Synear Food Holdings: Looking better than an overpriced shit
Background
Synear Food Holdings Limited is a Singapore-based investment holding company. The Company and its subsidiaries develops, produces and sells quick-freeze food products under its Synear brand name.
The Company produces a range of traditional Chinese staple food products, including savoury dumpling products, glutinous sweet dumpling products, and other products, including glutinous rice dumpling products and specialty desserts and snacks. Its operations are principally conducted in the People’s Republic of China.
The Company’s business consists of the manufacture and sales of frozen food. The Company has a sales and distribution network in more than 20 provinces in the People’s Republic of China. Its products are distributed to supermarkets, retail outlets and stores, including Wal-Mart, Supercentre, Carrefour and Metro Cash & Delivery in the People’s Republic of China. The Company’s subsidiaries include Art Advanced, Zhengzhou Synear and Kingpo International Limited.
Current Situation
I admit I would not taken a look at this company if Melvin and Brandon didn’t make enough noise on this. I have always had a thing for Synear and wanna get involved with the IPO but it didn’t materialise cause i thought its another Food Junction that just wouldn’t go anywhere.
Anyway since IPO this little stock zoom up to a high of SGD2.40 before down now to SGD 0.58. Basically if you got it at 2.40 and held till now, u just lost 75% of ur investment.
Profit Results
Basically they got frag in the 4th quarter. Whatever shit you can think of they got it.
- Possibly affected by government price controls to contain food inflation.
- Affected by high vegetable prices.
- Pork prices have also increased during this festive period.
- Delivery problems and affected sales from snowstorms.
As such the full year results becomes less significant compare to the 4th quarter results.
- A healthy 18% growth in revenue full year.
- Net profit improved 17% full year.
- Net Profit Margin remain stable at 21%
- Net operating cashflow after tax grew 70%
If you look at the full year results, it is a good situation to be in. Do note that the huge cashflow increase could partly due to not paying interest and income tax amounting to 64 mil RMB. Now for that 4th quarter result:
- Revenue grew 1%
- Cost of sales grew 13%
- Selling cost grew 14%
- Administrative expenses grew 7%
- Profit fell by 50%
- Net operating cashflow fell 20%
Bascially due to a combination of the factors mentioned above, cashflow basically fell big time as well as margins. Going forward, we get a pretty good idea of which cashflow we should be looking at. Instead of the 500mil rmb cashflow, a sensible estimate of FY 08 would most likely be 260mil rmb.
Balance Sheet
For a company which just lost 75% of its mkt cap, its balance sheet looks very good.
- Both inventory and receivables levels look stable.
- Very low interest bearing debt level – 2.2% of assets
- Huge cash pile – nearly 2 bil RMB. Thats 63% of all assets and 46% of current market cap of SGD $0.58
A part of the reason why cashpile was so big was due to nearly 1.1 bil of share issuing and 600 mil of share issuing in FY 07 and FY06 respectively. The spending on building plants and factories are nearly 383 mil. I would expect this trend to continue if they expect to ramp up production.
Performance indicators
A 12% operating cashflow yield is very good for FY 07. However, If we are to conservatively predict the operating cashflow yield, it should be 6 – 7% for FY 08 since I chose to use 280 mil of operating cashflow after tax compare to 519 mil this year. That would cater for the projected fall in operating cashflow should operating conditions remain this bad for the next 3 quarters.
For the record, I expect food prices to be very challenging for Synear going forward. However, I am looking at them to improve from this result. Sales should improve after taking away the snowstorm from the equation. However net margins will be affected still by rising food prices.
A 23% operating margin should not be sustainable. We might be looking at going back to 19% net margins as per FY 06. Still I think that is a rather good margin that you can have for a food company.
Another good attribute of Synear is its high ROIC of 72%. Those monies people put with them is really being put to work. We hope that whatever they achieve is the nature of operations and strategy rather then a one off event
Going forward, the moat for Synear can only be built if they chose to focus less on manufacturing but more on marketing and building a competitive brand. A highly recognised brand is a good hedge against falling margin in iteself.
That huge cash pile
You might be wondering how come they have such a big cash pile. That 2 billion RMB worth of cash comes up to 64% of their assets and nearly 46% of their current market cap.
That cashpile is not entirely from its IPO or its operating cashflow generation. In FY 06, there was a 640 mil RMB placement and in this FY07, there was an additional 1.1 billion RMB placement.
