Sino Grandness

CIMB report dated Jan 6,2016 on Sino Grandness - unrated. 

According to Euromonitor, GF market share of loquat juice in 2014 is 86%.

(08-01-2016, 09:38 PM)leeeta Wrote: CIMB report dated Jan 6,2016 on Sino Grandness - unrated. 

According to Euromonitor, GF market share of loquat juice in 2014 is 86%.

From page 10 of the report:
 
Still negative free cash flow
“Despite generating cash from operating activities, the company has constantly invested substantial capex given its expansion plans, resulting in negative free cash flows. With a net debt position of Rmb620m as at end FY14 (net gearing ratio of 39.0%), SFGI might need further fund-raising to finance its growth plans. According to the management, an additional Rmb 350-400m is needed for its Anhui plant (Rmb 200-250m has been invested so far). “
______________________________________________________________________________________________________ 
 
I reckon the above statement had overlooked and missed out entirely on one of the most crucial point – “ballooning operating receivables.”
 
True, OCF (after working capital changes, after tax paid, and after interest paid) was not enough to cover capex investment (as shown in figure 23 on page 10 of the report) - but OCF (before capital changes, after tax paid and after interest paid) was enough.
 
The business has been generating negative FCF due predominantly to: 
1)  Ballooning operating receivables, and
2)  Substantial capex investments
 
Without the ballooning operating receivables (meaning if cash could be collected fast enough), OCF (after working capital changes, after tax paid and after interest paid) would probably be enough to cover capex investment and the negative FCF situation would likely to be reversed.   
 
No doubt, working capital is simply a core part of a company’s operations, but when working capital runs in the negative for an extended period of time - since being listed in 2009 until now as in the case of SFGI - it is a BIG concern (red flag) that should be highlighted  - and not to be overlooked.

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Boon as always hits the nail on the head.

Its just simple selling of fruit juice and collecting big bucks. Business should be good enough to fund any expansion needed. if not then dun expand.

Big red flags everywhere, oh China's flag is also a big red one!! Lol



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Boon, you have stated "No doubt, working capital is simply a core part of a company’s operations, but when working capital runs in the negative for an extended period of time - since being listed in 2009 until now as in the case of SFGI - it is a BIG concern (red flag) that should be highlighted - and not to be overlooked."

Is this not a common feature among companies that are growing?

Garden Fresh is growing fast, with revenue surging to RMB 1,877m in 2014 from RMB 180m in 2010.

It is a red flag only if capex are faked as alleged by Newman9. But analysts and Thai investors had visited the newly-completed Hubei factory last October.

The table you reproduced shows RMB 676m had been paid as tax. What is the likelihood of faked payments to the tax authority?

just tried the loquat juice in Hong Kong tung chung city supermarket. not bad and price was reasonable too but it was placed on the very top of the shelf which is not easily noticeable.

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(10-01-2016, 05:18 PM)leeeta Wrote: Boon, you have stated "No doubt, working capital is simply a core part of a company’s operations, but when working capital runs in the negative for an extended period of time - since being listed in 2009 until now as in the case of SFGI - it is a BIG concern (red flag) that should be highlighted  - and not to be overlooked."

Is this not a common feature among companies that are growing?

Garden Fresh is growing fast, with revenue surging to RMB 1,877m in 2014 from RMB 180m  in 2010.

It is a red flag only if capex are faked as alleged by Newman9. But analysts and Thai investors had visited the newly-completed Hubei factory last October.

The table you reproduced shows RMB 676m had been paid as tax. What is the likelihood of faked payments to the tax authority?

Leeta : 

nope negative working capital running for an extended period of >5 years is not a common feature among companies that are growing, unless you are talking about s-chips?

Surging revenues 10 fold in 4 years just sounds too good to be true. If it sounds too good to be true.....

The issue here is receivables too much liao. No point investing in a company that's not even able to do a simple thing like collecting its debts, what a joke!!

Ballooning receivables and debt is always a big no no in investing and also a very common tell-tale sign that things are not quite right....

(10-01-2016, 07:14 PM)BlueKelah Wrote:

(10-01-2016, 05:18 PM)leeeta Wrote: Boon, you have stated "No doubt, working capital is simply a core part of a company’s operations, but when working capital runs in the negative for an extended period of time - since being listed in 2009 until now as in the case of SFGI - it is a BIG concern (red flag) that should be highlighted  - and not to be overlooked."

