Sino Grandness is a Singapore listed food and beverage manufacturer with operations in China. The Company has two distinct business lines: a) canning of fruits and vegetables primarily for the export market and b) manufacturing and distribution of branded beverages for the Chinese domestic market. We believe that the shares of Sino Grandness present a compelling short opportunity with a return potential of nearly 100% as current reported earnings significantly overstate actual earnings.

We have conducted months of due diligence and hired local researchers to aid in our investigative efforts. In addition to scouring filings and performing typical public records searches, we procured Euromonitor and Nielsen data, visited over 80 retail sites, had dozens of conversations with distributors, retailers, former employees, competitors, contract manufacturers, and other sources, and visited the Company’s three internal beverage production sites. Based on our extensive research, we have come to a view that published financials have been materially misrepresented. Importantly, as we lay out in detail below, we believe published financials and the true economics of the business will be scrutinized imminently and will likely lead to a substantial dilution and/or impairment of the Company's equity.

Sino Grandness needs to IPO its beverage subsidiary, Garden Fresh (HK) Fruit & Vegetable Beverage Co., Limited (“Garden Fresh”), on an internationally recognized exchange by October 2014 in order to comply with the terms of its convertible bonds and avoid a large redemption payment. Given current cash on hand of RMB 60 million and a potential redemption payment of RMB 723 million , failure to list Garden Fresh will likely lead to a massive dilution of the equity.

The company has been clear in its preference for a Hong Kong listing. Tighter listing requirements and tepid investor demand are already causing Hong Kong listing plans to be abandoned at other companies. Notably, sponsors now face criminal liability if misstatements are found in the prospectus. It appears Sino Grandness is already behind schedule on its listing plans. As of our latest check, Sino Grandness had still not filed a Form A1 to list on the Hong Kong Exchange, which analysts had expected to happen already in order to list by October.

In our opinion, research coverage has been very weak to date. Sino Grandness is covered by 5 analysts who are Singapore based and cover S-Chips, whereas Hong Kong listed China beverage companies are covered by Hong Kong based consumer analysts. Even modest improvements in coverage or basic IPO due diligence, such as obtaining Euromonitor or Nielsen data, should result in regulators, underwriters, and investors agreeing with our conclusion that earnings are massively overstated. We believe this will most likely lead to a failed IPO, ultimately rendering shares of Sino Grandness practically worthless.

Summary:

1. Reputable third party data sources such as Euromonitor and Nielsen suggest reported Garden Fresh revenues are significantly overstated. Sino Grandness beverage segment (Garden Fresh) reported sales of RMB 1.382 billion in 2013, which we believe would imply at least RMB 2.0 billion in sales at retail value. Garden Fresh does not appear in the top 23 of Euromonitor data or the top 13 of Nielsen data, which is as far as either company breaks out the data. The #23 on the Euromonitor list had retail sales of RMB 77 million and the #13 on the Nielsen list had retail sales of RMB 135 million, which we believe suggests reported sales overstate actual sales by at least 15-26x. Major investment banks with analysts covering China juices companies subscribe to Euromonitor. Furthermore, key beverage manufacturers listed on the HKEx, such as Tingyi, Uni-President, and China Huiyuan, reference Nielsen data in their filings. We believe that if and when regulators, underwriters, analysts and investors inevitably scrutinize this data, they will see a company materially overstating revenues which will most likely derail the IPO.

2. Our channel checks, which consisted of speaking with distributors, retailers, former employees, competitors, contract manufacturers, and other sources, uncovered overwhelmingly negative feedback regarding Garden Fresh trends and outlook and cast significant doubt on the reported size of the business. Sales of Garden Fresh products were described as “disappointing,” “not selling well,” and even “shrinking.” Distributors have indicated an interest in terminating their distributorships. The Company is “not well known” and several industry participants we spoke with outright doubted the reported sales level. Our site visits found the Company’s beverage production facilities essentially idle. We believe the Company has overstated its external capacity, based on our research into and conversations with its contract manufacturers, which further casts doubts on reported sales levels. In our opinion, the feedback we gathered is wildly inconsistent with reported sales levels and growth.

3. Benchmarking key metrics to industry peers supports the idea that sales are overstated. Compared to industry peers, Garden Fresh sales personnel purportedly generate 3x the sales while costing 1/2 as much to employ, meaning “sales return on sales labor” is purportedly 6x peer levels. Furthermore, when measured as a percentage of sales, Garden Fresh spends 1/4 as much on advertising & promotion as industry peers despite being an unrecognized new entrant lacking scale in a competitive market.

4. Margins are unbelievably high. Garden Fresh reported EBIT margins of 25-30% are almost as high as the 30-35% gross margins of leading industry peers such as Tingyi, Uni-President, and China Huiyuan. Garden Fresh’s 2013 reported EBIT margin of 27.8% was 7.9x the median EBIT margin of peers.

5. While we believe the beverages business is the most significant driver of value at Sino Grandness, and thus the focus of our research efforts, we also see evidence to suggest the vegetable canning business has overstated earnings:

a. We believe the Company overstated the market for canned asparagus in its IPO prospectus by a factor of 4x.

b. Company reported sales have completely bucked market trends. Despite already purportedly being the largest company in the industry, Sino Grandness reported its asparagus sales increased by 127% from 2007 to 2013 while the overall market declined 40%.

c. Specifically in 2008, we believe there is a large inconsistency with the Company reporting substantially increased sales volumes while the market, production volumes, and employees decreased substantially. Furthermore, a former employee recounted that sales volumes were down in 2008. Sino Grandness reported total sales volume increased 31% year-on-year, which we find highly inconsistent with China canned asparagus exports (down 22% year-over-year), internal production volumes (decreased 35% year-over-year), and full-time employees (decreased 40% year-over-year).

d. Reported profitability is completely out of line relative to peers. Sino Grandness reports EBIT margins of over 20% for canning private label vegetables compared to the 5-6% reported by peers. Sino Grandness margins even exceed those of global branded food manufacturers.

6. The Company has never generated free cash flow as reported profits have been consumed by accounts receivable and capital expenditures. Despite reporting cumulative net profits of RMB 1.1 billion from 2006-2013, cumulative free cash flow has been negative RMB 463 million, leading to share or convertible bond issuances every year since going public in 2009. With the announcement of its massive Anhui facility and indications that the company is expanding upstream into farming, it looks like any prospect of free cash flow generation is in the distant future. We have commonly found that companies misrepresenting financials report spectacular profitability while burning cash and requiring constant capital raises.

7. Given the upcoming bond maturities and capital expenditure requirements, we believe the stock is effectively worthless. We believe Sino Grandness is worth no more than RMB 800-900 million, which translates to RMB S$0.03-S$0.06 per share ignoring the need to raise capital. This is based on 1.5x EV/Sales for the beverages business and the assumption that sales are only 5x overstated (despite evidence suggesting sales could be overstated by 25x or more) and a 3x “suspected fraud” multiple on reported earnings for the canned vegetable business. If Sino Grandness does not list its Garden Fresh subsidiary in short order, it will face convertible bond redemption payments totaling up to RMB 723 million. Furthermore, the Company has a RMB 600 million investment plan in Anhui, bringing total capital requirements to RMB 1.32 billion, against a mere RMB 60.2 million in reported cash. We believe that the required equity issuance is so massive relative to the true equity value of the Company that the current shares are practically worthless.