These fund raising is for 3 purposes:
- Currently, the Group leases production premises, including factory premises, warehouses and staff quarters in Zhengzhou City from Henan Sinian Establishment Joint Stock Co Ltd, which is owned by the Company’s substantial shareholder, Mr Li Wei. Rapid urbanisation and expanding city borders in the PRC in recent years, especially in Zhengzhou City, have resulted in arising trend of industrial plants and facilities being relocated away from the city area to more suburban locations. The area surrounding Jinshui District in Zhengzhou city, where the Group’s existing production facilities are located, has increasingly been developed into new commercial and residential developments, which have resulted in the appreciation of land prices. As such, the directors of the Company foresee that the costs of operating its production facilities within the city area will rise in the near future. Accordingly, the Company inteds to relocate the group’s production facilities to the suburban areas.
- The above is estimated to cost RMB 1.2 billion.
- Currently, the group lease cold storage warehouses in Zhengzhou City, Henan province, PRC from independant parties for the storage of its raw materials and finished quick freeze food products. However, the supply of cold storage warehouses is becoming limited due to urbanisation which has, in turn, resulted in an increasing number of cold storage warehouses being relocated to suburban areas. In order to increase the storage capacity of the Group’s raw materials and finished quick freeze food products, the group intends to construct its own cold storage warehouses
- The above is estimated to cost RMB 310 million
- The group intends to acquire land in Shenyang,liaoning for construction of new production facilities. The main purpose for the construction of the new facilities is to facilitate sales of quick freeze food products in the three north-eastern provinces of HeilongJiang, Jilin and Liaoning as well as Inner Mongolia. This will decrease transportation costs and minimised contamination of food during transportation
- The above is estimated to cost RMB 180 million.
Basically spending could be much underway. The total amount of those 3 above comes up to 1.7 billion. That is what the second placement is for.
Going forward it means likely that the change in balance sheet will be a shift from cash to fixed assets.
Strategically, I cannot clearly say whether its a good move or not. Operating at such a high ROIC tells me they should know what the heck they are doing. However, I always maintain that it is building the brand that is more important.
Taking more fixed assets increases operation risks. What used to be an expense, becomes their operational problem. You will always be understress to maintain utilization rate.
The Price to book ratio for Synear is 1.62 times. This indicates how high it was at 2.40! Its net asset value according to the full year report is SGD 40cts. Right now its really trading closer and closer to that (52 cts on 10 Mar 08)
Since those cash will eventually be converted to fixed assets, I will not minus it off from Market Cap like how i normally value such high cash holding companies. However if you guys would really want to imagine, deducting 2 billion from a market cap of 4.3 billion, its enterprise value is around 2.3 billion.
The cashflow for this year is 500 mil rmb. Their enterprise value is worth about 4.2 years of their cashflow with zero growth. I think thats not conservative, since we know it runs a greater risks of getting wack in FY08.
So if we were to use 280mil of cashflow based on a bad scenario, their enterprise value is worth about 10 years of cashflow with zero growth. That puts it in the fair value range.
The bright side of that investment, are supposed cost savings and higher production capability. having larger production space does not equate to higher sales, but if the management thinks that demand is there, then this might be a good move. We can only wait to see.
The increase in capacity is 39% greater then their current annual capacity. If its 70% utilised u can only hope that its annual cashflow reaches 450mil. That basically matches the current market cap if they are able to earn that for 10 years.
My final thoughts
This is interesting in alot of ways. I never took a look at this since its IPO, but certainly am looking at this now. Apparently this have become a good stock for shorting. Today it gell to a low of 52.5 cents. It is really approaching 40 cents. Will it reach there? I’m taking a very close look at this.
Definately something i would consider to be vested here. Not an inducement to buy though.
Related posts:
- Synear buys land to expand frozen food facilities
- Food Junction 3rd Quarter Results
- Food Junction 2008 Full Year Result Analysis
- Evaluating EpiCenter Holdings: Can they compete with a big boy like Hon Hai
- Food Junction-Another Buying Opportunity?
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Comments
[...] Anyway since IPO this little stock zoom up to a high of SGD2.40 before down now to SGD 0.58. Basically if you got it at 2.40 and held till now, u just lost 75% of ur investment. Read more… [...]
Hi DNHH, for the matter i am debating whether taking on more factories is a good move, or more of an reluctant at that.
With regards to cashflow, these china food companies normally really get beat when it comes to these seasonal factors and demand and supply problems. I am just curious how do they actually get themselves out of this cycle.
