"Loquat Fan" contributed this article to NextInsight.

Finally, Garden Fresh, wholly-owned beverage subsidiary of Sino Grandness, is in a position to fully redeem the convertible bonds.

The convertibles bonds were issued in 2011 and 2012 to raise funds to grow the nascent juice business. 

loquat canRevenue of Garden Fresh, the juice subsidiary of Sino Grandness, has grown to RMB 2,531m in 2016, from RMB 180m in 2010.On 1 Mar 16, agreement was reached with bondholders to set 28 Feb 17 for Garden Fresh to redeem the convertible bonds for RMB 731m. 

Sino Grandness' FY2016 results statement on 28 Feb 17 stated the company's cash level as being RMB 298m at end-16, far short of the RMB 731m redemption sum. The company stated that it "has been in discussion with bondholders in relation to the restructuring of the Straight Bond 2 ("SB2") and Exchangeable Bonds and is confident of finalising the restructuring soon."

(The convertible bonds were restructured on 1 Mar 16 into three parts, Straight Bond 1 ("SB1"), Straight Bond 2 ("SB2") and Exchangeable Bonds. SB1 was repaid on time, on 1st May 16. SB2 and Exchangeable Bonds were to be repaid on 28 Feb 17, for an aggregate of RMB 731m.)

In its just-released 2016 annual report, Sino disclosed that as at end-Feb 2017, it had RMB 357m in cash and untapped credit facilities of RMB 482m; and on 10 March 17, it further obtained credit lines of RMB 100m. (It should be noted that the cash did not include the rights issue proceeds, as the exercise was concluded on 13 March 17.)

The company stated that as of 10 March 17, it had cash and liquidity resources of RMB 939 million, "which is sufficient to repay the straight bonds and exchangeable bonds of RMB 731 million in the event it is required to".

As it transpired, Garden Fresh could have discharged its convertible bond liabilities of RMB 731m on 28 Feb 17, or on 10 March 17. What then is the "discussion with bondholders in relation to the restructuring of the Straight Bond 2 ("SB2") and Exchangeable Bonds" for?

History


In 2011 Garden Fresh, as a start-up, had no access to sizeable bank loans of long tenor. It therefore had to accept the 25% as the compound interest rate for the RMB 100m 3-year convertible bonds. 

In 2012, Garden Fresh issued RMB 270m 3-year convertible bonds on a lower, 20% compound interest rate, likely because of strong profit in 2011.

If Garden Fresh gets listed, bondholders will convert the bonds into Garden Fresh shares, and collectively own 24.7% of the juice company.  

Garden Fresh has made good progress. Its revenue grew to RMB 2,531m in 2016, from RMB 180m in 2010. Two juice production bases are now in operations, and another one is being built. 

Garden Fresh initially relied entirely on contract manufacturers. But later built its own factories for better quality control and production scheduling. Better gross profit margin is also a factor for in-house production:

                         Gross profit margin in 2015

Type of packaging

Self-produced

Outsourced

Pet bottle

48.7%

40.2%

Aluminium can

n/a

47.8%

Tetra pak

n/a

38.0%

48.7%

40.8%

Note: In 2015, Garden Fresh's overall gross profit
margin was 44.3%.


Note that beverage in pet bottle produced in-house fetches a gross profit margin 8.5 percentage points higher than that produced by contractors.

There is scope for gross margin to go higher. At the first base, juice is heated to high temperature before being filled into thick pet bottles. The second base adopts medium temperature, using thinner bottles. Low temperature will be for the new base. As pet bottle makes up 40% of juice production cost, gross margin is set to rise when the third base starts production later.

Garden Fresh is installing filling lines for aluminium cans. It has also made prepayment for installation of filling lines for glass bottles. Juice in aluminium can fetch much higher margin as shown in the table. High margin can also be expected from glass bottles, likely served in high-end restaurants.

Had it not built factories, the convertible bonds would have already been redeemed. As bondholders have a say on capital spending, it may be inferred that they too see the merits of expansion and have given the go-ahead. 

The maturity dates of the convertible bonds Garden Fresh have been extended several times as building juice production faciilities had used up considerable amounts of cash. 

Back to what negotiation is all about

The bond restructuring on 1 Mar 16 was significant as payment of SB1 and SB2 would result in bondholders' potential collective stake in Garden Fresh being pared down to 14.7% (from 24.7% initially).

