Eratat Lifestyle

Skeptic wrote: Newbiestock,

You obviously don't understand the terms of the Sino Grandness agreement and I don't have the time now to explain it in detail to you now as I have a busy Saturday night. The credibility of your views here is already seriously under question with your inability to grasp the meaning of 'subscription price' as shown in earlier discussions.

In summary, Garden Fresh is not listed yet, although it is on track. Secondly its bonds were issued at 10-13% below par, but with zero coupon rate (meaning no interest). If Garden Fresh is listed, the bonds are converted into shares and are not redeemed. Only if Garden Fresh fails to list will the bonds be redeemed at an effective interest rate of between 15%-25% depending on the terms. Therefore the penalty only applies if it fails to list.

Also, unlike Eratat, Sino Grandness has obtained bank loans and before the convertible bonds did not have a big pile of cash lying around to use for growth. Unlike Eratat, its revenue and net profits have been doubling almost every year since listing, and it has used the cash it has raised (never at absurd interest rates like Eratat) to growth effectively. The chairman has also repeatedly purchased more shares in the company. If Garden Fresh lists successfully, there is no redemption, so the interest rate factor doesn't even come into play. The redemption only comes into place if it fails to list, which is why it is not the base case.

In Eratat's case, no matter what happens, the bonds will be redeemed and it will pay an effective interest rate of 32%. It is the base case and unavoidable.

Anyway I suggest you do more research before you compare apples to oranges. Meanwhile I have a busy night ahead of me and will not be able to elaborate further.

skeptic,

Not bashing you but here's my view. In this case, it is clear that Sino Grandness needs money. Take a look at the bond structure:

1. convertible bond
2. discount bond with no interest payments
3. a whole bunch of terms and conditions to restrict mgmt/board
infopub.sgx.com/Apps?A=COW_CorporateAnno...CBs_Announcement.pdf

All these are expected from a creditor who knows that the issuer needs cash and is seeking to protect himself from default. Convertible bond for lower interest rate, no interest payments so no cash outflow, and hefty restrictions to prevent mgmt/board from bailing out.

My point is: if Eratat is really cash-strapped as you said, why are all these absent from Eratat's bond offering? Instead, it has these terms:

1. high warrant conversion price with practically NO value
2. non-convertible bond
3. a quarterly-interest payment structure (when the most common bonds are semiannual payments)
4. minimal restrictions placed on the board/mgmt

These terms don't seem at all like what a creditor would offer to a company that is desperate for cash, or how a cash-strapped company would want to raise cash. It's like a lose-lose situation for both of them. Eratat can't raise cash in the most efficient way, and SHK doesn't enjoy downside protection. Are BOTH companies stupid?!!

I have been following the discussion on various forums all this time. And despite raising these points several times, I have yet to receive a satisfactory answer.

That is why I'm leaning towards the argument that Eratat is offering SHK the high interest payments for "something" in return, although what that "something" is, I do not know.

Comments welcome.

(Sidenote: XMH raised cash from a placement exercise despite record profits. Here is an excerpt from the recent NextInsight article: www.nextinsight.net/index.php/story-arch...record-profitability

"Q: How does the placement of shares to Credence help since you are already cash rich?
Credence has the expertise to help our expansion. For example, Credence is able to advise us operationally as we embark on conversion of industrial engines for marine vessel use (marinisation), warehousing logistics and manufacturing of ACEGEN products."

Is it impossible for SHK to do likewise for Eratat? )

Why the deal is approved without any questioning by the autority?

During the AGM, majority of shareholders voted for the sharebuyback mandate and the issue of new shares.

so, if the issue of new shares is approved, Eratat directors have the authority to issue bonds and warrants.

of coz, during the AGM, nobody knows about this bond/warrant thing...

Bestworld wrote: Why the deal is approved without any questioning by the autority?

newbiestock wrote: During the AGM, majority of shareholders voted for the sharebuyback mandate and the issue of new shares.

so, if the issue of new shares is approved, Eratat directors have the authority to issue bonds and warrants.

of coz, during the AGM, nobody knows about this bond/warrant thing...

Bestworld wrote: Why the deal is approved without any questioning by the autority?

I mean why didn't sgx question the high interest rate when they have tons of cash!

Newbiestock,

Thanks for your extended reply. I may not have time in the near future to continue to type such long posts due to my busy schedule but here is my reply.