Is this not a common feature among companies that are growing?

Garden Fresh is growing fast, with revenue surging to RMB 1,877m in 2014 from RMB 180m  in 2010.

It is a red flag only if capex are faked as alleged by Newman9. But analysts and Thai investors had visited the newly-completed Hubei factory last October.

The table you reproduced shows RMB 676m had been paid as tax. What is the likelihood of faked payments to the tax authority?

Leeta : 

nope negative working capital running for an extended period of >5 years is not a common feature among companies that are growing, unless you are talking about s-chips?

Surging revenues 10 fold in 4 years just sounds too good to be true. If it sounds too good to be true.....

The issue here is receivables too much liao. No point investing in a company that's not even able to do a simple thing like collecting its debts, what a joke!!

Ballooning receivables and debt is always a big no no in value investing and also a very common tell-tale sign that things are not quite right....

This is not true. If a company is growing rapidly, several rounds of fund raising can be quite common. Just take a look at companies like Uber and GrabTaxi. These companies are fast growing, loss making, cash hungry and they have been raising money very frequently for years. Retained profits are just not enough for these companies to fund their growth so extra capital is needed.

In the beverage industry, these kinds of rapid growths are less common but still achievable. Examples include, Wang Lao Ji and Minute Maid by Coca Cola. The reason why Minute Maid did not need fund raising to support its growth is because it is just 1 product in a huge company, therefore they had the resources to support Minute Maid's growth in China. As SinoG's canned operations are not large, profits from that segment is not enough to fund Garden Fresh's expansion and thus capital raising is needed.

Since Garden Fresh is growing, increasing receivables are expected. A more accurate measurement should be receivables as a percentage of revenue, which have been stable. Most food manufacturers depend on third party distributors in China. Large manufacturers such as Tingyi, Uni-President, Want-Want and Dali Foods have the scale, manpower and financial strength to negotiate direct with retailers and small distributors to obtain better credit terms (usually cash on delivery) for their products.  Small and medium sized food producers like SinoG do not have such advantages therefore they rely on large distributors to resell their products to smaller distributors. Large distributors have a bargaining chip in this scenario and would ask for better credit terms. If SinoG eventually becomes a large food producer, I’m sure their distribution policy would be one that is more advantageous to them.

Although uncommon, Garden Fresh's performance is not unbelievable.This is due to a unique product, aggressive marketing strategy and luck. Food production is a highly capital intensive business especially in its initial fast growing stage. Only much later when the production and distribution is established will the free cash flow start increasing. Garden Fresh is definitely more established now than it was in 2013 when the share price was much higher.

(10-01-2016, 07:14 PM)BlueKelah Wrote:

(10-01-2016, 05:18 PM)leeeta Wrote: Boon, you have stated "No doubt, working capital is simply a core part of a company’s operations, but when working capital runs in the negative for an extended period of time - since being listed in 2009 until now as in the case of SFGI - it is a BIG concern (red flag) that should be highlighted  - and not to be overlooked."

Is this not a common feature among companies that are growing?

Garden Fresh is growing fast, with revenue surging to RMB 1,877m in 2014 from RMB 180m  in 2010.

It is a red flag only if capex are faked as alleged by Newman9. But analysts and Thai investors had visited the newly-completed Hubei factory last October.

The table you reproduced shows RMB 676m had been paid as tax. What is the likelihood of faked payments to the tax authority?

Leeta : 

nope negative working capital running for an extended period of >5 years is not a common feature among companies that are growing, unless you are talking about s-chips?

Surging revenues 10 fold in 4 years just sounds too good to be true. If it sounds too good to be true.....

The issue here is receivables too much liao. No point investing in a company that's not even able to do a simple thing like collecting its debts, what a joke!!

Ballooning receivables and debt is always a big no no in investing and also a very common tell-tale sign that things are not quite right....

Bluekelah

Do you think Sino had faked payment of RMB 676m in tax between 2009 and the first 9 months of 2015?

Based on results announcements of Sino, its total pre-tax profit during the period was RMB 1,720m. 

