Sino Grandness

[babyblue]

Hi bluekelah,

Well there is probably more similarities between poker and the stock market. poker is not gambling for professionals : - its not a game of pure luck and skilled players have an Edge over the non skilled over the long run. skilled players make money consistently from poker. I was refering to the fact that you can do the right things but the OUTCOME might not be the right one. Simply because of probability. Of the idea that there might be alternate realities, a word either coin or popularised by Nassim Taleb. And by the way, not a few investment legends have made this analogy. I dont like to win arguments by quoting/ referencing authority figures but well sometimes it saves me lots of time.

When i refer to level, i wasnt refering to amount of money, im refering to the disingenuity of the fraudalant scheme. What i was trying to say is based on existing information, for Sino to turn out to be a fraud, so many things have to go wrong, so many actors have to be complicit in ways which are either illegal or detrimental to their self interests,  so many checks and balances have to fail, so many times Sino have to pull the wool over goldman's, dbs, established market research companies like euromonitor, tta and their various attempts at due diligence. For instance, the consequences for the team at dbs if Sino is a fraud is likely to be jail time.

But points taken.

Hi specuvestor,
I know your attitude is "show me the money". If i have a choice, obviously i will be more comfortable if the money is shown. But on the flip side what are you suggesting? That sino grandness/ garden fresh is faking their sales by orders of magnitude? and to make up for short fall in cashflow they are either over-inflating their capex by orders of magnitude or by other means? It will be more meaningful if you can draw out your analysis in its entirety (so we can learn and discuss) rather than casting a cloud of doubt and suspicions and stop there.

I too had similar train of thought but what is your conclusion after weighing the other side of the story, closely related to what i mentioned above, for this to be a major fraud (because if its not major than obviously the consequences are quite inconsequential), so many things have to go wrong, so many actors have to be complicit, so many checks and balances have to fail. Can such a fraud can be pulled off in a company with a simple business model of selling drinks.

As for the questions you have below, there are reasonable explanations. Which is that growth momentum was strong so capex had to be spent to feed that momentum. that interest was high and was acceptable was because garden fresh at that time was really zilch. he had no choice at the start. but as growth continued to be strong, a rational businessman had two choices, return the loan( and sacrifice investing for growth) or use all financial resources at his disposal to grow. i do get your point about working capital vs capex though. its a very nuanced point. in a vacuum i'll definitely agree with you but in a competitive world, it is rational to want to be one step ahead of your competitors, to have control, have your own production. long term capex may reap rewards only 2 years down the road. but delay doing it means you reap the rewards 2 years plus delay down the road and you reduce your flexibility in shaping your competitive environment.

thanks for both of your discourse so far. i know you are just trying to share for the buddies benefit.

I do not think Specuvestor is saying SG/GF's business is a fraud. He has clearly mentioned the business is REAL. Similarly, I do not think SG/GF's business is fake after the due diligence and ground work done by the folks here. Actually this means more to me, as most of these people here are risking their own money, compared to (the bankers) who are not. One can argue that some of these bankers are liable for prosecution if things go wrong but I have observed enough to see a difference between law and enforcement

One could also similarly argue that bondholders and TTA have done their due diligence and are in the same boat. It's ironic if people profess to do their homework in investing, but yet defer the decision decider to the decision of others. IMHO, it is sheer irresponsibility. I am even more amazed by the fact that people may actually sub-consciously find comfort in losing money together! I wouldn't feel much comfort if I had invested in SinoForest and lost together with the "legendary" John Paulson.

Specuvestor once talked about "Asset, business and structure". All in all, I believe SG has the asset and business, but the most important ingredient of this mix for the OPMI, is the 'structure'. This is the main difference that keeps us apart from TTA and the bondholders, OPMIs like us are more dependent on structure than TTA and have weaker structure (or protection) than the bond holders.

Forumer Boon's table of the historical annual cashflow basically summarized a track record that shows a cash guzzling machine. Reversion to the mean teaches me that high profit margins will not last forever, even more when u open your accounts for all to see in an IPO in capitalistic (what irony!) China. The recent bond conversion delay and TTA's CB investment looks like red flags to me, and further weakens the 'structure' that I look for when I invest. In essence, we need to ask ourselves - what is the incentive to reward the free loafing (faceless) OPMI and what is the disincentive to not run away from its obligations (that have been delayed a few times and is growing bigger n bigger).

I think you sound confused. you started off by what you think Specuvestor is saying and what i suppose you agree with that Sino grandness is not a fraud. and then you end of by pointing out the red flag? what does the red flag imply? why stop there? why dont you finish up what you want to say. if it is a cash guzzling machine but there is no fraud, you wont invest in Sino because Sino is not OPMI friendly?  My friend I think you need to clarify your own thoughts or your knowledge about sino a little.

