Sino Grandness (T4B) AGM 2016 Takeaways

Sino Grandness’ AGM was well attended by many curious and excited shareholders like myself. As usual, the management was kind enough to open the floor for Q&A, which lasted for 2 hours, before proceeding to vote on the resolutions. The Q&A provided a lot more clarity to shareholders on the current position of Sino Grandness and its future plans. I applaud the management’s patience and candour while being grilled for that 2 hours. Here are some of the Q&A exchanged during the AGM:

IMG_1950

11 Question & Answers

Question 1: Why was there a 3-fold increase in the salaries of key management personnel? (referring to pg 104 of the 2015 annual report)

CFO shared that is was largely due to increase in business volume for Garden Fresh, which led to an increase in headcount of around 40-50%, many of which is related to senior management positions (higher costs).

 

Question 2: Distribution & Selling (D&S) expense has increased significantly over the past 2 years compared to revenue growth, which has resulted in flat to marginal decline in Sino Grandness’ bottomline. How does this benefit the shareholders?

Management shared that one main portion of the D&S expense is  Advertising & Promotion (A&P). A&P is more of an investment than expense, it is not a short term thing and results will not be seen immediately. The focus is on building brand value, which is intangible, by aggressively investing into A&P. Management also brought up that the recent independent valuation of Garden Fresh brand stood at RMB3.5bn (S$729m). Furthermore, Sino Grandness’ A&P (previously 4-5%, now 10%) has historically been less compared to other major F&B players (average 10-15%) as a percentage of sales.

 

Question 3: What is the management’s projected D&S expense for the current financial year?

CEO shared that one of the consideration he would look at is the response from the customers/consumers. If the response is good, management will spend more. Mr Huang gave an example of the recently launched coconut juice drink which was well received. His long term goal for Garden Fresh is for it to be on the scale of the major F&B companies (RMB 10-40bn in revenue), Garden Fresh is 10% of their size so there’s plenty of room to grow. Mr Huang expects A&P investments to intensify moving forward.

 

Question 4: How did the management derive the RMB0.018 per ordinary share dividend? Wasn’t there an agreement to pay out 10% of Sino Grandness’ net profits?

Mr. Parry Ng pointed out that in the agreement, the company would only pay out the dividends if feasible. The dividend was derived from the 10% net profit of the canned business, not of the group. Garden Fresh was excluded due to the Goldman Convertible Bond (CB) restrictions.

 

Question 5: Why is it on the company level, there is an increasing amount of accumulated losses?

CFO shared that as an investment holding company, it does not have any income but has expenses such as staff costs. He added that banks and fund managers usually look at the group level instead of the company level so there shouldn’t be much concern.

The company auditor added that the accumulated losses would be a future concern since equity would turn negative, and that would look bad for the company. The auditor suggested the management to look into this area.

 

Question 6: Why are we borrowing money from the Thai Investors at 12-16.5%? Why not borrow more from banks and other cheaper sources?

CEO shared that there were strategic reasons behind the move and thing cannot be seen simply based on cost. Mr.Huang shared that when Garden Fresh started, the CB @ 20% IRR may seemed high, but he felt that Goldman would help boost the corporate profile of Garden Fresh. So while the tangible costs were high, so were the intangible benefits.

For the TTA loan, Mr Huang shared that it was rare to find a strategic partner committed to work together for the long term and even agreeing to lock-up their Sino Grandness shares for 10 years. Mr. Huang also shared that he could have went to other funds but these funds may just dump the shares anyways, which would be detrimental to shareholders. A good relationship with TTA would also allow Sino Grandness to leverage on TTA’s business contacts and networks. For example, Nestle.

 

Question 7: How strategic is this partnership to the shareholders? The convertible option at 0.55 per share would significantly dilute shareholdings.

CEO reiterated that since Sino Grandness’ IPO in 2009, he has never sold a single share and occasionally adds to his position. Mr Huang pointed out that as majority shareholder (35.53%), he was in the same boat as the shareholders. In fact, any dilution would hit him the hardest.

However, Mr Huang mentioned that we shouldn’t be comparing with just a few cents and be too myopic. He shared that given his many years of experience doing business that it would be worthwhile in the long run, given their network and contacts. For example, look at the Goldman deal, back then the IRR was extremely high, people told him he was crazy but looking today, without the deal, Garden Fresh would not have been as big as it is.

 

Question 8: Is there room to negotiate of the option to convert the shares? The deal seems too good for TTA (thus unfair to Sino Grandness’ shareholders).