(10-01-2016, 11:35 PM)leeeta Wrote:

(10-01-2016, 07:14 PM)BlueKelah Wrote:

(10-01-2016, 05:18 PM)leeeta Wrote: Boon, you have stated "No doubt, working capital is simply a core part of a company’s operations, but when working capital runs in the negative for an extended period of time - since being listed in 2009 until now as in the case of SFGI - it is a BIG concern (red flag) that should be highlighted  - and not to be overlooked."

Is this not a common feature among companies that are growing?

Garden Fresh is growing fast, with revenue surging to RMB 1,877m in 2014 from RMB 180m  in 2010.

It is a red flag only if capex are faked as alleged by Newman9. But analysts and Thai investors had visited the newly-completed Hubei factory last October.

The table you reproduced shows RMB 676m had been paid as tax. What is the likelihood of faked payments to the tax authority?

Leeta : 

nope negative working capital running for an extended period of >5 years is not a common feature among companies that are growing, unless you are talking about s-chips?

Surging revenues 10 fold in 4 years just sounds too good to be true. If it sounds too good to be true.....

The issue here is receivables too much liao. No point investing in a company that's not even able to do a simple thing like collecting its debts, what a joke!!

Ballooning receivables and debt is always a big no no in investing and also a very common tell-tale sign that things are not quite right....

Bluekelah

Do you think Sino had faked payment of RMB 676m in tax between 2009 and the first 9 months of 2015?

Based on results announcements of Sino, its total pre-tax profit during the period was RMB 1,720m. 

No need to fake payment, all these numbers are on paper, u don't even sure if they really 'pay' this amount. 
Remember Eratat, they are in net cash position and give dividend some more, but in the end what happened?

(04-01-2016, 10:20 AM)CY09 Wrote: Dug through their actions and realise both had similarities.

Eratat made announcement that it was "accepted as sponsor for the apparel of the male cast in a movie《瘦身魔方》co-produced with Hunan Satellite TV in 2012.", held TV advertising commercials and is "nationally promoted via a weekly TV programme on a martial art called Judose"

In addition, during a period of time, Wang Lee Hom (then well known Taiwanese Singer), was their brand ambassador in 08. Eratat held runway shows too to promote their products which resulted in roaring sales. I remember singapore investors were invited to these shows (Voyage research analysts etc). On the shop front, I rmb Boon from VB was even able to take a look at its stalls in China

While i am not saying SFIG will go down this road, there are similarities

Personally, I will recommend investors of SFIG to make a trip to Hong Kong* and scan the shelves of random Wellcome/ 7-11 shops. There are many wellcome supermarkets so feel free to pick a few to visit. You may/may not be surprised

<divested>
*if you do, please buy me a large tin of jenny cookies. Thanks

Would like to comment on the ‘similarities’ highlighted by you.
 
Brand sponsorship programme with TV station and satellite channel is one mode of advertising to reach out to a wide audience. Another is the appointment of a brand ambassador (often a celebrity) to humanise a product with the aim of increasing brand awareness and sales. Both established and new companies are open to these modes, and many often do these.
 
So the point that Sino Grandness and Eratat accepted brand sponsorship TV programmes and appointed brand ambassadors is not a point that is unique (or similar, to use your word) to draw concern of potential adverse outcome.
 
But I appreciate your concern for investors.
 
And since we are now discussing Sino Grandness with Eratat (though they manufacture different products), I would like to highlight a point on their distribution modes. 

Eratat invited franchisees to set up specialty stores to sell its shirts. Under a franchise system, one has to order a minimum number of items from the producer regularly in order to retain the franchise. Franchisees experiencing poor sales but not wanting to lose the franchise are, therefore, likely to continue ordering and storing the items until they run out of money. Poor retail sales would therefore take a long while to come to light. 

Meanwhile, the producer would book the revenue once the items are handed over, without regard to the actual sales at the franchisees' end. 

That would be one typical scenario for a franchise system with specialty stores.
 
On the other hand, drinks are sold through distributors. As food and drinks have short shelf lives, and shelf space is valuable, supermarkets and convenience stores will promptly stop ordering slow-moving brands from distributors, who would have no hesitation to stop buying such brands.
 
Distributors do not take long to realise poor retail sales of drinks, and if Garden Fresh beverage was not selling well in retail outlets, Sino Grandness sales revenue would have taken a beating early.