SINO GRANDNESS FOOD INDUSTRY GROUP LTD (SFGI:SP)

Author: newman9 (Value Investors Club) Date: 10/22/2014 Recommendation: SHORT Price: S$0.525 (US$0.413) Price Target: S$0.00 Market Cap: S$308mm (US$242 mm)

***SUPPLEMENTAL FOLLOW-UP REPORT TO BE READ IN CONJUNCTION WITH ORIGINAL REPORT ACCESSIBLE HERE OR IN APPENDIX***

Disclaimer: As of the publication date of this report, the authors of this report have short and other positions in Sino Grandness and stand to realize gains in the event that the price of the stock decreases. Following publication of the report, the authors may transact in the securities of the company covered herein. The authors have no obligation to update the information contained herein and may make investment decisions that are inconsistent with the views expressed in this report. All content in this report represent the authors’ opinions. The authors have obtained all information herein from sources believed to be accurate and reliable. However, the authors make no representation or warranties as to the accuracy, completeness or timeliness of the information, text, graphics or other items contained in this report. The authors expressly disclaim all liability for errors or omissions in, or the misuse or misinterpretation of, any information contained in this report. Discussions regarding potential future events and their impact on any issuer are based solely on historic information and estimates and/or opinions, are provided for illustrative purposes only, and are subject to further limitations as specified elsewhere in this report. No guarantee can be made of the occurrence of such events or the actual impact such events would have on any issuer's future performance.

INTRODUCTION

On September 4, 2014, we posted a research report outlining our view that Sino Grandness has materially misrepresented published financials. This is a supplemental follow-up report which is intended to be read in conjunction with the original report which can be accessed here and is also included as an appendix to this report. In this follow-up, we address the following:

1. While we probably should have done this the first time, we will provide additional details about our due diligence efforts including many pictures documenting our site visits. Perhaps a picture is worth a thousand words. We think investors will find this helpful to verify our due diligence efforts and also get a taste of what we saw.

2. The “Frost & Sullivan Report” and the recent investment by Thoresen Thai Agencies (TTA) should not be a substitute for due diligence and should certainly not be taken as “proof” that Company financials are accurate. Investors should recall that Frost & Sullivan was the industry consultant engaged to prepare the independent data for the Tianhe Chemicals Group (1619:HK) prospectus published just in June of this year. Tianhe has seen its stock fall by over 40% after being accused of fraud by Anonymous Analytics. Frost & Sullivan has been involved with other frauds as well. Moreover, when some of the smartest money managers in the world have been duped by Chinese frauds, we are not sure why investors would be inclined to take comfort from the relatively small investment of a Thai shipping and commodity conglomerate.

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ADDITIONAL BACKGROUND ON DUE DILIGENCE

In our original report, we referenced the extensive retail and production site visits that our local researchers conducted. We probably should have included pictures the first time around, but we thought our findings were pretty obvious and didn’t want to extend what was already a 30-page report. Well, we have changed course and in the following section we will share some additional details about our visits, including a bunch of photos which investors might find helpful.

Our researchers visited 92 different retail sites

Our researchers visited 92 different retail sites, and found Garden Fresh products in 47 of the stores. Guangdong and Zhejiang provinces are estimated to account for 50% of beverages sales. Additionally, the Company has production capacity in Sichuan province and purportedly sells its products there. As such, our researchers visited stores in Guangzhou (33 stores), Hangzhou (20 stores), Chengdu (18 stores), Shanghai (11 stores), and Shenzhen (10 stores). The site visits were roughly evenly split across modern channel retailers such as Vanguard, Ren Ren Le, 7-Eleven, Wal-Mart, Carrefour, and JUSCO, and a variety of corner shops. The corner shops were chosen based on their proximity to modern channel retailers.

Please see the original report for the feedback we received during these site visits, which was overwhelmingly negative and casts significant doubt on the quantum and direction of reported sales. What follows is a non-exhaustive sample of our photos documenting our site visits. These photos should provide some more context to the original report.

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At a 7-Eleven in Guangzhou, our researchers spotted Garden Fresh loquat juice and loquat & mango juice placed low in the fridge. You will notice there are two facings and the bottles are not prominent. The loquat juice is discounted from RMB 6.00 to RMB 5.00, which could reflect poor sell-through.