Let me remind people that at the time of convertible bond issuance to Goldman Sachs and SHK, Sino Grandness share price was only about 40 cents, with a market cap of about 100 million SGD (currently it is 3.5 times of that).

The total bond amount was 370m RMB or about 75 million SGD. If Garden Fresh alone goes on to achieve 250 million rmb net profit this year, which it certainly looks on course to achieving, the bonds will be converted at a P/E of 6, meaning Garden Fresh will be valued by Goldman Sachs and SHK at 1.5 billion RMB, giving the 370 million (or 75 million SGD) in funds they committed a 24.7% stake in Garden Fresh.

So yes, there was to be a 24.7% dilution. And this was for a stake in Garden Fresh, not Sino Grandness. At the time of convertible bond issuance, Sino Grandness's market cap was about 100 million, but what was the implied value of Garden Fresh? Now we don't have the time to go into a complicated valuation of Garden Fresh 2 years ago especially when it is not a listed entity, but considering it was contributing to an estimated 1/4 to 1/3 of Sino Grandness's net profit at that time, let's just say Garden Fresh's implied market cap was about 30 million, (don't forget that Sino Grandness has its canned vegetables and fruits segment as well, which is its original business). You do the maths. This means that at the time of bonds issuance, it was agreed that if Garden Fresh met the net profit target of 250rmb million in 2013, the 370 million RMB in convertible bonds (or about 75 million SGD) would be converted into 24.7% stake in Garden Fresh, implying a market valuation of Garden Fresh at 300 million SGD, about 10 times the implied value of Garden Fresh at the time of bond issuance. Or even if you want to argue that Garden Fresh was worth at least 50 million (or half of Sino Grandness's market cap) at the time of bond issuance, 300 million is still 6 times of that!

What this means is that when SHK and Goldman Sachs subscribed to Garden Fresh Bonds to the tune of 75 million SGD, it was agreed that if Garden Fresh met a net profit of 50 million SGD by 2013, they would be convertible for a 24.7% stake in Garden Fresh, 6 to 10 times the implied value of Garden Fresh at the time of bond issuance, based on Sino Grandness's market cap at the time of bond issuance. If you had asked shareholders when Sino Grandness's market cap was only 100 million, and Garden Fresh's implied market cap was left than half of that, okay Goldman Sachs and SHK are going to give us 75 million (more than Garden Fresh's implied market cap at the time). We are confident Garden Fresh can achieve 50 million net profit by 2013, so if we achieve that, we give Goldman Sachs and SHK at 24.7% stake in Garden Fresh for their 75 million, valuing Garden Fresh at about 10 times its current market cap. Dilution yes, but this is at 6-10 times the implied market cap at the time of bond issuance! Would you go for it? I think most would say it's a good deal.

24.7% dilution in Garden Fresh ownership at 6 to 10 times the current market cap (at the time of bond issuance)?? That's a really good deal by comparison. The 75 million in bonds issued was even more than the implied market cap of Garden Fresh at the time of issuance! And this only gives Goldman Sachs and SHK a 24.7% stake!

Also, a 24.7% dilution in Garden Fresh stake is not a 24.7% dilution in Sino Grandness shares for Sino Grandness shareholders, the actual net dilution depends on how much Sino Grandness's other business are valued, but it would certainly be less than that. And all this at 6 to 10 times the implied market cap at the time of issuance.

Eratat was priced at about 14 cents at the time of SHK bond issuance. What happened with Garden Fresh was the equivalent of SHK and Goldman Sachs approaching Eratat to say they will lend them about 120 million SGD, (about double Eratat's market cap, similar to Garden Fresh's case 2 years ago) and if Eratat manages to achieve net profit of about 80 million SGD (just like how 250 million rmb net profit is about 2/3 the 370 million rmb bond issuance in the case of Garden Fresh) within the next 3 years, it will convert the 120 million lent into a 24.7% stake in Eratat, giving Eratat an implied market cap of about 480 million SGD, about 8 times its market cap at the time of bond issuance. And if the Eratat management told you they were very confident of achieving 80 million SGD in net profit within the next 2-3 years, would you consider this a good deal?

