Sino Grandness

[Boon]

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I have tabulated the above table F and plotted graph 3.
 
From the cash flow statements of the group which I have summarized (see table A, post#1072), the top 3 use of cash were:
 
1) increase  in operating receivables
2) acquisition of PPE
3) imcome tax paid
 
I then expressed them as % of revenue and compared them with ocf b4 wcc as % of revenue.
 
ocf b4 wcc as % of revenue, which is represented by the blue-line on the graph was surprisingly quite stable, and averaging at 25% over the 6 years period.
 
The top 3 use of cash as a % of revenue is represented by the red-line.
 
Blue-line above red-line means ocf b4 wcc could cover the top 3 use of cash, and the gap between the two lines represents the “cash surplus” as % of revenue. This scenario happened only once in 2010 over the 6 year period. 
 
Red-line above blue-line means ocf b4 wcc could not cover the top 3 use of cash, and the gap between the two lines represents the “cash deficit” as % of revenue. 
 
This “cash deficit gap” as a % of revenue had stayed pretty flat at around 6% to 7% between 2011 and 2014. If it doesn’t improved, more sale means more funding (in absolute term) would be needed to plug the gap.
 
Funding gap of RMB 6 m would be needed for revenue of RMB 100m.
Funding gap of RMB 12 m would be needed for revenue of RMB 200m.
Funding gap of RMB 180 m would be needed for revenue of RMB 3,000m.
 
Question: Will the blue-line climb above the red-line (or the red-line dives below the blue-line) again? If so, what is the likely timeline?
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[Young Investor]

Hi Boon

The "cash deficit gap" is mainly the result of rapid expansion. When sales growth moderates, as it will happen later, "cash deficit gap" may reduce or turn into a surplus.

The factory being built in Anhui will generate revenue after commercial production.  Revenue contribution by the newly-completed Hubie factory is expected to rise when production is stepped up.

I think the full pay-off of capital spending is yet to come.

[crubs]

Every year, Sino Grandness attends 2 major trade shows.

The 1st and larger trade show is held in Chengdu around late March annually. The 2nd trade show is smaller and changes venue yearly.

The indicative orders from both trade shows are

Chengdu Trade Show
2014: RMB 390m
2015: RMB 470m

Roving Trade Show
2014: RMB 300m
2015: RMB 380m

These numbers are indicative orders secured from its distributors for Garden Fresh beverages only. In 2014, indicative orders from both trade shows totalled RMB 690m, which accounts for 36.7% of Garden Fresh sales of RMB 1.88bn.

In the 2015 March Chengdu trade show, Garden Fresh secured RMB 470m of indicative orders, a 20% increase from 2014 of RMB 390m

Sino Grandness' 1H 2015 revenue from its beverage segment was RMB 1.048bn, a 21.8% increase from 1H 2014 of RMB 860m.

We can see that the increase in revenue is similar to the increase in indicative orders. As such, it is possible to say that 1) The indicative orders are not inflated 2) Indicative orders might be a good proxy for future sales revenue

In the 2015 October trade show, Garden Fresh secured RMB 380m in orders, a 27% increase from the 2014 October trade show of RMB 300m.

In 2H 2014, Garden Fresh's revenue was RMB 1.06bn. If indicative orders are a good proxy for future sales, beverage sales for 2H 2015 might be RMB 1.29bn (27% increase). Since beverage sales in 3Q 2015 were RMB 627m, beverage sales in 4Q 2015 might be around RMB 663m.

This would bring Garden Fresh's 2015 sales to RMB 2.3bn, a 24.6% increase from 2014.

This forecast is based on the assumption that the percentage of beverage sales derived from the trade show in 2015 remains at 36.7% as in 2014.

[Oldman9]

Oldman9
[quote pid='124709' dateline='1452559833']

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
[/quote]

Hi All

Anyone can enlighten me?

I have compiled the following table (in RMB Million).

There is concern about bond redemption.

If Garden Fresh has slowed down building factories and sales, it can pay off the convertible bonds.

cheers
oldman

[Boon]

Hi oldman,

Cash was at RMB 304 million as at 9M2015.

If operation could turnaround and generate “surplus cash” - that would help.

Otherwise, any short fall would need to be funded by drawing down on existing available credit facilities and/or by raising more equity and/or debt from the capital market.
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[portuser]

Oldman wrote:

I have compiled the following table (in RMB Million).

There is concern about bond redemption.

If Garden Fresh has slowed down building factories and sales, it can pay off the convertible bonds.

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I think it is important for Garden Fresh to have its own juice factories. 

In 2007, Huiyuan stated in its IPO prospectus: "[we] produce all of our products at production facilities operated by our 11 subsidiaries located in China"
 
Likewise, when it raised money in Hong Kong in 2015, Dali Food stated: "[w]e manufacture all of our products in-house, which allows us to quickly respond to changes in market demand and maximizes our control over product quality and food safety".  