Garden Fresh loquat juice and loquat & mango juice at a 7-Eleven in Guangzhou. Source: newman9

At another 7-Eleven in Guangzhou, our researchers found Garden Fresh loquat & mango juice placed on the bottom shelf of the fridge. Again there are two facings and the bottles are not prominent. The juice is once again discounted.

Garden Fresh loquat & mango juice placed at another 7- Eleven in Guangzhou. Source: newman9

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At an Aeon (JUSCO) in Guangzhou, our researchers were unable to find Garden Fresh products at all. However, they were able to find several facings of Kagome loquat juice on the bottom shelf of the fridge.

There were no Garden Fresh products at Aeon (JUSCO) in Guangzhou. There were products of a competitor, Kagome. Source: newman9

At a Carrefour in Guangzhou, our researchers found one of the more prominent placings for Garden Fresh products. Again, we see a couple facings.

Garden Fresh products at a Carrefour in Guangzhou. This is one of the more prominent placings we found. Source: newman9

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At a Family Mart in Shanghai our researchers found Garden Fresh loquat juice on the top shelf at the back of the store.

Garden Fresh loquat juice at Family Mart in Shanghai. Source: newman9

During our conversations with distributors and retailers, we heard that the Garden Fresh products were not turning well. In other words, the product was just sitting on shelves rather than selling through to consumers. We were able to corroborate this when we checked the bottles and found 2013 production dates during our visits in July and August 2014.

Garden Fresh in a Chengdu store stamped with an October 9, 2013 production date. Photo taken August 2014. The old production dates suggest slow turns on the shelves. Source: newman9

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Please keep in mind that in addition to the site visits, we had hours upon hours of conversations with industry participants such as distributors, procurement managers, competitors, contract manufacturers, and other sources to form a holistic view of Sino Grandness and Garden Fresh. We have thoroughly documented these conversations although they are not in an easy to share format for obvious reasons. Again, please refer to the original report for details on our conversations. We would strongly urge investors to do their own independent checks rather than to rely on trade shows or other checks facilitated by Sino Grandness.

Our researchers also visited all 3 of the Garden Fresh production factories

Our researchers also visited the Garden Fresh factories to observe levels of activity. They found the factories were essentially idle.

Garden Fresh (Sichuan) Fruit & Vegetable

Our researchers visited the Garden Fresh (Sichuan) Fruit & Vegetable Beverage factory located at 206 Xinqiong Road, Linchiung Industrial Park, Qionglai City, Chengdu City, Sichuan Province.

Exterior view of the Garden Fresh (Sichuan) Fruit & Vegetable factory Source: newman9

Given this is the only factory that is currently operational and purportedly has 70,000-100,000 tonnes of beverages capacity, we expected to see significant activity. Our researchers monitored the factory for two days. On the first day, no vehicles entered or exited the complex. On the second day, a mid-size truck with a packaging company’s name on the door entered the factory. Given Company reported capacity and sales, we would have expected to see something more like 60-150 delivery vans per day, not just a single packaging company truck over the course of two days.

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After monitoring the Sichuan factory for two days, this was the only vehicle our researchers saw enter or exit the complex. Source: newman9

Garden Fresh (Hubei) Food & Beverage

Our researchers also visited the Garden Fresh (Hubei) Food & Beverage Factory located at No. 175 Guangjiazhou Road, Dangyang City, Hubei Province.

Exterior view of the Garden Fresh (Hubei) Food & Beverage factory Source: newman9

Our researchers monitored the factory for two days and saw only one truck the entire time. It entered the complex at 9am and sat idle as little red boxes were loaded onto the vehicle. We are not sure what was in the boxes, but we doubt it was juice products. The truck remained at the factory that evening. During their site visit, our researchers also saw a couple employees leaving the Hubei factory.

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Over the course of two days, our researchers saw only one truck enter the Hubei factory. On the second day, it entered the factory in the morning and remained there that evening. Source: newman9

Employees leaving work at the Hubei factory. Source: newman9

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There was farmland opposite the Hubei factory. Loquats have a short shelf life and the fruit is fragile, and as such one would expect a loquat concentrate producer to be in close proximity to fresh loquat supply. Our researchers saw only 200 to 300 loquat trees growing. Local farmers indicated the fruits from these trees are too sour for consumption.