CEO shared that inevitably, you’ll need strong strategic partners to further build the business. He doesn’t mind diluting the pie of the pie grows much bigger. During the short selling saga, he realised his most valuable strategic partners. For example. despite the short selling saga, the Thais still went in at 40 cents (revised from 60 cents).

 

Question 9: What is the value of the Garden Fresh post-IPO?

CEO got very excited about the question and started sharing about the progress about the IPO until the moderator, Mr. Parry Ng, stopped him and reminded him not to comment further. Mr. Ng went on to share that as much as the management would like to share the progress of the IPO with shareholders, they are forbidden by the HKSE to divulge any details. Failure to comply would result in further delay of the IPO. He added that management will keep shareholders updated on the progress of the IPO as and when possible.

[Though unfounded, Mr.Huang’s enthusiasm made me more confident in the probability of success for the Garden Fresh IPO]

Question 10: Timing for TTA deal (US$20m loan) is abit off, isn’t it better to wait post-IPO? We shareholders have been around Sino Grandness for longer than TTA, this deal is fantastic to TTA.

CEO directly hinted that he set his eyes on a partnership with Nestle. There has to be something for them (TTA). There has to be sufficient risk to reward for them. It is unlikely that TTA would be interested in the shares of Sino Grandness post-IPO when its shares are re-rated higher.

 

Question 11: What are the long term growth plans for Sino Grandness?

CEO shared that post Garden Fresh IPO, the focus will shift to the snacks and canned food business. Mr. Huang shared that the snack food business is doing well and has huge potential. He drew a comparison to Want Want,a rice cake and flavored drinks maker, which delisted from SGX in 2007 and listed on the HKSE in 2008 at much better valuations.

[If it is true that the management intends to focus on grooming and spinning off its snack food business to HKSE or any other reputable stock exchange, then there’s definitely more upside to the growth story of Sino Grandness]

 

IMG_1953

Conclusion

After much volatility and uncertainty over the past year, it does seem that the worst is behind us and that better days are right ahead. Now all eyes will be on the Garden Fresh IPO (expected to occur in July)!

 

Kenny Chia

Value-Growth Investor

7 thoughts on “Sino Grandness (T4B) AGM 2016 Takeaways

  • April 30, 2016 at 4:43 PM
    Permalink

    All the replies from the board were seems to be a self comforting for shareholders only and it doesn’t reflect any real facts…it is not a value stock & not worth to hold long term…minority shareholders normally will suffer from all such moves by the company only to benefit a few of their own people…invest with care…

    Reply
  • May 1, 2016 at 4:04 PM
    Permalink

    On question 5, can the Company pay out dividend when its Company Level is in accumulated losses? Although consolidated group is in positive retained earnings, I thought to declare dividend in Singapore, as per Companies ACT it can only be paid via retained earnings?

    Reply
    • May 1, 2016 at 4:52 PM
      Permalink

      There were a 2 shareholders who asked this technical question at the AGM as well. The company’s auditor present did mention that it is possible to do so without contravening the companies act.

      Reply
  • December 19, 2016 at 12:38 AM
    Permalink

    Jenny, what’s your updated thoughts on SFGI post recent events please?

    Reply
    • December 19, 2016 at 11:00 PM
      Permalink

      Hi Smit, personally I feel that the recent events brought up numerous inconsistencies and red flags with the growth narrative of SFGI. The IPO of GF, which was supposed to unlocked massive value to SFGI shareholders, lapsed. Management then proposed a 0.31 rights issue, which was then adjusted down to 0.21. Reasons for the rights issue provided by management was to fund the growth of the canned food business, which I found quite hard to believe. The cards have not been turning up in favour of SFGI.

      Keeping in mind that there is still the CB loan to pay for in Mar-17, the next few months will be crucial as to whether SFGI is a hero or a zero. I will be keeping a close eye on this counter.

      Reply
      • December 20, 2016 at 3:39 PM
        Permalink

        Hi Kenny. Thanks for your feedback. Agree with your analysis – I don’t understand why do a rights issues (RI) for 1/10th the size of the value of the potential spin off (the IPO was indicatively valued at ~S$600m-700m were as the RI is S$70m). Not to mention an over 30% dilution if one doesn’t subscribe to the RI. Once again thanks for sharing your view – please do share if get any further insights.

        Reply

Leave a Reply

Your email address will not be published. Required fields are marked *