(01-03-2015, 09:57 PM)tiongkokgor Wrote: Wow! Interest costs RMB 300 mil, nearly double of principal.
Was it wise for Garden Fresh/Sino Grandness to have tapped on the convertible bonds?
Sino Grandness issued convertible bonds in 2011 and 2012 to grow its beverage business, which is being operated by Garden Fresh set up in 2010.
Bondholders imposed onerous conditions because Garden Fresh was then a nascent outfit. It would appear that bondholders believed that Garden Fresh may do well, and get listed on an established exchange later. They therefor agreed to convert their bonds for a stake in the listed Garden Fresh, but if listing does not materialise, Sino Grandness will pay hefty interest cost.
The stake in Garden Fresh that Bondholders are entitled to depends on profits of Garden Fresh between 2011 and 2013. If yearly profits meet the following targets, bondholders get the minimum of around 25% of Garden Fresh:
2011.....RMB 70m
2012.....RMB 140m
2013.....RMB 250m.
Garden Fresh reported a profit of RMB 86.4m in 2011 against the RMB 70m target for that year. This disclosure was made in 2012 in connection of the issue of the second tranche of bonds. For the next two years, Sino Grandness gave gross profits only, but indicated that the profit targets had been exceeded comfortably.
Total profit of Garden Fresh in the three years between 2011 and 213 are therefore at least RMB 476m (= 86.4 + 140 + 250), more than the interest cost of RMB 300m.
Garden Fresh reported higher sales and gross profit in 2014:
.......................................2014.........2013........% change
Sales (RMB m)................1,877........1,382...........35.8
Gross profit (RMB m)..........806...........579...........39.2
Gross profit margin (%)......42.9..........41.9............increase of 1 % point
Money from the bond issues has enabled Garden Fresh to grow, and more importantly to build the highly automated factory in Hubei capable of producing 240,000 tonnes of beverage and equipped with manufacturing facilities to produce pet-bottles.
In comparison, the first factory in Sichuan has a capacity of 70,000 tonnes but does not make pet-bottles.
Garden Fresh beverage was initially produced by factories of external parties situated in coastal areas. When sales rose, it built its first own factory in Sichuan, in the west, where loquat trees are grow in abundance. Hubei was chosen as the site for the second factory to serve central China. Reliance on external factories is now declining, and when the Hubei factory stated production in Oct 2014, gpm in 4Q rose to 46.5%, compared with 42% in the first 9 months.
When 2011 bonds matured in Oct 2014, 19.5% were redeemed, and the remaining 80.5% bonds were rolled over to 30 June 2015. 2012 bonds mature on 25 July 2015.
Because of the redemption in Oct 2014 as well as 30 June and 25 July are fast approaching, Sino Grandness had to prepare its accounts on the basis that bondholders will redeem.
Excluding the one-off expenses for redemption, 2014 profit of Sino Grandness would be RMB 451m (as stated in the news release) instead of the RMB 233m reported in the results announcement.
It is rare for a new beverage brand to succeed. What have made Garden Fresh one of the exceptions?
Was Garden Fresh being lucky to be the first to make juice from the loquat fruit? Were Walmart and Carrefour willing to try out Garden Fresh juice in Guangdong because there had been no other loquat juice before? Was 7-Eleven willing to join in after Garden Fresh was selling well enough to occupy the limited shelf space in its convenience stores in Guangdgong?
Garden Fresh juice is now being sold by Wellcome (owned by Jardine Metheson) which has 200 supermarkets in Hong Kong. According to Sino Grandness, Jardine Metheson will soon roll out Garden Fresh juice in its 900 7-Eleven stores in Hong Kong. (
There is unconfirmed report that the 600 7-Eleven stores in Guangdong are being run by Jardine Metheson.)
As doubts about Garden Fresh have been circulating for a long while, it is unlikely that the Thai investors were oblivious of them and were cursory in their due diligence. It would be foolhardy for them not sell 47m of the 86m Sino Grandness shares for ten years, and let Mr Prayudh become the honorary chairman of Sino Grandness, if they are not reasonably confident.
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