Farmland opposite the Hubei factory. Source: newman9

Anhui Grandness

Lastly, our researchers visited the Sino Grandness Industrial Park located at the intersection of Jingyi Road and Chenzhuang Road, Economic Development Zone, Guzhen County.

Project signage which says “Singapore Sino Grandness Food Anhui Industrial Park” Source: newman9

Construction at Anhui has clearly yet to commence. The land is vacant, not even completely fenced off, and livestock was grazing within the targeted land. According to local sources the land needs to be leveled off before construction can even begin. Local sources assumed that construction has been delayed due to financial problems on the part of Sino Grandness.

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Unfenced side of Anhui Grandness land Source: newman9

Animals grazing on the Anhui Grandness land Source: newman9

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THE FROST & SULLIVAN REPORT AND TTA INVESTMENT

The Frost & Sullivan Report should not be relied upon as a substitute for proper due diligence…

Our report in September outlined our view that reputable third party data sources such as Euromonitor and Nielsen suggest reported Garden Fresh revenues are significantly overstated. Subsequently, reports surfaced that Sino Grandness has commissioned Frost & Sullivan to provide independent data in the Garden Fresh IPO prospectus.

We would like to reiterate that it is common place for beverages companies listed on the Hong Kong Exchange to reference Nielsen data which can be seen by looking at the filings of Tingyi, Uni-President, or China Huiyuan. Hong Kong food and beverages analysts commonly reference Euromomonitor in their research reports. Sino Grandness even referenced Euromonitor in 2010. So it would have seemed logical that Sino Grandness would reference either Euromonitor or Nielsen in the Garden Fresh IPO prospectus. We thought regulators, underwriters, analysts, and investors would inevitably come to realize that Sino Grandness was materially overstating revenues.

Sino Grandness appears to have pulled the wool over everyone’s eyes by commissioning Frost & Sullivan as its independent data provider. In turn, the Frost & Sullivan Report has given the Company some credibility as it seemingly validates reported revenues. We would like to remind investors that there are always third parties, whether knowingly or unknowingly, that add credibility to fraudulent companies, such as Big 4 auditors, bulge bracket equity analysts, and seemingly reputable independent consultants. We are shocked that in the year 2014 investors would still put blind faith in any of these people.

Frost & Sullivan is the same firm that provided the third party data for Tianhe Chemical’s IPO prospectus (1619:HK). For those who don’t know, Tianhe Chemicals has been accused of fraud by Anonymous Analytics and its stock has declined approximately 40% after publication of that report. Frost & Sullivan also provided the third party data for companies such as China Zaino (now called Dapai International, DAPAI:SP), Sijia Group (1863:HK), Boshiwa International (1698:HK), and Naibu International (NBU:LN) which are all currently suspended or trading as micro caps due to fraud-related concerns.

According to marketing materials published in the Anonymous Analytics report, Frost & Sullivan “appears to be more of a public relations company than an independent research firm” as illustrated by references to “investor confidence building measures” and “pre-empting investor concerns.”

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Source: Anonymous Analytics report “Tianhe Chemicals: Alechemy” dated 9/2/14

In fact, investors in the United States have long suspected that Frost & Sullivan is not an independent firm. As pointed out by Citron Research in 2008, “Frost & Sullivan is a marketing company that sells awards to companies.” This view is corroborated by former employee commentary on sites such as Complaints Board. Back in 2006, the CEO of Promega GmbH refused a Frost & Sullivan award after being asked to pay for it.

Do you really think that Frost & Sullivan has gone to great lengths to independently verify Company- reported metrics? We have little doubt that the Frost & Sullivan Report relies heavily on figures provided by Sino Grandness management. For investors who want to rely on the Frost & Sullivan Report, we wish you good luck in even obtaining a copy let alone receiving anywhere near the transparency on its research as we have provided in this report.1

To be clear, we are in no way suggesting that Frost & Sullivan is systematically or intentionally aiding in fraud. Any firm that supports Initial Public Offerings on the SGX, ASX, Bursa Malaysia, Hong Kong Exchange, and AIM (UK) is likely to have interacted with some frauds. But we are suggesting that investors and analysts should really think twice before accepting the “Frost & Sullivan Report” as proof that Sino Grandness published financials are accurate. Smart investors should ask themselves why Frost & Sullivan data differs so dramatically from that of Euromonitor and Nielsen.

