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drinks3.16Loquat drinks of Garden Fresh. Photo: CompanyGARDEN FRESH, the beverage subsidiary of Sino Grandness, applied on 31 March 2016 for a listing of its shares on the Hong Kong Stock Exchange.

Following that, its "application proof" (or draft prospectus) became available online. (Click here) 

The document does not have IPO-related data (such as pricing and valuation) as these are announced only when the HK Stock Exchange has formally approved the listing.

The 400+ page document is, however, replete with insights into the business of Garden Fresh. We share the following takeaways and some conjectures:

1. DBS Asia Capital is the sole sponsor of the IPO  -- and that means...

Great job by DBS in clinching the deal and it could mean the IPO shares will be available for subscription by Singapore-based investors (including retail), aside from HK/China investors.

With only a sole sponsor (instead of the usual two sponsors), the IPO is likely meant to raise a relatively small sum of money - perhaps in the region of RMB1.2 billion (about S0 million), as may be inferred from the expansion plan budget for Garden Fresh (see point No.3 below). 

A relatively small IPO offering is conducive to Garden Fresh being accorded a higher PE than otherwise.  

After the IPO, as is usually the case, DBS Bank's equities research arm can be expected to provide coverage of not only Garden Fresh but also Sino Grandness.

This will be most welcome by shareholders of Sino Grandness which has not received sustained analyst coverage in Singapore for a few years already (despite its strong business performance and valuations at 2-4X PE). Given the positive stock performance so far this year and the accompanying surge in the volume of shares traded, it would not be surprising if other research houses become motivated to initiate coverage of the stock in the near future. 

2. The expected listing date is on or around Wednesday, 6 July.  (see page 21)

It's just another three months to go to the listing ....and perhaps 2.5 months from now to the announcement of the IPO pricing and, by extension, the market valuation of Garden Fresh.

The IPO pricing will further make clear the intrinsic value of Sino Grandness.

If Sino Grandness (which closed at 72 cents today) can reasonably be valued at, say, .80, then there is more than 100% potential upside in less than three months. (See: SINO GRANDNESS' subsidiary: What its IPO value might look like)

♦ Expansion plans: RMB1.25 billion during 2016- 2018

3. Garden Fresh has expansion plans totaling RMB1.25 billion for execution and completion by 2018.

"Our new production plant (in Anhui) will benefit from the abundant supply of raw materials in Anhui Province and neighboring He’nan Province, which have high fruit yields.

"In addition, the close proximity of Anhui Province to the East China market with approximately 400 million of population will enable us to deliver our products to that market at relatively low transportation costs."

Garden Fresh's business growth, which has been breath-taking since its inception in 2011, will be further fuelled by these plans for which RMB1.14 billion will come from IPO proceeds.

Some highlights of the expansion plan: 

Anhui: This plant is nearing completion and will need RMB50 m for two cold can filling lines.

Hubei: This plant, operational since Sept 2014, will have RMB260 m of investments for various capabilities, including two loquat puree processing lines.

sinogrand factory bottlesGarden Fresh's production plant in Sichuan. Photos: Company

“We plan to increase our own production capacity and sourcing capabilities. Beverages we produce ourselves are significantly cheaper than those purchased from contract manufacturers. In addition, producing more of our own beverages in-house will increase the stability of our supply and improve the quality of our products.

“We believe it is important to pace the expansion of our production capacity systematically and gradually so that our expansion matches the growth in the market for our products.”

Sichuan: This plant, operational since 1H2012, will have RMB200 m of investments, including one loquat puree processing line which will be completed in 2H2017. 

South China: A brand new production plant will be built for RMB740m, making it Garden Fresh's fourth self-owned plant.

It is expected to be completed in 2018 with a production capacity of 240,000 tonnes.

(For more details, see page 148 of the IPO document). 


4. Loquat beverage market to continue to surge 

SGhuang11.14Huang Yupeng will relinquish his Executive Chairman and CEO posts in Sino Grandness and become its Non-executive Chairman while his sister, executive director Huang Yushan, will become CEO. Mr Huang will remain as Executive Chairman and CEO of Garden Fresh. NextInsight file photo.Largely because of the emergence of Garden Gresh, China’s loquat juice market has experienced significant growth.

From 2011 to 2015, the total retail sales value of loquat juice increased from RMB799.4 million to RMB4.7 billion, or a CAGR of 56.1%.

According to a Euromonitor report cited in the Garden Fresh IPO document, in 2015, Garden Fresh had a whopping 86.3% market share for loquat beverages in China. 

The best is yet to come: the Euromonitor report forecasts that by 2020, the total market size is expected to reach RMB15.3 billion, growing at a CAGR of 23.3% from 2016.

The loquat beverage market, being relatively new, is likely to see entrants attempting to gain a foothold through, at least initially, irrational pricing or over-aggressive A&P.  

See also postings on the IPO document in Valuebuddies.com, in particular the one by 'portuser'.


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