Sino Grandness

[Young Investor]

It came as a surprise that the share price went up this morning after yesterday's announcement of the convertible loan of US$20 mil from Soleado. My friends and I are expecting the share price to drop due to dilutive effect. Does Sinograndnes really need this loan to pay SB1?

[chan99]

From my understanding of the circular, the loan is for expansion of the canned foods business. Since Garden Fresh will be listed separately the cash flow from that business cannot be used for expanding the canned business segment going forward. We all know that Garden fresh is the cash cow of SinoG. Secondly the belief that TTA is showing in this business is something to be happy about as they have stood firm behind SinoG through out, never sold any of their shares & have in fact bought more when the price was depressed. Thirdly the interest rate is only 12% as against 25% that was agreed for CBs earlier. This shows the strides that SinoG has made in terms of credit worthiness. Remember that TTA had bought SinoG at about 40c initially. Now they will be buying at 55c. The dilution is a small thing in the sense that the reward that will be reaped by SH's on account of the expansion will far outweigh the dilutive effect of the convertible loan. And finally the company has clearly mentioned in the IPO document that the listing date is tentatively July 6th. So nowhere have they mentioned that the IPO will be before 31st May. They have cash balance to repay the CBs but they will need money for expansion of their canned foods business as well as for working capital purposes which is why this loan is for. I can see only this as a positive development from SH's point of view.

[specuvestor]

For US$20m they will go through EGM and personal guarantees. Now TTA will do the due diligence

If this loan go through they will be able to pay SB1

Hi Mr. specuvestor,

I didn't go into detail of the debate between you, crubs, and portuser on the matter previously, due to other commitments, obviously. I briefly read crubs and portuser part of story now.

Yes, Sino investment, is relatively small to TTA, thus a formal DD is not there. With the high profile of the investment, and the following TTA commitments, it is inconceivable for a "NO due diligence" of TTA on Sino. As portuser has highlighted, as outsider, no way we will know the detail now. We can doubt on depth of the DD, or the focus of the DD due to each individual's opinion, but very unlikely No DD.

May I suggest that let's avoid using "No DD" or similar statement in future posts? Let's give Sino, the benefit of doubt. What do you think?

Regards
Moderator/CF

Hi CF

Sure. You know I only state what I know. I have closed this DD issue 3 days ago: http://www.valuebuddies.com/thread-3371-...#pid128202

The announcement on "Conditions Precedent" say one of the criteria is DD. That's what I was referring to in this recent post 

Cheers

[specuvestor]

From my understanding of the circular, the loan is for expansion of the canned foods business. Since Garden Fresh will be listed separately the cash flow from that business cannot be used for expanding the canned business segment going forward. We all know that Garden fresh is the cash cow of SinoG. Secondly the belief that TTA is showing in this business is something to be happy about as they have stood firm behind SinoG through out, never sold any of their shares & have in fact bought more when the price was depressed. Thirdly the interest rate is only 12% as against 25% that was agreed for CBs earlier. This shows the strides that SinoG has made in terms of credit worthiness. Remember that TTA had bought SinoG at about 40c initially. Now they will be buying at 55c. The dilution is a small thing in the sense that the reward that will be reaped by SH's on account of the expansion will far outweigh the dilutive effect of the convertible loan. And finally the company has clearly mentioned in the IPO document that the listing date is tentatively July 6th. So nowhere have they mentioned that the IPO will be before 31st May. They have cash balance to repay the CBs but they will need money for expansion of their canned foods business as well as for working capital purposes which is why this loan is for. I can see only this as a positive development from SH's point of view.

Garden Fresh can pay upwards to the listco especially since it owns 100% and hence use to fund their canned business.

I might have missed it but I can't see the expected timetable on page ii

I was basing more on this page 8: https://www.hkex.com.hk/eng/rulesreg/lis...l61-13.pdf

http://www.hkexnews.hk/APP/SEHK/2016/201...010011.pdf

Sole Sponsor - DBS Asia Capital Limited
Auditors and Reporting Accountants - BDO Limited
Latest Practicable Date - [June 20], 2016
Listing Date - [July 6], 2016

[chan99]

From my understanding of the circular, the loan is for expansion of the canned foods business. Since Garden Fresh will be listed separately the cash flow from that business cannot be used for expanding the canned business segment going forward. We all know that Garden fresh is the cash cow of SinoG. Secondly the belief that TTA is showing in this business is something to be happy about as they have stood firm behind SinoG through out, never sold any of their shares & have in fact bought more when the price was depressed. Thirdly the interest rate is only 12% as against 25% that was agreed for CBs earlier. This shows the strides that SinoG has made in terms of credit worthiness. Remember that TTA had bought SinoG at about 40c initially. Now they will be buying at 55c. The dilution is a small thing in the sense that the reward that will be reaped by SH's on account of the expansion will far outweigh the dilutive effect of the convertible loan. And finally the company has clearly mentioned in the IPO document that the listing date is tentatively July 6th. So nowhere have they mentioned that the IPO will be before 31st May. They have cash balance to repay the CBs but they will need money for expansion of their canned foods business as well as for working capital purposes which is why this loan is for. I can see only this as a positive development from SH's point of view.

