Sino Grandness

[theasiareport]

With so many bargains lying in the market for high quality companies with little or no debt, strong recurrent cash flows and clean balance sheets, why pick the 10 foot hurdle?

No doubt, the indications of red flags do not indicate fraud has occurred. But given the track record of Chinese companies listed overseas (25% suspended, de-listed or under investigation on the SGX alone), I cannot help but wonder why investors will ply into such an investment.

[Boon]

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.

[Image: aujuqu.jpg]

Hi crubs,

I am afraid I have to disagree with you on the above statement shaded in red. 

I am predicting a higher (> 51%) figure for FY2015 based on the fact that 9M2015 receivables was at 1,752,772,000

I hope I am wrong on this but it doesn't appear to me that this worrying trend is going to be reversed any time soon...................................  
_____________________________________________________________________________________________________________________________________

[Boon]

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?

Hi leeeta,
 
It is a common feature among some fast growing companies (but not all) – depending on industry nature and also business model of the companies.
 
I don’t mean to say all companies whose working capital runs in negative for an extended period of time would end in trouble - if this were what you are trying to imply. From the perspective of conducting DD, all companies with such profile warrant a closer scrutiny, IMO.
 
I am new and know little about Sino Grandness - only started investing time in it recently – in going through the financials and the tread.
 
Hence, not in a position now to offer any meaningful opinions on both Newman9’s Capex allegation and tax issues. 
__________________________________________________________________________________________

[crubs]

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.

[Image: aujuqu.jpg]

Hi crubs,

I am afraid I have to disagree with you on the above statement shaded in red. 

I am predicting a higher (> 51%) figure for FY2015 based on the fact that 9M2015 receivables was at 1,752,772,000

I hope I am wrong on this but it doesn't appear to me that this worrying trend is going to be reversed any time soon...................................  
_____________________________________________________________________________________________________________________________________

Hi Boon,

Pardon my error, I was actually referring solely to TRADE receivables. Below is the numbers for TRADE receivables as a percentage of revenue.

2009: Trade Receivable = 145m / Revenue = 450m : 32%
2010: Trade Receivable = 173m / Revenue = 645m : 26.8%
2011: Trade Receivable = 210m / Revenue = 1019m : 20.6%
2012: Trade Receivable = 427m / Revenue = 1640m : 26%
2013: Trade Receivable = 633m / Revenue = 2261m : 28%
2014: Trade Receivable = 1110m / Revenue = 2819m : 39%

Trade Receivables in Q1, Q2 & Q3 for 2015 were 1132m, 952m, 1042m respectively.  Despite increasing sales in 2015, trade receivables have remained relatively stable.

Note that Hui Yuan has RMB 1,447m in trade receivables against RMB 2,586m in sales for the first half of 2015.

Trade Receivables is a better measurement because Receivables alone include other items such as prepayments to contractors & suppliers, VAT receivables, export tax refund etc ...

For example, prepayments to contractor is cash paid in advance for equipment. This will be reclassified to PPE upon delivery of the machinery. As Sino Grandness is spending on capex, this item under Other Receivables will be larger.

[Oldman9]

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

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

Hi All

According to the CIMB report  (pg 10) "Sino Grandness 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"....question is, where are they going to get the money from?

Anyone?

cheers
oldman

[desmondxyz]

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

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

Hi All

According to the CIMB report  (pg 10) "Sino Grandness 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"....question is, where are they going to get the money from?

Anyone?

cheers
oldman

Let me guess, they will issue another round of "fresh garden ipo" bond and go burst.....replica of Eratat...

[Boon]

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.

[Image: aujuqu.jpg]

Hi crubs,

I am afraid I have to disagree with you on the above statement shaded in red. 

I am predicting a higher (> 51%) figure for FY2015 based on the fact that 9M2015 receivables was at 1,752,772,000

I hope I am wrong on this but it doesn't appear to me that this worrying trend is going to be reversed any time soon...................................  
_____________________________________________________________________________________________________________________________________

Hi Boon,

Pardon my error, I was actually referring solely to TRADE receivables. Below is the numbers for TRADE receivables as a percentage of revenue.

2009: Trade Receivable = 145m / Revenue = 450m : 32%
2010: Trade Receivable = 173m / Revenue = 645m : 26.8%
2011: Trade Receivable = 210m / Revenue = 1019m : 20.6%
2012: Trade Receivable = 427m / Revenue = 1640m : 26%
2013: Trade Receivable = 633m / Revenue = 2261m : 28%
2014: Trade Receivable = 1110m / Revenue = 2819m : 39%

Trade Receivables in Q1, Q2 & Q3 for 2015 were 1132m, 952m, 1042m respectively.  Despite increasing sales in 2015, trade receivables have remained relatively stable.

Note that Hui Yuan has RMB 1,447m in trade receivables against RMB 2,586m in sales for the first half of 2015.

Trade Receivables is a better measurement because Receivables alone include other items such as prepayments to contractors & suppliers, VAT receivables, export tax refund etc ...

For example, prepayments to contractor is cash paid in advance for equipment. This will be reclassified to PPE upon delivery of the machinery. As Sino Grandness is spending on capex, this item under Other Receivables will be larger.

[Image: 16gx6qr.jpg]

Hi crubs,
 
Thanks for the clarification.
 