…nor should investors take false comfort in the recent investment by Thoresen Thai Agencies (TTA)

1 Even as its stock price has collapsed 85% from its 2012 IPO in the face of fraud concerns, Naibu International has refused to make the Frost & Sullivan report available to its investors.

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In our view, the recent investment by Thoresen Thai Agencies and PM Group is largely a non-event. When some of the smartest investors in the world have been duped by Chinese frauds, we are quite puzzled by investors’ willingness to use the TTA and PM Group investment as a substitute for due diligence.

Thoresen Thai Agencies is an investment holding company engaged in dry bulk shipping, offshore oil & gas services, fertilizer production and distribution, and other businesses. As such, we certainly do not see them as an authority on investing in the food & beverage sector in China. Furthermore, this is not a lot of money for TTA, which has specifically described the investment as equivalent to the “cost of buying one ship.” The 954 million baht investment represents only 2% of TTA’s 49 billion baht in assets. We wonder how thorough their due diligence was given the investment is a drop in the bucket.

Admittedly, we are just speculating and we do not know what TTA’s due diligence was like. Fortunately, Sino Grandness investor relations representative Parry Ng has recounted his interactions with them:

“I made a 20-minute presentation and [Mr. Prayudh Mahagitsiri] just sat there drinking loquat juice. I was getting nervous…At the end of my presentation, he said his first words: ‘It’s good. You passed.’ ”

Interestingly, TTA seems to believe the Frost & Sullivan data and was willing to publish it in their own press release. That in itself calls into question whether TTA has bothered to procure Euromonitor or Nielsen data, or to observe the inconsistencies between reported financials and what is actually happening in the channel and at the factories. Sadly, TTA might find out the hard way that business in China is not the same as business in other parts of the world. Fortunately for them, it will not be too costly of a learning experience given the size of the investment.

The silver lining for Sino Grandness is that 80.5% of the 2011 convertible bond holders agreed to extend the IPO deadline to June 30, 2015. Why wouldn’t they? They still have a shot at making a handsome return on the IPO and they continue to get paid a 25% IRR while they wait. Admittedly, the 19.5% of convertible bondholders that cashed out locked in a nice 95% return on their investment or 25% IRR.2 While the outstanding principal on the 2011 convertible bonds has now reduced to RMB 80.5 million, the potential maximum repayment has barely changed given the continued compounding at 25% IRR. Furthermore, the Company has indicated that the funds will go to capital expenditures, distribution expansion, and working capital. As such, there are no changes to our views or price target.

2 RMB 37.9 million repayment on RMB 19.5 million principal in 2011, representing an IRR of 25%.

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APPENDIX: SINO GRANDNESS FOOD INDUSTRY GROUP LTD (SFGI:SP) ORIGINAL REPORT PUBLISHED SEPTEMBER 4, 2014

SINO GRANDNESS FOOD INDUSTRY GROUP LTD (SFGI:SP)

Author: newman9 (Value Investors Club) Date: 9/4/2014 Recommendation: SHORT Price: S$0.685 (US$0.547) Price Target: S$0.00 Market Cap: S$402 mm (US$321 mm)

Disclaimer: As of the publication date of this report, the authors of this report have short and other positions in Sino Grandness and stand to realize gains in the event that the price of the stock decreases. Following publication of the report, the authors may transact in the securities of the company covered herein. The authors have no obligation to update the information contained herein and may make investment decisions that are inconsistent with the views expressed in this report. All content in this report represent the authors’ opinions. The authors have obtained all information herein from sources believed to be accurate and reliable. However, the authors make no representation or warranties as to the accuracy, completeness or timeliness of the information, text, graphics or other items contained in this report. The authors expressly disclaim all liability for errors or omissions in, or the misuse or misinterpretation of, any information contained in this report. Discussions regarding potential future events and their impact on any issuer are based solely on historic information and estimates and/or opinions, are provided for illustrative purposes only, and are subject to further limitations as specified elsewhere in this report. No guarantee can be made of the occurrence of such events or the actual impact such events would have on any issuer's future performance.