And you see im not outsourcing my research and neither are other forumers here. In my case I see the red flags ( which by the way are really not definite and more circumstantial, if you compare to what happened in other s chips) but I also see the OTHER side of the story, and i analyze the actors involved and try to form A CONCLUSION. and thats what a lot of you guys are missing, dont just point out the red flags. synthesise the other side of the story and reach a conclusion on the likelihood of various outcomes. I'm still waiting and i say this humbly for someone to point out how a fraud can take place and how likely. 

But if your attitude is that the moment you see red flags you will avoid a stock, then that is fine by me. But you would missed out a treasure trove of opportunities that provide the highest return. Would you have invested in OSIM in 2008/2009 when on the surface multiple red flags were showing? But dig deeper you may have put in some money.

[portuser]

Specuvestor wrote:

"As portuser mentioned, without the EB they might not be able to reach this scale now. I dont disagree with this. What i disagree is that a rational businessman will risk default and >20% interest penalty to grow his business. Would u borrow ah long to invest capex to grow your biz? Working capital maybe yes, not long term capex.

The 2011 EB was delayed to 30 June originally and then delayed to 25 July again to be inline with 2012 EB holders. Why? What do u think the EB holders were thinking when they delayed to 30 June originally?

Then the chairman represented he will fully pay the EB but will likely pay partial as the EB holders wanted a stake. But instead of paying EB holders he again used more than RMB 500m cash for expansion. Would it not make sense to pay back partial debt say RMB 150-200m and use RMB300m for capex which are not going to affect the 2016 IPO PE anyway. To date the existing EB holders have not received a single $ back. Chinese say 有借有还 再借不难. He could have easily done a refinancing (not restructuring)

And then we have this restructuring into not 1 but 2 straight bonds of different maturity when their cashflow is so strong. Why?

We know they raised about US$25m from TTA about 18 months back and now looking for another US$20m from TTA in form of convertible loan instead of placement like last time. Why? Prima facie we can guess the cash burn rate is roughly US$18m a year.

How do we know to look at cashflow like this rather than simple finance / accounting 101? Cause we been through dot com where reality can be more bizarre than dreams."
.....................................................................................................................................................................................


Garden Fresh issued two tranches of 3-year convertible bonds, RMB 100m in 2011 and RMB 270m in 2012.

The first carried a 13% discount as well as a default rate of 25%.

For the second tranche, discount was 10% and default rate 20%. During the EGM to approve the issue of 2012 Bonds, CEO indicated that although the second tranche was almost three times as large as the first, the less stringent terms reflected confidence of prospective holders of 2012 Bonds who had the benefit of seeing Garden Fresh's strong growth in 2011.

The option to extend to the maturity date to 30 June 2015 was set out in the 2011 agreement, to cater for possible delay in IPO of Garden Fresh. 

Nascent companies, like Garden Fresh, have to turn to the bond market because bank loans, especially of longer tenors, are off limits. 

When they filed for IPO, Huiyuan and Dali Foods highlighted in-house production. Without the bonds, Garden Fresh would not be able to install sufficient production capacity. Among the projects initiated in 2015 is production of juice in aluminium cans in Hubei. Demand for this form of packaging has reached a level that justifies self-production instead of relying on contract manufacturers.

The options of project deferment or partial redemption were laid out in page 50 of 2014 annual report. In the end, Sino Grandness spent RMB 718m in 2015 (RMB 147m as cash disbursed plus RMB 571m as cash prepayments). Moreover, RMB 90m was prepaid for advertisements to be aired this year. 

Did Sino Grandness not consider "pay[ing] back partial debt say RMB 150-200m and use RMB300m for capex", but chose to spend RMB 808m instead? 

It is a fact that cash flows are tight because of business growth. If IPO materilaises, the financial position will become strong with bond liabilities (RMB 1,033m as at end-2015) being extinguished, and inflow of IPO proceeds. 

Is page 51 of 2015 annual report over-optimistic in saying that Sino Grandness has the ability to meet the following obligations:

(a) pay RMB 107m by 31 May 2016; and
(b) pay RMB 731m by 29 Feb 2017 if IPO fails?

Skepticism about Sino Grandness abounds. There was doubt that Garden Fresh can file for IPO.  Doubt also prevailed that bondholders will allow Sino Grandness to reclaim from them a stake of Garden Fresh.

.............................................................................................................................................................................

Some are wondering how would Sino Grandness own 63.96% of Garden Fresh after IPO, as stated in page 6 of the application proof.  

