SINO GRANDNESS (Lim&Tan)

S$0.505-SFGI.SI

• 2Q2011 performance was robust with net profit rising 57% yoy and 74% qoq to a record Rmb54mln. This comes on the back of 70% yoy and 60% qoq rise in sales to a record Rmb284mln.

• 1H2011 profit rose 109% to Rmb85mln, accounting for 57% of full year consensus profit forecast of Rmb148mln. And with management remaining upbeat about 2H2011 prospects at yesterday’s results briefing due to the seasonal strength of their export canned fruit and vegetable business as well as continued strong demand for their fruit and vegetable juice business in China, we are upping our full year profit estimate from Rmb148mln to Rmb170mln.

• Growth in their export canned vegetable business was a robust 70%, underpinned by market share gains from competitors in Peru and Kenya as they faced challenging weather conditions and management expects this favourable trend to continue going into 3Q2011. Their new market in Australia (major customer is Coles supermarket) benefitted from a tax concession from the Australian government which reduced their import taxes from 25% to 0.

• The fruit and vegetable juice business has continued to power ahead with 2Q2011 sales rising 20% qoq and 317% yoy to a record Rmb96mln due to the continued strength of their loquat blend of juices. Management remains upbeat on prospects, citing their recent penetration into more than 60 Walmart supermarkets in Guangdong as well as Carrefour, Tesco, Jusco and Parkson.

• In anticipation of higher demand for both business divisions going forward, the company has hiked inventories from Rmb30mln to Rmb109mln in 2Q’11 and will be increasing production capacity in their new Sichuan facility, planning to spend Rmb30mln.

• While receivables rose from Rmb212mln to Rmb287mln, receivable days actually fell from 98 to 74 due to the surge in their business activities towards the end of 2Q2011. But management said that they expect to collect the bulk of their receivables in 3Q2011, helping to ease working capital constraints.

• Hence, while their cash holdings fell from Rmb59mln to Rmb16mln in 2Q2011, management said that this situation will improve in 3Q2011 as they accelerate their receivable collections and reduce their inventories. They have another Rmb30-50mln credit lines from Ping Ann Bank, BOC and Jiangsu Bank.

• At 4x PE against 45% growth, valuations are undemanding justifying our continued BUY recommendation, except that there is a tendency for the stock to consolidate post results releases and sentiments towards S-Chips are currently depressed.