Garden Fresh started off not owning juice factory. Outsourcing production could be a prudent move as demand for loquat juice was then not a certainty.

With rising popularity of loquat juice, a small juice factory (70,000 tonnes a year) was built in Sichuan, followed by a much larger one (240,000 tonnes) in Hubei. The third factory is being constructed in Anhui.

Garden Fresh must have assessed the relative merit/risk of conserving cash for bond redemption versus building factories to improve its valuation.

[Boon]

Hi Boon

The "cash deficit gap" is mainly the result of rapid expansion. When sales growth moderates, as it will happen later, "cash deficit gap" may reduce or turn into a surplus.

The factory being built in Anhui will generate revenue after commercial production.  Revenue contribution by the newly-completed Hubie factory is expected to rise when production is stepped up.

I think the full pay-off of capital spending is yet to come.

Hi Young Investor
 
The longer the cash deficit situation persists, the larger the amount of CASH is needed to fund the gap. 
 
In my simplified 4 key variable model, if tax as % of revenue remains a constant at 6%, then to achieve “cash surplus”:
 
(increase in operating receivables as % of revenue + acquisition of PPE as % of revenue) must be less than  (ocf b4 wcc as % of revenue – 6%)
 
If ocf b4 wcc as % of revenue stays flat at 25%, to achieve “cash surplus”:
 
(increase in operating receivables as % of revenue + acquisition of PPE as % of revenue) must be less than 19%.   
 
If ocf b4 wcc as % of revenue dropped to 11%, as in the case for Hui Yuan in FY2014, then to achieve “cash surplus”:
 
(increase in operating receivables as % of revenue + acquisition of PPE as % of revenue) must be less than 5%.   
 
Assume further that maintenance capex (mcx) as % of revenue is 5%, to achieve “cash surplus”:
 
(increase in operating receivables as % of revenue + growth capex as % of revenue) must be less than 0%
 
in other words, under such circumstances, the only way to achieve  “cash surplus” is to have no growth capex and a  DECREASE in operating receivables or decrease in operating receivables as % of revenue must be greater than growth capex as % of revenue.

It is all relative.
 
Question : How sustainable is the current ocf b4 wcc as % of revenue (or ebitda margin) of Sino Grandness ?
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[portuser]

In China, purchase of goods or services entails value-added tax (VAT) pegged to 17% of the price. To the buyer, the VAT he pays is termed [input] VAT. To the seller, the same VAT collected from the buyer is called [output] VAT.

Each company pays government the difference between [output] VAT and [input] VAT.

Sino Grandness sets up subsidiary to build and own new factory. Before production commences, the subsidiary has no [output] VAT to offset the [input] VAT paid to the contractors. The strain on cash flows is severe.  

When it starts selling later on, the subsidiary can retain [output] VAT equal to the [input] VAT paid earlier to contractors. Cash flow improves as a result.

Pending offsetting against future [output] VAT, [input] VAT is known as "VAT receivables" and appears as part of "other receivables".  


Massive factory construction in recent years by Garden Fresh has resulted in substantial buildup of VAT receivables:

....................................................................................................RMB m

..............................................................................................2013........2014

VAT receivables (as at year end)...................................................69..........121

Advances to contractors and suppliers of PPE (as at year end).........64............55

PPE (during the year)..................................................................249..........140


Cash flow should improve when the full suite of factories is operational.

[CY09]

The newest factory has been in operation since oct 2014. So rightfully SFIG products from this factory should have been able to offset the factory's inputted VAT. Hence, this coming quarter results shouldn't other receivables fall a lot since the plant is producing about 120,000 tonnes of beverage?

Furthermore, some of these receivables were a result of PPE purchase prepayments. So rightfully, other receivables should start to decrease and PPE will increase with no cash loss/gain. If so, we will have to determine through this quarter's results to see if other receivables have fallen a lot which is corresponded by an increase in cash and PPE.

[portuser]

The newest factory has been in operation since oct 2014. So rightfully SFIG products from this factory should have been able to offset the factory's inputted VAT. Hence, this coming quarter results shouldn't other receivables fall a lot since the plant is producing about 120,000 tonnes of beverage?

Furthermore, some of these receivables were a result of PPE purchase prepayments. So rightfully, other receivables should start to decrease and PPE will increase with no cash loss/gain. If so, we will have to determine through this quarter's results to see if other receivables have fallen a lot which is corresponded by an increase in cash and PPE.

The newest operating factory you referred to is the Hubei factory costing around RMB 500m. The factory will have to sell RMB 500m worth of products to wipe off the trade receivables paid for the construction.

The on-going construction of another factory in Anhui entails payment of VAT which can only be offset later.