracted.

In fact, its share price may receive a double boost once the spin-off is confirmed, owing to the lifting of interest expenses from net profit and further re-rating from the trading value of Garden Fresh.

Sino is anticipated to release its results on 11 August and we do not expect any negative surprises.

♦ Recent downswing in share price unjustified. On 1 August, Sino’s share price fell from a high of S$0.590 to S$0.420. Subsequently, the company has clarified that some of its products have been selected as samples for a quality test and have passed the test.

Based on Sino’s announcement, some members of the investment community have apparently misread a third-party article to suggest that the products have failed the test.

Sino Grandness
Share price: 
54.5 c
Fair value: 
79.5 c

Current share price assumes worst case scenario. The key risk behind Sino is less about the failure to spin-off Garden Fresh, but more so about its ability to repay bonds with a carrying value of RMB681.62m as of 31 March 2016.

In a worst case scenario, assuming that Sino raises up to RMB 1.0 billion of equity to pay off the bonds while waiting for the spin-off Garden Fresh, we estimate that Sino may still be worth S$0.501 per share (based on 7.0x post-fund raising earnings). The downside will be the roller coaster ride that Sino’s share price will face in the process.

Few have insight about spin-off now
Liu Jinshu"As part of our analysis, we have considered multiple scenarios and we emphasize that we are not suggesting if the listing will fail. Procedurally, the HKSE officials will deal with Sino’s professionals in Hong Kong who will in turn inform the company. Therefore, the company’s insight about the progress of its application is also limited."

-- Liu Jinshu (photo)

♦ Further upside is possible if debt refinancing is obtained or if HK listing succeeds. Conversely, we estimate that Sino may be worth up to S$0.880 per share if it does not spin off Garden Fresh, but successfully refinances its bonds with debt. This estimate is again based on a multiple of 7.0x adjusted earnings.

Under the successful spin off scenario, the estimated fair value of Sino may rise up to S$1.00 to S$1.20 per share if we re-rate the valuation multiple to 10x to 12x adjusted earnings.

Also, our multiple of 7.0x earnings is a subjective input and a different valuation can be obtained using other multiples. As we have not formulated detailed forecasts nor performed an in-depth valuation, we do not provide a rating on Sino at this juncture. For indicative purpose, we peg Sino at the average fair value across our three scenarios as provided (see table below).

100% Equity Funding by Sino to repay bonds Successful Debt Refinancing Successful Spin-Off
No of shares as of 31 March 2016 (m) 673.34 673.34 673.34
Add conversion shares from Soleado loan 50.00 50.00 50.00
Stock Options 40.61 40.61 40.61
Rights Shares 808.08 NA NA
Adjusted No of shares 1572.04 763.96 763.96
RMB SGD rate 4.95 4.95 4.95
EPS (SGD) 0.072 0.126 0.100
P/E Multiple 7.0 7.0 10.0
Estimated fair value (SGD) 0.501 0.880 1.001
                                                                                             Average 0.794

Full report here.

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