Ha-ha! It is interesting to note that Sino booked prepayments to Contractor/Supplies under Other Receivables…………..
 
Anyway, having separated them out, the absolute figures of Trade Receivables as a % of Revenue had “improved” ( still considered high ? ) - the upward trend (from FY2011 to FY2014), which is still a big concern, remained.
 
Other Receivables as % of Revenue appears to be in a more stable condition.  
______________________________________________________________________________________________________________________________________

[crubs]

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.

[Image: aujuqu.jpg]

Hi crubs,

I am afraid I have to disagree with you on the above statement shaded in red. 

I am predicting a higher (> 51%) figure for FY2015 based on the fact that 9M2015 receivables was at 1,752,772,000

I hope I am wrong on this but it doesn't appear to me that this worrying trend is going to be reversed any time soon...................................  
_____________________________________________________________________________________________________________________________________

Hi Boon,

Pardon my error, I was actually referring solely to TRADE receivables. Below is the numbers for TRADE receivables as a percentage of revenue.

2009: Trade Receivable = 145m / Revenue = 450m : 32%
2010: Trade Receivable = 173m / Revenue = 645m : 26.8%
2011: Trade Receivable = 210m / Revenue = 1019m : 20.6%
2012: Trade Receivable = 427m / Revenue = 1640m : 26%
2013: Trade Receivable = 633m / Revenue = 2261m : 28%
2014: Trade Receivable = 1110m / Revenue = 2819m : 39%

Trade Receivables in Q1, Q2 & Q3 for 2015 were 1132m, 952m, 1042m respectively.  Despite increasing sales in 2015, trade receivables have remained relatively stable.

Note that Hui Yuan has RMB 1,447m in trade receivables against RMB 2,586m in sales for the first half of 2015.

Trade Receivables is a better measurement because Receivables alone include other items such as prepayments to contractors & suppliers, VAT receivables, export tax refund etc ...

For example, prepayments to contractor is cash paid in advance for equipment. This will be reclassified to PPE upon delivery of the machinery. As Sino Grandness is spending on capex, this item under Other Receivables will be larger.

[Image: 16gx6qr.jpg]

Hi crubs,
 
Thanks for the clarification.
 
Ha-ha! It is interesting to note that Sino booked prepayments to Contractor/Supplies under Other Receivables…………..
 
Anyway, having separated them out, the absolute figures of Trade Receivables as a % of Revenue had “improved” ( still considered high ? ) - the upward trend (from FY2011 to FY2014), which is still a big concern, remained.
 
Other Receivables as % of Revenue appears to be in a more stable condition.  
______________________________________________________________________________________________________________________________________

Hi Boon,

Classifying prepayments to contractors/suppliers is a standard accounting treatment. Many companies do the same too. Hui Yuan has an accounting item called "Prepayments of raw materials and others -- third parties" of RMB439m classified under Trade and Other Receivables in their FY2014 annual report.

Agree that TRADE receivables have been increasing from 2011 to 2014. This coincides with the growth of Garden Fresh and it being a larger portion of SinoG's revenue. In 9m 2015, trade receivable is stable as revenue growth slowed. If Sino G had trouble collecting the money, trade receivables would have grown despite a flat revenue.

[portuser]

Boon

Please refer to your comments in the preceding post:

"It is interesting to note that Sino booked prepayments to Contractor/Supplies under Other Receivables…………..
 
Anyway, having separated them out, the absolute figures of Trade Receivables as a % of Revenue had “improved” ( still considered high ? ) - the upward trend (from FY2011 to FY2014), which is still a big concern, remained.
 


Huiyuan also took longer to collect debts in 2014 than 2013:

......................Trade receivables as % of sales
................................2013.........2014
Huiyuan.....................24%..........34%
Sino Grandness..........28%..........39%

Both did better in the first half of 2015:

Huiyuan......................28%
Sino Grandness...........32% 

In 3Q 15 Sino's ratio dropped to 27%. (Huiyuan does not report quarterly.)


Sino is not alone in classifying prepayments as "other receivables". Tat Hong does the same as shown in page 118 of its annual report. 

Prepayment cannot be classified otherwise. Take the case of constructing a building. When money is paid before construction starts, physical asset has yet to come into being, and the prepayment has to remain as it is. When construction is in progress, the value of the partially completed asset is estimated and reported as construction-in-progress. Simultaneously, prepayment is reduced by the same amount.

But Sino's "other receivables" are very large and comprise items that are not normally found in the accounts of other companies.

Of the RMB 327m "other receivables" at end of 2014, VAT receivables and export tax refunds amounted to RMB 121m and RMB 48m respectively.

These were monies owed by government and their presence in page 79 of the annual report sheds some light on the state of affairs in the company.


 

[Boon]

Hi crubs and portuser,
 
Best World booked prepayments under “Other Assets” – St****** used to do that but had shifted them under “Other Receivables” in the latest AR.
 
Anyway, back to Trade Receivables as % of Revenue, I reckon by comparing 3M, 1H or 9M figures to that of FY figure is not exactly comparing apple to apple. So let’s wait for the FY2015 figures.
 
By comparing SG to HY could be useful provided one could make the correct comparisons, interpretations and conclusions from it.
 
What interpretations and conclusions could one draw from the following table?


[Image: w0knch.jpg]