INTRODUCTION

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.1 Given current

1 Please note that the 2011 convertible bonds mature on October 19, 2014 but bondholders have an option to extend the maturity to June 30, 2015. Throughout this report we will refer to the October 2014 maturity, but this could get pushed back to June 2015.

1 | P a g e cash on hand of RMB 60 million2 and a potential redemption payment of RMB 723 million3, 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

2 2Q14 financial statements 3 Maximum redemption payment based on Principal Amount multiplied by 1.25x for the 2011 Convertible Bond and Principal Amount multiplied by 1.20x for the 2012 Convertible Bond, where x = number of calendar days from and including issue date, but excluding Redemption Date, divided by 365. This has been described in various Company filings and also by various sell-side pieces.

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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.

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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.

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HISTORY AND BACKGROUND INFORMATION

Sino Grandness was founded in 1997 as a trader of canned products.4 After what has been recounted as “an arduous two year process,” the Company went public in November 2009. This was the tail end of an unfolding wave of S-Chip scandals which saw the FTSE ST China Index down about 70% from October 2007 to October 2009.

At IPO, the Company’s primary business was the manufacture and export of canned fruits and vegetables. In 2008, 45% of sales were asparagus, 24% long beans, 17% mushrooms, and 14% others such as sweet corn and fruits. About 98% of sales were outside China, with 83% of sales being to Europe.5

These products were sold to a concentrated base of Western Europe discounters primarily for their private label or house brands. In 2008, the top 3 customers were 65% of sales and the top 8 customers were 82% of sales. Lidl was the largest customer at 40.8% of sales, and other notable customers were I Schmidt, Calkins, Golden Gate, REWE, Huepeden (supplier to Aldi), Compare, and Siplec.6 The Company has also claimed to sell to Carrefour, Walmart, and Metro.7 The economics of this business were phenomenal. The company earned unbelievable 20% EBIT margins for being in what we would have thought was a commoditized and competitive business, selling to a concentrated group of price sensitive and sophisticated buyers.

By mid-2010, the stock had gone from a high of SG$0.24 to SG$0.10 and looked destined to follow the lead set by numerous S-Chip predecessors. Meanwhile, given reported profitability and the fact that in its IPO prospectus Sino Grandness had suggested it would payout 20% of net profits as dividends, investors might have been expecting dividend checks.

Then in January 2011, the Company stumbled upon its opportunity to cancel the dividend, become a serial capital raiser, and perhaps rejuvenate the stock price. The opportunity was a new business venture to manufacture and distribute loquat juice under the Garden Fresh (鲜绿园) brand. In just a few short years, the Company has purportedly become one of the top players in China juices with EBIT margins of 25-30% which are almost as high as the 30-35% Gross Margins of domestic heavyweights. Amazingly, Sino Grandness pulled this off despite its heritage of being an export business, with no juice manufacturing capability, and de minimis A&P spend.

Shortly thereafter, Sino Grandness looked set to capitalize on its newfound success by listing Taiwan Depository Receipts on the TSE. However, this plan was later abandoned, and instead the Garden Fresh

4 Sino Grandness 2009 annual report 5 Sino Grandness IPO prospectus 6 Sino Grandness IPO prospectus, page 111 7 For example, Sino Grandness IPO prospectus, page 23

5 | P a g e subsidiary raised capital by issuing onerous convertible bonds. These bonds convert to Garden Fresh equity at a P/E of 5-6x and, in the event Garden Fresh does not list, carry IRRs of up to 25%.

Sino Grandness must now list Garden Fresh on an internationally recognized exchange by October 2014 to avoid redemption. The Company hopes to list on the Hong Kong Exchange with a value of SG$750 million based on “a ‘conservative’ 15 times price-earnings ratio”. There’s just one small problem. Even the most basic due diligence will uncover that reported financials are materially misrepresented and derail the IPO process.

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SINO GRANDNESS BEVERAGES (“GARDEN FRESH”)

Given the Beverages segment (“Garden Fresh”) is the largest segment, has been a key point of analyst and investor enthusiasm, and the convertible bonds are linked to its listing, it has been the focal point of our due diligence efforts.

Exhibit 1: Sino Grandness Segmental Results

Source: Company filings

Sino Grandness first entered the domestic Chinese beverage market in 2009 with the launch of a canned herbal beverage product,8 but the Company’s big break occurred in January 2011 with the launch of loquat juice purportedly after a member of the R&D staff noticed that there were many loquat farms near the Sichuan plant. Loquat is a niche fruit in China most known as an herbal remedy to sooth the throat and lungs.

