SINO GRANDNESS FOOD INDUSTRY GROUP - Resul ts above expectations (DMG)

BUY

Price S$0.505

Previous S$0.680

Target S$0.760

SFGI’s 2 Q11 net profit was ahead of expectations at RMB54m (our estimates: RMB38m) largely due to better-than-anticipated canned revenue and GPM of RMB187m and 33% (our estimates: RMB126m and 30%). The canned segment had benefited from strong overseas demand as a result of poor harvest of asparagus in Peru and long beans in Kenya. In addition, SFGI saw positive flow through from its price hike early in the year. For the beverage segment, revenue and GPM of RMB97m and 41% were both slightly above our projections. After a strong set of 1H11 results, we revise our FY11 and FY12 earnings estimates up by 13% each to RMB168m and RMB188m respectively. Maintain BUY with a higher TP of S$0.76 (old: S$0.68), pegged to 6x FY11F P/E.

A canned surprise. 2Q11 revenue was up 70% to RMB284m driven by good performance from both its canned and beverage divisions. Canned revenue surged 50% YoY to RMB187m as asparagus-mushroom increased by 64%-28% to RMB98m-RMB55m, while long beans recovered from a low base to RMB17m. Higher ASP across the canned segment, as well as the absence of anti-dumping tariff for canned mushroom to Australia, lifted GPM by 4ppt to 33%.

Commendable beverage showing. Beverage revenue more than doubled to RMB97m as SFGI expanded its distribution network in China through some 50 distributors (Mar11: 40). Cessation of herbal drinks in 1Q11 helped GPM improve by 4ppt to 41%. SFGI will likely start its advertising campaign e.g. TV-commercial of its loquat series in Shenzhen and Hangzhou in 3Q11. Management expects total A&P expense to be capped within 6% of beverage sales.

A tight balance sheet. Cash balance is low at RMB16m. Nonetheless, SFGI expects its untapped credit facilities of RMB30-50m and positive operating cash flow in 3Q11 to help alleviate the current situation. FY11 capital expenditure includes RMB50m for construction of its Hubei plant, RMB30m for a beverage production line in Chengdu and RMB30m for additional processing capacities.