The bond restructuring resulted in bondholders reducing their 23.27% collective stake in Garden Fresh to 12.16%. The following table shows the changes in shareholding culminating in Sino Grandness' 63.96% stake in Garden Fresh:    


...............................Pre-IPO............................................IPO

..........................Before bond.. ...After bond..............Issue of 21.04%..............Sale of..............Final ownership as
.........................restructuring...restructuring..........new shares for IPO....vendor shares.......indicated in prospectus  

Sino Grandness.........76.63%..........85.28%..........................70.46%...............6.50%..............................63.96% 
Bondholders..............23.37%..........14.72%..........................12.16%...............1.12%*.............................11.04% 
Public.........................0.00%...........0.00%..........................17.38%..............not applicable.....................25.00%

* Bondholders join Sino Grandness in offering vendor shares, in proportion to their shareholdings. 

[weijian]

[quote pid='128673' dateline='1461478030']
I think you sound confused. you started off by what you think Specuvestor is saying and what i suppose you agree with that Sino grandness is not a fraud. and then you end of by pointing out the red flag? what does the red flag imply? why stop there? why dont you finish up what you want to say. if it is a cash guzzling machine but there is no fraud, you wont invest in Sino because Sino is not OPMI friendly?  My friend I think you need to clarify your own thoughts or your knowledge about sino a little.

And you see im not outsourcing my research and neither are other forumers here. In my case I see the red flags ( which by the way are really not definite and more circumstantial, if you compare to what happened in other s chips) but I also see the OTHER side of the story, and i analyze the actors involved and try to form A CONCLUSION. and thats what a lot of you guys are missing, dont just point out the red flags. synthesise the other side of the story and reach a conclusion on the likelihood of various outcomes. I'm still waiting and i say this humbly for someone to point out how a fraud can take place and how likely. 

But if your attitude is that the moment you see red flags you will avoid a stock, then that is fine by me. But you would missed out a treasure trove of opportunities that provide the highest return. Would you have invested in OSIM in 2008/2009 when on the surface multiple red flags were showing? But dig deeper you may have put in some money.

hi babyblue,
Thanks for your reply. My thoughts are pretty clear about why SG doesn't fit me as an investment. Things are grey in investing and that might explain why I might sound confused to you (apologies for that).

It is also very evident to me who are the people here are doing independent research, and who are those that think they are doing independent research (while been hit blind by confirmation bias)

Most of us here are OPMIs. We may not have your degree and scope of research I reckon. Personally,  I do not find anything wrong with NOT investing when there are red flags. In fact it is perfectly fine. In scientific research, we perform hypothesis testing in which establish a null hypothesis to try to reject the null hypothesis, and not try to prove it. If we can't reject it, then we accept it with a certain level of confidence. You quoted Nassim Taleb (my fav author actually) earlier, so I reckon you have read some of his work and will be familiar with the 'All swans are white thing' then? That's what I practise - I establish a null hypothesis and then try to reject it by looking for red flags (via asset/business/structure). You are right - this system has made me lose a lot of gems along the way,  but it immunes me from halo effects and confirmation biases. It allows me to stick to the first rule by Mr Warren - Don't lose money. I am not ashamed of losing out on gems because this method has also helped me to avoid many shenanigans. As long as I know that I am preserving the capital that I depend on for compounding in the long run, I should do good in the longer run.

P.S. In 2008/9, I would have been too fearful to invest in OSIM.

[crubs]

As of FY 2015 Sino Grandness as a group had a cash balance of RMB 142,986,000 and Garden Fresh had a cash balance of RMB 97,361,000. Therefore Grandness has a cash balance of RMB 46,625,000.

As a Group, RMB 30,647,000 is pledge to the bank for loans. There is no break down between Garden Fresh and Grandness for the amount pledged for loans.

Therefore, unrestricted cash for Grandness as at end 2015, can only be assumed to be lower than RMB 46,625,000.

At end 2015, Sino Grandness has RMB 422,363,000 in capital commitments and Garden Fresh has capital commitments of RMB 80,728,000. Therefore, Grandness has capital commitments of RMB 341,635,000. The annual report did not state this is spread over how many years, but since the bulk of it refers to the Anhui plant, it should be for the next year.

Grandness also declared a dividend of 0.018RMB per share, translating to about RMB 12,000,000.

Therefore capital commitment + dividend commitment for Grandness is about RMB 353,635,000 for FY 2016.

In 2015, Sino Grandness generated RMB 577,888,000 of after tax operating cashflow. Garden Fresh's portion was RMB 420,386,000, which means operating cashflow of Grandness was RMB 157,502,000.

