Sino Grandness

[portuser]

Boon

Holders of CB1 and CB2 had wanted to own more of Garden Fresh.  Back in 2011 and 2012, they imposed three 'valuations' tied to Garden Fresh 2013 profit as follows:

(1) RMB 1,500m (= 6 times RMB 250m), if 2013 profit is RMB 250m and above;

(2) between RMB 1,100m and RMB 1,375m, if profit is RMB 200m and above but below RMB 250m; and

(3) 5 times profit below RMB 200m.

Bondholders' 23.4% stake in Garden Fresh is the result of dividing the aggregate outstanding principal amounts of CB1 and CB2 (RMB 350.5m) by the RMB 1,500m 'valuation'.

As lower 'valuation' results in higher ownership of Garden Fresh, bondholders had strong incentives to drive down 'valuation'.

If RMB 1,500m were in fact the 'market value' of Garden Fresh, CB2 holders' stake would be worth a mere RMB 270m, which is CB2's principal amount. They would be wise to redeem on 25 July 2015 (the maturity date) to receive a hefty sum of RMB 480m. 

The main asset of Garden Fresh is brand value, which is not reflected in NAV. The circular has made it clear that NAV was just for illustrative purposes.

Your have observed that 2014 profit fell:

 “Profit for the year/period” which I interpret to be “NPAT” or net profit after tax of the ListCo Group was actually falling from RMB 153.5 million in FY 2013 to RMB 117.3 million in FY2014."

If 2013 profit were in fact RMB 153.5m, bondholders' claims on Garden Fresh will not be 23.4%; they would own close to half of Garden Fresh [see (3) above].

In page 6 of annual report, Sino Grandness provides its adjusted profits. For 2014, adjusted profit was RMB 467.1m, against reported profit of RMB 249.5m. The huge difference (RMB 217.6m) was non-cash expenses related to CB1 and CB2 issued by Garden Fresh. 

Garden Fresh 2014 profit is therefore RMB 334.9m, which is likely a major determinant in pricing IPO shares.