Garden Fresh can pay upwards to the listco especially since it  owns 100% and hence use to fund their canned business.

I might have missed it but I can't see the expected timetable on page ii

I was basing more on this page 8: https://www.hkex.com.hk/eng/rulesreg/lis...l61-13.pdf

http://www.hkexnews.hk/APP/SEHK/2016/201...010011.pdf

Sole Sponsor - DBS Asia Capital Limited
Auditors and Reporting Accountants - BDO Limited
Latest Practicable Date - [June 20], 2016
Listing Date - [July 6], 2016

[specuvestor]

Err yes so your point is that GF shouldn't pay dividends to shareholder?

[chan99]

Err yes so your point is that GF shouldn't pay dividends to shareholder?

So you are saying GF has the ability to pay $20 Mln in dividends? I thought you were doubting the fundamentals of SinoG in the first place!

GF is a growing company & it needs cash to fund its own growth. I am sure it will take some sort of financing, whether from a bank or otherwise to fund its own growth in the first place. That being the case I don't foresee GF paying high dividends to SH's. Moreover we are talking about $20 Mln here for the growth of the canned business which it needs now. A dividend one year later is of no use in any case.

[weijian]

Definitely vendor sale to meet the SB1 and maybe SB2 payments. If they have to get this loan my guess is IPO not happening before 31 May in time for SB1

These are very specific cashflow catalysts. Otherwise I'm wrong. IMHO opinion it will be most interesting if this synthetic CB fails

That would be what I thought (to pay the SB payments) although the PR mainly says otherwise (for non-beverages CAPEX instead). If it is truly the latter, it probably means either Chairman doesn't really have good planning skills on HIS cashflow to come up with this 'bridging loan' OR he is simply shrewd enough to squeeze more capital commitments from TTA as share price goes higher?

Looking at the double digit interest rate and discount to last trading price, it doesn't seem like Chairman negotiated this loan from a position of strength. Things are starting to look suspiciously similar to here:
http://www.valuebuddies.com/thread-1167-...l#pid87156

Of course! I could be totally wrong!

[crubs]

specuvestor,

On page 23 of the 2012 CB, it states  


So long as any Convertible Bond remains outstanding, save with the approval of an Extraordinary Resolution, the HK Issuer and/or any of its subsidiaries (and in the case of (i) and (xii) below, the Company):
(iv) will not make any Capital Distributions (as defi ned below) to the holders of its equity or debt securities;

On page 26, "Capital Distribution" is defined as
“Capital Distribution ” means any dividend or distribution (whether of cash or assets in specie) or other property (whenever paid or made and however described) (and for these purposes a distribution of assets in specie includes without limitation an issue of shares or other securities credited as fully or partly paid) by way of capitalisation of reserves and including any Scrip Dividend to the extent of the Relevant Cash Dividend.

Since Garden Fresh is a separate entity with separate accounts, the only way Grandness would receive cash would be by dividends. As long as the CBs are in effect, no profits made by GF are allowed to be distributed. This was also why dividends to shareholders in 2015 comes from the profits of Grandness alone.

CB holders are invested only in GF, so it is in their interest to prevent the management from using GF profits for other purposes.

The new bond agreement made no mention of this clause, therefore it is assumed to be status quo.

On page 51 of the 2015 Annual Report the company states that as a group as at 29th Feb 2016,

1) They have cash balance of RMB233.1m
2) Untapped banking facilities of approximately RMB273.6m

Of the cash balance and banking facilities, we do not know how much of it belongs to GF and Grandness respectively. It would be helpful to clarify with the management.

On top of that Grandness would have capex requirements for its Anhui Plant under the company Grandness (Anhui) Foods Co. Ltd.
If sales is picking up, additional funds will be needed for working capital and advertising expense
Lastly, the CB redemption. (I do not know whether GF or Grandness is responsible for the 31st May payment)

I do not have the cashflow forecast for Grandness but if sales are doing well, the company might genuinely need the funds.

[getrich]

Hi Fatfudge

The profit figure that is relevant for investment purpose is the adjusted profit of RMB 517.5m. This will be RMB 0.769 per share or $0.16 per share. PE is less than five.

You may want to read page 8 of the annual report:

"Excluding the impact of non-cash charges in relation to convertible bonds, adjusted earnings would have risen by 6.4% in FY2015 to RMB517. 5 million as compared with RMB486.2 million in FY2014.

So, SG wants to issue shares at "adjusted PE" of less than 5 times. IS SG SHARES SO WORTHLESS?