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Why Is Sino Grandness Food Industry Group Ltd Falling By 11% Today?

Sino Grandness Food Industry Group Ltd (SGX: T4B), an integrated manufacturer and distributor of bottled fruit juices as well as canned fruits and vegetables, is in a bit of a snag lately.

An investing report on the China-based company, dated 4 September 2014, had surfaced on the internet a few days ago. According to Sino Grandness’ Chief Executive, Huang Yubeng, the report contained “negative statements relating to the sales and financial position” of the company.

The report seemed to have first appeared on the website, valueinvestorsclub.com. The site is an online investment club run by the famous hedge fund manager Joel Greenblatt. The report’s author is short Sino Grandness’ stock (meaning to say he or she would stand to profit if the company’s share price falls).

In its announcement concerning the report, Sino Grandness “strongly rejects the baseless and unsubstantiated assertions made.”  However, the company’s actions have not managed to stem the damage. Its shares had fallen by 5.4% on Tuesday and the losses have continued, with Sino Grandness falling another 10.8% today to S$0.50 as of the time of writing (12:25pm, 23 October 2014).

With its share price decline, Sino Grandness is now trading at an extremely low valuation – it carries a trailing price/earnings (PE) ratio of 3. In contrast, the broader market, as represented by the SPDR STI ETF (SGX: ES3), is valued at a PE of around 13. The SPDR STI ETF is an exchange-traded fund which tracks the market bellwether, the Straits Times Index (SGX: ^STI).

Given its low valuation, is this a good time for investors to be looking at Sino Grandness?

The negatives

One issue which the report highlighted deals with the high profit margins which Sino Grandness seems to enjoy. The company has consistently achieved a net margin of more than 10% over the past few years, at times even seeing the figure go as high as 20%.

But, industry leaders in China, such as Tingyi and Uni-President, have only managed to achieve net margins of around 3% to 4%.

Sino Grandness might need to enlighten investors on how it is able to obtain such high profit margins.

The positives

The report also stated that Sino Grandness had bonds which were maturing earlier this month and might be in a weak financial position because of the then-upcoming repayments.

However, the company had managed to extend the maturity of the convertible bonds, averting any potential financial strain. In addition, the firm also underwent a private placement exercise which saw it issue 86 million new shares to two investors at a price of S$0.61 each, raising more than S$52 million in the process.

All these happened after 4 September 2014, the date of the report’s publication. Thus, the company is in a decidedly better financial position as compared to what’s painted in the report after the private placement and the bond extension.

Moving forward

It seems that Sino Grandness is not placing too much focus on the short report. Besides making a simple announcement refuting the claims made in the report, Sino Grandness also revealed some new happenings with its business. For instance, the company’s new juice production facility in Hubei Province, China, is completed and will commence production this month. The factory is expected to boost the juice production capacity of the company by about 240,000 tons annually.

Foolish Summary

The report in question is not made by a reputable source as the writer is neither a research firm nor a respected investor.  However, regardless of whether Sino Grandness is indeed as bad a company as the report makes it out to be, it seems like the company’s reputation has already taken a hit.

The company might need to seriously address the issues pointed out in the report (like its high profit margins in relation to industry peers) with facts and figures if it wants to regain the trust of investors again.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim does not own any company mentioned above.