Getting out of the seasonal factor? No they can’t because it depend on China consumer. The day where they consume 365 days on most of the items where they normally do on certain dates is the day where many food companies able to get out of that cycle. Eg. like in SG, we usually drink can drink during CNY when we were young, nowaday is anytime any day. It is still a long way for them but the time will come. And not every item is suitable for 365 days.Some items are suitable for only certain date : like mooncake will never get out of the cycle. But don’t write them off because buying once a year mean looking for good and trusted brand and company that can build up that kind of brand = earning extraordinary profit. Think recent CNY event.
With that I like to link to building more factories and branding. 1st of all, do they or Synear really have a brand? Branding can withstand price cutting from lower or cheaper brands and withstand price increase from their own. Most brands does not build up in a few years. Many of what I read and know of, spend decades and decades, especially food related to build up their branding. Which SGX listed China food companies have brands that last more than 20 yrs? Not Synear, not Sun moon star. The closest that I knew of is actually want want (too bad it is delisted). Want want is very famous in China but they fought a “rice cracker war” with their cheaper brands competitors about 3 to 5 yrs back and won. They came out with a lower profitility(still very decent) compare prior to that. With the kind of high margin these food companies (including Synear) enjoy, can these food companies fight their future brand wars which are sure to come like the one Want Want fought?
Building more factories? I understand the power of branding and outsource capital intensive part to other. But I don’t really think they have a choice, they have to build them if they want to grow, especially for quality of their products unless they have strong brand. Even strong brand take big interests in their outsources. The dream of outsourcing and concentrating on branding is still out of their reach because they don’t have the kind of brand to do it yet. I don’t question their expansion of factories because they know it better than me where the demand is coming unless they are having big expansion where the current factories utilisation is very low.
I think one cannot forget to look at Synear distribution channel because it often play a big part in building up the competitive advantage and Synear distribution expenses is very low because they depand on external parties which at the same time distributing other companies products as well. Perhaps the big fight started there rather than those factories.
Hi DNHH,
i guess probably i didnt judge the importance of the distribution expenses high enough. What are those usually on? paying kickbacks to distributors or basically the margins that the disributors can earn from distributing their products.
Another question that i am trying to figure out is this change from leasing to building more factories. Does ROI definately go down? IMO sales would probably be better, but it is not expansion. This is capital replacement at best. If ROI gots down by half, is this consider a good enough purchase?
best regards.
The distribution expenses in the P&L usually make up of 2 major components, distribution expenses and A&P which are important in understanding the company. In 2007, Synear distribution expenses as % to revenues jumped from around 7% to 9% due to revenues not growing while expanding logis. I don’t know what level of distribution expenses consider right but look at another opp. company Hsu Fu Chi with their internal distributors, their expenses range from 18 to 20%. Is Hsu Fu Chi too high or Synear too low? I don’t know but don’t forget in country like China, distribution can make a big diff.
Sales better, leasing and capital replacement? That is too difficult for me. Let me use something simple.
When the customer is retail, it doesn’t matter how many factories one build, it is consumer who choose what to buy. Building factories does not lead to increase in sale, it is the increase in demand by consumer that lead to building more factories.
Say XYZ products are in demand and factories are operating at 100% utilisation. Expansion is required so lease or buy? If buy, XYZ can construct the factory at the spec that suit them the best but they need to pay upfront all the money. If lease, does their production require special setting? Is there ready factory on offer with that fit XYZ requirement? If not leasing an empty factory and start to configure to XYZ requirement. So in lease, XYZ pay(usually) some amount upfront and yearly rental payment. Yearly rental payment is subject to review upward with the general market conditions.
But there is a big diff on leasing and owning the land and property. Leasing : as long as they stay there, they are require to pay rental at market rate which usually move upward with the economy. Owning the land in China mean they can stay there for the whole land right period and even put up for extension when the time is up but pay upfront. At the end of the day, there is no residue value for leasing but the land right should worth something, perhaps appreciate together with the economy and does not need to pay attention to outside rental rate if they does not intent to move or perhaps act opportunistically if it is a good time to sell off and move elsewhere where land is cheaper. This is what leasor is doing right now in Synear.
Now let talk about accounting which is where the usual ROI come from. In accounting, leasing always look like a better deal because leasing(operating lease) does not capitalise those factories and when rental expenses = depreciation charge(assume for simplicity). So the starting years, ROI for leasing is better but as time goes by where depreciation work it magic to reduce asset value and rental increase as together with the economy, ROI for owning assets start to look better and better especially for property.
Now which is better? accounting, despite being the medium for the whole businesses, it is still not the real thing. Anytime, I will throw away the accounting part and take what is real.
