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Nanocap - China Star Food Group (SGX:42W), Potential Rerating In 12 Months

Note - CSFG is a nanocap stock... RMB $110m of market cap (US$17m) with approximately half its market cap in net cash. CSFG trades at 0.4x tangible book.

The business is a manufacturer of sweet potato snack food products in China, distributed to ~400 distributors and wholesalers.

6 main product categories: nuts, pastries, baked goods, candies, preserved food, crisps. 

Founder / CEO Liang Chengwang owns approx. 30% of total shareholdings.

Increases in distributor count - 282 distributors in FY12 to 391 in FY16, has driven revenue growth as follows (RMB’000) 30.7% CAGR:

FY13: 211m

FY14: 357m

FY15: 419m

FY16: 471m

This has been partly as a result of shifting preferences amongst Chinese consumers for healthier and organic alternatives to traditional snack foods. The market for sweet potato is expected to grow at double digit CAGR to 2020.

Gross profit margins have trended up over the same period from 41% to 44% as the company has expanded into higher margin products - mainly candies & baked goods.

The company has been able to post NPAT has averaged about 22% over the period, although margins have trended down towards the 18% mark amidst increased investment into SG&A and R&D. 

FY13: 49m

FY14: 81m

FY15: 93m

FY16: 87m*

*Note excludes RTO expenses and goodwill impairment

So whats happened to FY17 figues? Sales and profits have fallen off a cliff, mainly due to a local government directive requiring factories within the Liancheng county that did not meet pollution control requirements to halt production. The company’s Hengming and Henggang Factory as well as newly formed Zilaohu Factory. As a result, operations were halted since Q1 2017, adversely affecting revenues for FY17. 

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CSFG’s Zilaohu factory can only commence only after the completion of Liancheng county’s centralised wastewater treatment plant, which was originally expected in Q3 2017. However, the group recently made alternative arrangements with the independent wastewater contractor to dispose of the wastewater generated, allowing the Zilaohu factory to restart its operations. 

2Q FY18 sales were 17.5m as CSFG commences production in mid-September after the halt in production activities. 

CSFG is only producing out of its Zilaohu plant (30,000 tonnes of capacity). However, ramped-up utilisation rates achieved during FY16 of 88.7% results in 26,610 annual tonnes of production. Using FY16’s revenue per tonne of $18,444, estimated annual revenue for FY19 going forward is $490.8m.

FY16 NPAT margins of 20% (historical average) brings estimated FY19 NPAT at ~$98m. CSFG’s market cap. converted to RMB is $110m.

CSFG is trading at an high-case ~1x FY19E P/E. Once production normalises, conservatively in FY19, should result in a rerating of the current share price.

Possible future upside to come from:

1) Additional sales driven by Walmart China agreement and other supermarket chains such as Ren Ren Le amd Yonghui. To date, CSFG’s products are sold through 419 Walmart stores in China

2) Pipeline of new higher margin products introduced to the market i.e. nougats, steamed snacks, mochi, frozen-goods etc

3) Geographic expansion 

4) Industry consolidation due to smaller competitors being unable to comply with stricter environmental regulations

5) Introduction of direct retail franchises