Garden Fresh is purportedly focused on the high juice content segment of the market, which is typically defined as 100% Juices and Nectars (26-99% Juice). The Company’s common products would be 100% Loquat Juice, 50% Concentrate Loquat Juice, and then a variety of lower concentrate mixed juices such as Loquat Pear, Icy Loquat, Loquat Peach, and Loquat Mango.

Sino Grandness has reported to investors that Garden Fresh is a rapidly growing and highly profitable business

The table below highlights reported sales and operating profits for the Beverages segment (“Garden Fresh”). We have also included China Huiyuan reported juice sales (excludes “other beverage products”).

8 2009 annual report

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Exhibit 2: Sino Grandness Beverages Segment (“Garden Fresh”) Summary Financials FY2009 FY2010 FY2011 FY2012 FY2013

Sales 52 180 402 865 1,382 Yr/Yr Growth 246.4% 123.6% 115.4% 59.7%

EBIT ("Segment Result") 118 234 385 Margin % 29.5% 27.1% 27.8%

China Huiyuan Juice Sales 2,688 3,397 3,284 3,010 3,672 Sino Grandness as % 2% 5% 12% 29% 38% Source: Company filings, newman9 analysis

We think there are a few things to notice and keep in mind. First, Garden Fresh is purportedly rapidly growing as illustrated by >100% sales CAGR and 60% sales growth in 2013. Second, Garden Fresh is purportedly highly profitable with reported 27%+ EBIT margins. Lastly, Garden Fresh is now large enough that it should be highly visible and well-known by industry participants, given reported sales are over 1/3 those reported by China Huiyuan (the fourth largest company in the overall juice market and the largest company in the high content segments).

Data from reputable third parties such as Euromonitor suggests Garden Fresh revenues are massively overstated…

In 2013, Garden Fresh reported revenues of RMB 1.382 billion. We believe markups are at least 50%, which would lead to retail sales of more than RMB 2.0 billion.9 Euromonitor estimates the retail sales value for the #10 company, Xiamen Huierkang Group Co Ltd, to have been RMB 1.4 billion in 2013. As such, we would have certainly expected to find Garden Fresh listed in the top 10. Garden Fresh was not even found in the top 23, which is as far as Euromonitor breaks out the data. The #23 company, Bright Food (Group) Co Ltd, had estimated retail sales value of RMB 77 million. Please note that we have vetted the list below to ensure that these companies are distinct from Sino Grandness and/or Garden Fresh (which should hopefully be clear based on the “Global Brand Names”).

9 Markup would need to capture both a distributor and retailer markup. As an example, our channel checks found the wholesale price of 50% Loquat Juice was RMB 3.30-3.80 per 500mL bottle which was retailing at RMB 5.80-7.00 (53-112% markup).

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Exhibit 3: Euromonitor Total China Juice Market – Company Share and Sales Euromonitor (2013) Market Sales at RSP Rank Company Global Brand Names Share % (RMB million) 1 Coca-Cola Co, The Minute Maid, Qoo 13.7% 15,000 2 Ting Hsin International Group Master Kong, Wei Chuan 8.9% 9,763 3 Uni-President Enterprises Corp President 5.8% 6,410 4 China Huiyuan Juice Group Ltd Hui Yuan 4.4% 4,871 5 Coconut Palm Group Co Ltd Coconut Palm 4.2% 4,614 6 Hangzhou Wahaha Group Co Ltd Wahaha 3.7% 4,021 7 China Green (Holdings) Ltd China Green 3.2% 3,501 8 Beijing Shunxin Agriculture Co Ltd Qian Shou 2.2% 2,368 9 Yangshengtang Co Ltd Nongfu Orchard, C100 1.7% 1,910 10 Xiamen Huierkang Group Co Ltd Hek 1.3% 1,410 11 PepsiCo Inc Tropicana 1.3% 1,393 ??? 12 Vitasoy International Holdings Ltd Vitasoy 1.1% 1,235 13 Suntory Holdings Ltd Suntory 0.5% 560 14 Liwayway Marketing Corp Great Lake 0.4% 399 15 Lassonde Industries Inc Rougemont 0.3% 344 16 Zhejiang Liziyuan Dairy Food Co Ltd Liziyuan 0.2% 230 17 Dole Food Co Inc Dole 0.2% 227 18 Lotte Group Huabang 0.2% 185 19 Yeo Hiap Seng Ltd Yeo's 0.2% 178 20 Black Cow Food Co Ltd Black Cow 0.1% 144 21 Kirin Holdings Co Ltd Kirin 0.1% 121 22 Tianjin Da Heng Group Da Heng 0.1% 85 23 Bright Food (Group) Co Ltd Bright 0.1% 77