Example : CDL does not revalue their properties like most of the other listed properties companies. Because of that, CDL B/S does not show much properties assets. Let say CDL go to bank and borrow money using their properties as collateral. Do you think banker will say, NO we can only lend you 500 million instead of 1 billion because your offices and hotels value in ur B/S is recorded too low, if you revalue them to the market price den we will lend u 1 billion? Understand the limitation of accounting.
Lease or buy which is better? I don’t know but after so long, I like owning assets better and many times it doesn’t matter.But I like this move(the current expansion even if they lease it from outsider parties)because after that, all interests person transaction will be gone. I feel more comfortable reading their account and it reflect better Synear profitability.
The distribution expenses in the P&L usually make up of 2 major components, distribution expenses and A&P which are important in understanding the company. In 2007, Synear distribution expenses as % to revenues jumped from around 7% to 9% due to revenues not growing while expanding logis. I don’t know what level of distribution expenses consider right but look at another opp. company Hsu Fu Chi with their internal distributors, their expenses range from 18 to 20%. Is Hsu Fu Chi too high or Synear too low? I don’t know but don’t forget in country like China, distribution can make a big diff.
Sales better, leasing and capital replacement? That is too difficult for me. Let me use something simple.
When the customer is retail, it doesn’t matter how many factories one build, it is consumer who choose what to buy. Building factories does not lead to increase in sale, it is the increase in demand by consumer that lead to building more factories.
Say XYZ products are in demand and factories are operating at 100% utilisation. Expansion is required so lease or buy? If buy, XYZ can construct the factory at the spec that suit them the best but they need to pay upfront all the money. If lease, does their production require special setting? Is there ready factory on offer with that fit XYZ requirement? If not leasing an empty factory and start to configure to XYZ requirement. So in lease, XYZ pay(usually) some amount upfront and yearly rental payment. Yearly rental payment is subject to review upward with the general market conditions.
But there is a big diff on leasing and owning the land and property. Leasing : as long as they stay there, they are require to pay rental at market rate which usually move upward with the economy. Owning the land in China mean they can stay there for the whole land right period and even put up for extension when the time is up but pay upfront. At the end of the day, there is no residue value for leasing but the land right should worth something, perhaps appreciate together with the economy and does not need to pay attention to outside rental rate if they does not intent to move or perhaps act opportunistically if it is a good time to sell off and move elsewhere where land is cheaper. This is what leasor is doing right now in Synear.
Now let talk about accounting which is where the usual ROI come from. In accounting, leasing always look like a better deal because leasing(operating lease) does not capitalise those factories and when rental expenses = depreciation charge(assume for simplicity). So the starting years, ROI for leasing is better but as time goes by where depreciation work it magic to reduce asset value and rental increase as together with the economy, ROI for owning assets start to look better and better especially for property.
Accounting, despite being the medium for the whole businesses, it is still not the real thing. Anytime, I will throw away the accounting part and take what is real.
Example : CDL does not revalue their properties like most of the other listed properties companies. Because of that, CDL B/S does not show much properties assets. Let say CDL go to bank and borrow money using their properties as collateral. Do you think banker will say, NO we can only lend you 500 million instead of 1 billion because your offices and hotels value in ur B/S is recorded too low, if you revalue them to the market price den we will lend u 1 billion? Understand the limitation of accounting.
Lease or buy which is better? I don’t know but after looking at these kind of stuffs for some time, I like owning assets better and perhaps it doesn’t matter.The real question is not leasing or buying because it does not change the main points where the most important is will consumer buy Synear profit. But I like this move(the current expansion even if they lease it from outsider parties)because after that, all interests person transaction will be gone. I feel more comfortable reading their account and it reflect Synear profitability better.
something bigger out there. dun get too carried away by numbers. look at real events. 52 yr old top exec of co suddenly claiming health reasons and walk out just like that. alarm bells ringing already??? guys, be careful!
Hi dnhh, i feel like i get a better idea what are the balancing points after listening to your views.
sickchick, i hear you. Which is why i am not vested in this yet. Only time will tell, if the company is bigger then this man or this man is bigger than the company.
When looking at those China food companies, especially those closely associated with festive seasons, it is very useful to look at revenues and cashflow according to those dates. Even Pork company like Pfood cant escape this cycle yet.But once these food companies can get out of this huge swing in season factor, ROE bascially going to surge.
Comparing 2007 and 2008 CNY dates, Synear 4Q2007 revenues were really bad. It cashflow also tell a story. Why and where went wrong? A good guess is that the selling price hit somekind of roof level as of now. Don’t forget their distributors increased.
Anyway, many of the listed china food companies are interesting right now which include Synear. If there are time, try go thru everyone of them, there will be interesting findings. Hope the listing wont stop at China Angel.