07-06-2013, 05:05 PM
(06-06-2013, 05:24 PM)Investing Sidekick Wrote: Unless I am missing something, the convertible bonds in principle work like
IPO happens: up to 49.9% of Garden Fresh is "lost" to the bonds converted
IPO doesn't happen: worst case scenario a payment of roughly 4 times the current carrying value of the bonds is payable. I dont see any way for them to fund that than through issuance of more debt, and if they cant raise it then who knows what will happen.
There is certainly an element of risk to this, but at the moment it is more of a 'what if' than something thats actually happening
Dilution
Sino Grandness is unlikely to forgo 49.9% of Garden Fresh.
The extent of dilution depends on Garden Fresh' profit in 2013.
If the profit exceeds RMB 250m, Garden Fresh will be valued at 6 times of RMB 250m, or RMB 1,500m, and bondholders will have a 24.7% stake in Garden Fresh for their RMB 370m bonds.
A lower 2013 profit but exceeding RMB 200m will result in Garden Fresh being valued at 5.5 times. For example, a 2013 profit of RMB 200m will result in a valuation of RMB 1,100m; and the bondholders will have 33.6% stake in Garden Fresh.
If Garden Fresh ends up with a 2013 profit lower than RMB 200m, valuation will be 5 times.
Garden Fresh' 2012 profit was RMB 167m on sales of RMB 873m. With indicative new orders amounting to RMB 290m received during the Chengdu Trade Fair in Mar 2013 and higher in-house production that fetches better margin, 2013 profit is likely to exceed RMB 200m.
Probable dilution therefore should be between 24.7% and 33.6%. A dilution as high as 49.9% seems unlikely.
Redemption penalty
The penalty that Garden Fresh faces is not four times the value of the bonds.
The worst case will result in Garden Fresh redeeming the bonds 73% higher than face value when no effort is made on its listing.
If the listing fails despite effort being made, the redemption will be 52% higher. than face value.
Redemption will be in two stages.
The first redemption of RMB 152m takes place in Sep 2014 for the RMB 100m bonds issued to Sun Hung Kai.
As for the RMB 270m bonds issued to Goldman Sachs, redemption is RMB 411m in Oct 2015.
If Sino Grandness continues to do well, it may be able to redeem the bonds from profit, or from bank borrowings as it becomes more credit-worthy.