Now no doubt that the deal had its risks. I'm not saying its risk free. But to compare it to the deal Eratat got is laughable. So, in summary, yes there will be dilution for Sino Grandness as well, but this would be at 6 to 10 times the implied market cap of Garden Fresh at the time of bond issuance. Secondly, 24.7% dilution in Garden Fresh means a smaller dilution for Sino Grandness shareholders in Sino Grandness shares, because Sino Grandness has other businesses as well. There are many other inaccuracies in your post but I have no time to point them all out. The final thing I would like to point out is that a basic understanding of finance should tell you that Sino Grandness's chairman buying more Sino Grandness shares (which he has done repeatedly) does not means he is pumping funds into the company - no new shares were issued when he bought them. When you buy shares in Eratat, are you pumping money in the company? No. This is basic finance and I don't think I need to explain this in further detail.

Anyway the contrasting share price performance of Eratat and Sino Grandness over the last year says it all. Actually I shouldn't have to explain so much because the contrasting share price movements reflects the fact that the market can see the difference.

On the question of why Eratat cannot borrow funds from banks and must borrow from SHK at 32% interest rate, despite already claiming to have 545 million in cash, again you are still trying to justify on their behalf, without being sure. Go and find out from them for sure then come back here and report. Don't give excuses like must wait till next shareholder meeting, Eratat was supposed to have been awarded one of the most transparent s-chips listed in Singapore. Their Investor Relations team is supposed to regularly respond to investor's inquiries, like they did in the past. Go demand some answers for them, don't try to do their job for them.

Ok thank you I think I've said enough for now and may stop commenting for a while.

And once again, I note that my own questions are sidestepped neatly…

Anyway, skeptic, there are several flaws in your argument.

FIRSTLY, it’s highly unlikely that at the point of issuance of the bond, assuming a total market cap of SGD100m for Sino-Grandness, implied value of Garden Fresh is only worth SGD30m. Why? I will use 2011 figures found here: infopub.sgx.com/Apps?A=COW_CorporateAnno...G_FY2011_Results.pdf

1. LARGEST business segment
2. FASTEST growing segment, at 124%, almost FOUR times as fast as the other business segments
3. HIGHEST gross margin out of all the other business segments (40%!!)
4. STRONGEST brand of Sino-Grandness  “In July and September 2011, the Group’s wholly-owned subsidiary Garden Fresh (Shenzhen) Fruit & Vegetable Beverage Co., Limited was accorded the prestigious title “10 Best InHouse Brands In Guangdong Province For 2010” (“2010 年度广东省十佳自主品牌”) and “Excellent Value Of Chinese Brand” award (“中国品牌价值冠军”) separately. Subsequently in October 2011 during the Food and Beverage Trade Exhibition held in Shenyang, Liaoning Province PRC, Garden Fresh brand was accorded the “Most Competitive Brand For Retail Market” award (“最具市场(终端)竞争力品牌奖”).”

As a percentage of total gross profit, Garden Fresh already makes up 47%. Clearly, as the single most promising business segment of Sino Grandness, value of Garden Fresh can easily make up more than half of Sino-Grandness’s total market cap. 60-70% would not be unreasonable, rather than the paltry 30% you mentioned.


SECONDLY, the RMB 370m convertible bond with a net dilution of 24.7% that you pointed out is the very, very BEST-CASE scenario.

In fact, assuming that profits aren’t so good, but Garden Fresh still managed a listing and all the bonds are converted at the maximum amount, “the Company’s effective shareholding interests in the HK Issuer will be diluted from 100% to 50.1%”. That gives an implied value of 370/0.499=RMB 741m, or SGD 148m market cap for Garden Fresh.

50% dilution in exchange for a mere doubling of market cap. Ouch, not such an attractive deal after all, is it?

It gets even worse if Garden Fresh is not listed, as the redemption amount is substantially higher than principal. I guess you are familiar with that and I don’t have to go into that now.


The ONLY REASON you can paint such a positive picture of the Sino Grandness bond deal in the first place is because, credits to the management, they DID execute well. It’s clearly a very risky deal that will harm shareholders substantially if management failed to live up to expectations.

If I were to use your analogy in the case of Eratat, I would just list out the very best-case scenario which is 14.8% dilution with exercise of warrants, giving Eratat an implied market cap of SGD0.25*82.5m/0.148=SGD140m. Compare with current market cap of 57m. Wow, a 2.5 times doubling of market cap at only 14.8% dilution, WITHIN a span of only two years!! Such an attractive deal!!

And again, I would like to point out as to how SHK and Goldman protected their downside in this Sino-Grandness deal. Even if Garden Fresh did not earn good profits or failed to list, they made sure their downside is sufficiently protected, in the form of a large chunk of the company or absurdly high redemption price of bonds.

Why didn’t SHK do the same with Eratat?