Cashflow for Grandness in 2016 might be higher, but definitely insufficient to meet its capital commitments.

It is possible that the credit lines for Grandness are already used and still insufficient. Management has mentioned that majority of the credit lines were available to Garden Fresh and not Grandness

Based on Grandness's willingness to spend on capex despite the upcoming commitments for the Anhui plant, they might have seen this coming well in advance.

[piaopiao]

[quote pid='128673' dateline='1461478030']
I think you sound confused. you started off by what you think Specuvestor is saying and what i suppose you agree with that Sino grandness is not a fraud. and then you end of by pointing out the red flag? what does the red flag imply? why stop there? why dont you finish up what you want to say. if it is a cash guzzling machine but there is no fraud, you wont invest in Sino because Sino is not OPMI friendly?  My friend I think you need to clarify your own thoughts or your knowledge about sino a little.

And you see im not outsourcing my research and neither are other forumers here. In my case I see the red flags ( which by the way are really not definite and more circumstantial, if you compare to what happened in other s chips) but I also see the OTHER side of the story, and i analyze the actors involved and try to form A CONCLUSION. and thats what a lot of you guys are missing, dont just point out the red flags. synthesise the other side of the story and reach a conclusion on the likelihood of various outcomes. I'm still waiting and i say this humbly for someone to point out how a fraud can take place and how likely. 

But if your attitude is that the moment you see red flags you will avoid a stock, then that is fine by me. But you would missed out a treasure trove of opportunities that provide the highest return. Would you have invested in OSIM in 2008/2009 when on the surface multiple red flags were showing? But dig deeper you may have put in some money.

hi babyblue,
Thanks for your reply. My thoughts are pretty clear about why SG doesn't fit me as an investment. Things are grey in investing and that might explain why I might sound confused to you (apologies for that).

It is also very evident to me who are the people here are doing independent research, and who are those that think they are doing independent research (while been hit blind by confirmation bias)

Most of us here are OPMIs. We may not have your degree and scope of research I reckon. Personally,  I do not find anything wrong with NOT investing when there are red flags. In fact it is perfectly fine. In scientific research, we perform hypothesis testing in which establish a null hypothesis to try to reject the null hypothesis, and not try to prove it. If we can't reject it, then we accept it with a certain level of confidence. You quoted Nassim Taleb (my fav author actually) earlier, so I reckon you have read some of his work and will be familiar with the 'All swans are white thing' then? That's what I practise - I establish a null hypothesis and then try to reject it by looking for red flags (via asset/business/structure). You are right - this system has made me lose a lot of gems along the way,  but it immunes me from halo effects and confirmation biases. It allows me to stick to the first rule by Mr Warren - Don't lose money. I am not ashamed of losing out on gems because this method has also helped me to avoid many shenanigans. As long as I know that I am preserving the capital that I depend on for compounding in the long run, I should do good in the longer run.

P.S. In 2008/9, I would have been too fearful to invest in OSIM.

[/quote]

[Young Investor]

The options of project deferment or partial redemption were laid out in page 50 of 2014 annual report. In the end, Sino Grandness spent RMB 718m in 2015 (RMB 147m as cash disbursed plus RMB 571m as cash prepayments). Moreover, RMB 90m was prepaid for advertisements to be aired this year. 

Beside having their own factories, what other benefits did the company gain?

[weijian]

hi piaopiao,
Take a look at the cashflow summary by Boon some time back (He owns the credit for taking the time to summarize that, not me). Take a look at the recent actions by SFG listed down by specuvestor...What do you see?
Sometimes, we are all looking at the same thing, but may see different things. I do not wish to start another debate about the differences that we have seen, we should move on from this. The focus for SFG should be on the IPO for Garden Fresh and subsequent handling of its obligations to the bondholders.

[budgetier]

Hi,
Sino Grandness spent about RMB700m on capex in 2015. I can well understand the merits of expansion to have its own factory, the main one being cost advantage from in-house production. But what exactly is the cost advantage? I am unable to find this information from its annual report for 2015 or the threads of discussion in this forum so far. Wld appreciate it if forumers could help me on this. Thanks.

[specuvestor]

As of FY 2015 Sino Grandness as a group had a cash balance of RMB 142,986,000 and Garden Fresh had a cash balance of RMB 97,361,000. Therefore Grandness has a cash balance of RMB 46,625,000.

As a Group, RMB 30,647,000 is pledge to the bank for loans. There is no break down between Garden Fresh and Grandness for the amount pledged for loans.

Therefore, unrestricted cash for Grandness as at end 2015, can only be assumed to be lower than RMB 46,625,000.