When the bonds were issued in 2011 and 2012, bondholders valued Garden Fresh at a mere RMB 1,500m. The profit of Garden Fresh was RMB 385m in 2015, and 12 times of that will give rise to a RMB 4,720m valuation. It is therefore important to "reclaim" as much bondholders' potential stake in Garden Fresh.

With Garden Fresh as its star performer, the financial standing of Sino Grandness has improved over the years. On 29 Feb 15, its untapped credit facilities were RMB 274m. A year later, untapped credit facilities went up to RMB 482m on 28 Feb 17; and 10 days later, another RMB 100m credit line was secured. 

As at 10 March 17, banks in China had lent RMB 298m and made available RMB 582m. Their exposure 
to Sino Grandness Group was RMB 880m. Back in 2011 and 2012, Garden Fresh had to turn to the bond market, paying high interest rates for a total of RMB 370m.  

In 3Q16, Garden Fresh secured a US$ 25m 7-year loan from Deutsche Investitions - und Entwicklungsgesellschaft mbH (DEG). As the development bank set up by the German government, DEG evaluates how borrowers will deploy loans to run a viable business and benefit common folk at the same time. DEG must have satisfied itself that juice production by Garden Fresh has provided farmers avenues to create wealth.

Are parties now discussing what should be bondholders' collective stake in Garden Fresh even if listing of Garden Fresh is not to happen any time soon?

Garden Fresh is now in a position for full redemption. Partial redemption and leaving the remaining bonds intact will still entail hefty compound interest rates of 25% and 20%. The bondholders may become shareholders of Garden Fresh in recognition of their seed money that has helped in building up the juice company.   

Listing of Garden Fresh

Sino Grandness  24 cents
52-week range 19.5-71.4 cents
Market cap S$235 million
PE (ttm) 1.5*
Dividend yield --
Year-to-date return 10%
Source: Bloomberg
* PE is 2, if the "e" (earnings) excludes change in convertible bond valuation. 

Sino Grandness has also indicated in the annual report that the draft prospectus to list Garden Fresh on the Stock Exchange of Hong Kong submitted on 31 March 2016 "is valid for 6 months from date of submission after which it will automatically lapse and relevant information will need to be updated. The lapsing of the listing application does not mean that the Proposed Listing has been cancelled. The Company is in the process of updating the relevant information. The Company reiterates that it is continuing its ongoing efforts towards obtaining the approval for the Proposed Listing of the Beverage Business."


Other articles by Loquat Fan:


Comments  

+1 #5 Potato 2017-04-15 18:59
It's imprudent of Sino Grandness not to have planned for its own internally generated cashflow to pay off the CBs. Why is it ceaselessly relying on borrowings?
Quote
-1 #4 boonbibi 2017-04-11 11:01
Georgia,

Sino generated positive cash flows from operating activities in every of the last 5 years:

RMB mil (Year)
66 (2012)
109 (2013)
49 (2014)
578 (2015)
96 (2016)

But it paid RMB 808m on PPE during those 5 years, and had prepaid RMB 788m by 2016 on PPE:

RMB mil (Year)
174 (2012)
249 (2013)
61 (2014)
147 (2015)
177 (2016)
808 (total)

788 (prepayment by end-2016)

1,596 (grand total)

Because of heavy spending on PPE, the CBs have not been repaid. But now Sino has enough untapped credit facilities to do so.
Quote
-1 #3 Georgia 2017-04-10 22:20
Operating cashflow is not ideal yet. Sino Grandness is only in a position to use other borrowings to help repay its CB obligations. .
Quote
-1 #2 loquat fan 2017-04-09 18:33
Installation of glass bottle filling line was disclosed in page 10 of 2016 full-year results announcement:

"Deposit paid to non-current assets increased.....w hich was mainly attributable to property, plant and equipment in our Garden Fresh Hubei, being additions of automated glass filling prodution line....."
Quote
-1 #1 Cttong 2017-04-09 16:01
The link mentioned beverage aluminium cans which fetched higher gross profit margin but beverage in glass bottles was not mentioned at all.


https://www.nextinsight.net/story-archive-mainmenu-60/938-2016/10736-sino-grandness-how-it-intends-to-expand-its-beverage-gross-margin
Quote

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