Sino Grandness

[portuser]

Specuvestor

The diagram you refer to shows only three beverage subsidiaries -- Garden Fresh (Hubei), Garden Fresh (Shenzhen) and Garden Fresh (Sichuan). There is no Garden Fresh (Anhui). I believe your conclusion that beverage will not be produced in Anhui is based on this.

The Anhui beverage facilities comes under Garden Fresh (Shenzhen). 

The RMB 246,800,000 advance (page 82 of Sino's 2016 annual report) attributed to Garden Fresh (Shenzhen) is the deposit paid to suppliers for beverage production equipment in Anhui (page 1-31 of Garden Fresh draft IPO prospectus). 

Garden Fresh (Shenzhen) itself does not directly own beverage production facilities.

That beverage will be produced in Anhui is also stated in page 102 of Sino's 2016 annual report:  
"In financial year 2013, the Group has entered into a Cooperation Agreement with Guzhen (固镇) Municipal Government of Anhui Province, PRC whereby the Group principally agreed to invest RMB 600.0 million to construct a production plant to produce canned products and beverages." 

[specuvestor]

Portuser

On Page 3 of the company announcement there is no mention of Anhui plant under "Beverage Business Segment". I think the situation is likely as per what piaopiao mentioned that Grandness will lease to Garden Fresh for beverage production. Hence I commented: "now with the rights money going to Anhui Grandness they leasing out part to GF which is facing YoY declines."

So the beverage production equipment you mentioned goes to the leased factory. Unless there are actually two Anhui plants which I doubt.

In 2011 AR, Grandness 2010 asset was RMB564,415,556 with sales RMB645,064,111.
In 2016 AR, Grandness 2016 asset was RMB1,492,029k with sales RMB978,591k.
European sales, which is mainly from Grandness, declined as the largest segment from RMB520,441,421 in 2011 to RMB427,853k in 2016.

With such capex means Grandness sales is expected to double then?

[portuser]

Page 182 of Graden Fresh draft IPO prospectus sets out the following annual caps for lease payment:

...........................Lessor...............Lessee...Annual cap on lease payment
Anhui...........Grandness.... Garden Fresh............RMB 996,000
Hubei......Garden Fresh..........Grandness............RMB 2,670,000
Sichuan.......Grandness......Garden Fresh............RMB 713,000

Grandness owns the land in Anhui and charges Garden Fresh a rental. Beverage factory and equipment are owned by Garden Fresh. 

[weijian]

In short, my basis of simple human nature (hopefully), that when there were lots of negative reports, one will be likely to double their due diligence effort. And Mr. Prayth should be more than able to so due his beverage business background.

It is will be a super fraud show if Mr. Prayuh, a shrewd businessman, being conned by someone.
Again, with caveat, never say never, but chances is low in my humble opinion.

This is correct, but only mainly in theory. In practice, people will double their due diligence for sure, but the question is "in what direction?"

In theory, people are rational and make the best decision based on what hurts to their pocket. In practice, people are loss averse and hate cognitive dissonance (what hurts their feelings/ego) - So naturally it is very easy for one to seek a general direction of affirmation from supporting views (confirmation bias). The end result frequently ends up in "double down" on their existing investment, because they get convinced (even more) and then there is a need to recoup the losses. Because been right  finally and the price rising may only make one break even. A person like that wouldn't be happy just with "breaking even" - he/she needs to make more than that because he/she had already put in even more due diligence after the initial wave of negative reports.

I am an average person, i have made such mistakes. Bill Ackman is a brilliant person and made such mistakes too (https://www.valuebuddies.com/thread-6821...#pid138419). I reckon Mr Prayun lies in between....

[PkNanas]

Since we are discussing about various parties' due diligence in their dealing with Sino Grandness, may I refer also to following:

In 3Q 2016, Garden Fresh was granted a 7-year US$25m loan by DEG, the German development bank. The floating interest rate is 3.8% above 6-month Libor, rendering an effective rate between 4.5% and 5.06%.


Any assessment on whether DEG had conducted due diligence?

[specuvestor]

We don't have to look so far... SFGI has bank borrowings from DBS and BOC, and previously Ping An Bank, all Shenzhen branches... which is probably why DBS Securities did the GF A1 submission. That lends some credibility as I previously posted, instead of some local house like SHK Securities etc

Bank lending gives some credibility which is better than none, just as big4 audit firms lend (pun intended) more credibility. But if you understand the lending process and the relatively "small amount" involved vs say even Singapore's O&G sector, then effort made is adjusted internally as well to meet minimum DD and has personal and corporate guarantees and pledges (which says something about their credit assessment). Both DBS and DEG has about US$25m exposure, similar to Soleado US$20m. Why does it need the loan is another question.

End of the day value investors focus on cash flow which we have been reiterating many times. 100-99 and 1000-999 are both 1 but they have different implications. Watch their cashflow properly with ref to their cash holding and debt levels and you can come to your own conclusion.

As you count the cashflow it may be interesting to note that most of the outstanding amount in the EB arises from the 2011 & 2012 CB interest accrued. Obviously the holders of the CB also practice Return OF Capital as primary consideration. Their investment cost for zero coupon CB was RMB78.7m (excluding the 9.5% redemption) + RMB243m = RMB321.7m which is similar to the SB1 and 2 payment amount

[portuser]

Specuvetor wrote "now with the rights money going to Anhui Grandness they leasing out part to GF which is facing YoY declines."

Did you mean that part of rights issue money ended up being used by Garden Fresh instead of the non-beverage business?

Thank you.

[specuvestor]

Not that I know of. GF supposed to be cash rich. Can easily pay the lease to Anhui Grandness.

[portuser]

Garden Fresh can afford the RMB 1m yearly rental to Grandness (Anhui).

How could Garden Fresh, or Sino, be cash rich? You must have meant it as a joke?

Although it had RMB 699m (of which RMB m 175m was the unspent right issue proceeds) as at end-June 2017, it was burdened by convertible bond liabilities of RMB 737m. 

[specuvestor]

You know what I meant

As per my post above the exchangeable bonds burden of RMB534.74m is a pre-IPO bet gone awry consisting mainly of the compounded high interest cost of the 2 CBs over these 5 years. It would be better if the burden is not the OPMI's burden.

As for cash, they generate RMB1.5b operating cashflow last 2 years. Except they didn't repay the loan yet only repay SB1 coincidentally after Convertible Loan from Soleado and SB2 after this rights issue. Obviously the high growth is worth more than RMB534.74m so no complains.