At end 2015, Sino Grandness has RMB 422,363,000 in capital commitments and Garden Fresh has capital commitments of RMB 80,728,000. Therefore, Grandness has capital commitments of RMB 341,635,000. The annual report did not state this is spread over how many years, but since the bulk of it refers to the Anhui plant, it should be for the next year.

Grandness also declared a dividend of 0.018RMB per share, translating to about RMB 12,000,000.

Therefore capital commitment + dividend commitment for Grandness is about RMB 353,635,000 for FY 2016.

In 2015, Sino Grandness generated RMB 577,888,000 of after tax operating cashflow. Garden Fresh's portion was RMB 420,386,000, which means operating cashflow of Grandness was RMB 157,502,000.

Cashflow for Grandness in 2016 might be higher, but definitely insufficient to meet its capital commitments.

It is possible that the credit lines for Grandness are already used and still insufficient. Management has mentioned that majority of the credit lines were available to Garden Fresh and not Grandness

Based on Grandness's willingness to spend on capex despite the upcoming commitments for the Anhui plant, they might have seen this coming well in advance.

Great objective post though i know you are trying to say the convertible loan to Grandness is reasonable. IIRC company went into loquat juice because Grandness was not going anywhere. We can also compare the capex planned for Grandness vs their pre Garden Fresh capex

@babyblue if u look through the thread you will see that i was originally cautiously optimistic. I do not belong to the camp of "it is s-chip so skip it". In fact i think YZJ and Yanlord are alpha stocks for their respective sectors, if the sector outlook is good. But when facts change, my opinion change

For the record yes i think Garden Fresh is a real business but i question the scale and cashflow. To reiterate CityFarmer, 200-199 and 2-1 have the same answer but the implication and analysis is different

In any case if they managed to pull off the IPO, all skeptics bets are off. The facts have changed.

[portuser]

Hi,
Sino Grandness spent about RMB700m on capex in 2015. I can well understand the merits of expansion to have its own factory, the main one being cost advantage from in-house production. But what exactly is the cost advantage? I am unable to find this information from its annual report for 2015 or the threads of discussion in this forum so far. Wld appreciate it if forumers could help me on this. Thanks.

Page 1 of the application proof states that self-production captures additional margin and increases the stability of production volume.

Contract manufacturing is on the decline. Its share of overall cost of sales decreased from 77.6% in 2013 to 57.7% in 2015 (page 28), when the Hubei Plant ramp up production:  

..2013.........2014.........2015
77.6%.......72.8%......57.7%

Garden Fresh's gross profit margin was 44.4% in 2015. The calculations below show the margin of self-produced juice could be as high as 50% vs 40% for contract-manufactured one. 

Replacing contract manufacturing by self-production will be impactful. In 2015 revenue from contract-manufactured juice would amount to RMB 1,229m with its 53% share. The 10 percentage point margin improvement translates into a staggering pre-tax profit of RMB 122.9m.

This explains why Garden Fresh was in a hurry to add capacity, rather than conserve cash to redeem the convertible loans.   

The existing juice production capacity comprises Sichuan plant's 90,000 tonnes and Hubei plant's 200,000 tonnes. 

Cash flows have enabled the addition of another 100,000 tonnes of production capacity in Hubei and the installation of 240,000-tonne capacity in the new Anhui plant. 

With IPO money, Garden Fresh plans for yet another 410,000 tonnes. 

By end-2017, its capacity will become 1,040,000 tonnes, more than triple the existing 290,000 tonnes.

Garden Fresh is also climbing the technological ladder. At its first plant in Sichuan, juice is filled into pet-bottles at high temperature. It is medium temperature at the second plant at Hubei. The cost advantage of Hubei plant is obvious as thinner pet-bottles are used there. Pet-bottles accounted for 40.6% of cost of sales of self-produced juice (page 155).

600,000 tonnes that will come on stream will be for low temperature application, and enjoy even higher margin (page 149).

Talks about sales inflation have been circulating, and should be known to the IPO sponsor and Euromonintor. The 1,040,000 tonnes of juice capacity will be capable of generating RMB 4,756m revenue vs the RMB 2,319m reported in 2015. Garden Fresh will be greeted with ghost factories if it has been over-stating sales.


---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 

In 2015, self-production and contract manufacturing were evenly matched in output. That the latter accounted for 57.7% of overall cost of sales suggests that its gross profit margin was much lower than that of self-production.

Simple calculations show that if contract manufacturing accounted for exactly half of sales, its gross profit margin would have been 36% vs 53% for self-production. 

Similarly, if contract manufacturing accounted for 53% of sales, its gross profit margin would have been 40% vs 50% for self-production.