Reported Assumed Estimated Sales Markup RSP n/a Garden Fresh 1,382 50% 2,073 Source: Euromonitor, newman9 analysis

As part of its research process, Euromonitor carries out extensive conversations with leading manufacturers, distributors, and trade associations to develop a consensus view of the total size of the market and share for each major player. It is our understanding that very little information about Garden Fresh could be found during trade interviews and hence the Company was excluded from the Euromonitor data. We believe that Garden Fresh not showing up in the top 10 (let alone top 23) of Euromonitor estimates and industry participants having little to say about the Company is consistent with the company overstating its revenues.

Upon entering the beverages market, Sino Grandness referenced Euromonitor data in its August 2010 multiple distributorship agreements press release. A keyword search of Company filings and releases returns no references to Euromonitor subsequent to that. We wonder why.

We believe that Hong Kong beverage analysts at the major banks subscribe to Euromonitor data and that the glaring inconsistency between Company reported revenue and sell-out as captured by Euromonitor will become quite obvious to the market.

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…which is corroborated by objective Nielsen scanner data

A criticism of Euromonitor data is that it is somewhat subjective and relies heavily on conversations with industry participants as well as company furnished information. However, the work done by Euromonitor is further corroborated by Nielsen, which uses objective scanner data. Garden Fresh is not found in the top 13, which is as far as Nielsen breaks out the data. Nielsen shows the #13 company, Beiqi, had estimated retail sales value of RMB 135 million.

Exhibit 4: Nielsen Total China Juice Market – Company Share and Sales Nielsen (2013) Market Sales at RSP Rank Company Share % (RMB million) 1 Coca Cola Company 23.6% 6,744 2 Ting Hsin 19.2% 5,480 3 President 13.2% 3,774 4 Hui Yuan 6.9% 1,979 5 Ye Shu 6.7% 1,919 6 Wahaha 4.9% 1,404 7 Nongfushanquan 3.8% 1,079 ??? 8 Pepsico 3.5% 1,010 9 Weichuan 1.5% 416 10 Jinmailong 1.4% 397 11 Wangwang 0.7% 192 12 Great Lakes 0.5% 155 13 Beiqi 0.5% 135

Reported Assumed Estimated Sales Markup RSP n/a Garden Fresh 1,382 50% 2,073 Source: Nielsen, newman9 analysis

Garden Fresh is particularly focused on the high juice content segment (100% juices and Nectars which are 26-99% juice). So just to make sure we weren’t missing something, we looked at those segments in more detail. Garden Fresh does not show up in the top 5 in either the 100% Juices or Nectars (25-99% Juices) markets.

Exhibit 5: Nielsen High Concentrate Juice Segments – Company Share

100% Juices Nectars (25-99% Juice) 2013 Market Share 2013 Market Share Company Volume Value Company Volume Value Huiyuan 56.0% 50.0% Huiyuan 45.2% 38.5% Wei Chuan 24.9% 28.9% Nongfu Orchard 28.1% 22.9% Great Lake 6.2% 5.7% Beiqi 4.5% 6.3% Dole 2.9% 2.9% Kaiwei 4.5% 6.4% Chunguolan 1.5% 1.6% SPSE (Xiapusaier) 3.1% 3.3%

Others 8.5% 10.9% Others 14.6% 22.6% Total 100.0% 100.0% Total 100.0% 100.0%

Garden Fresh n/a n/a Garden Fresh n/a n/a Source: Nielsen, newman9 analysis

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We believe that Garden Fresh not showing up in the top 13 overall juice companies or the top 5 of the high concentrate segments of the Nielsen data is consistent with the company overstating its revenues. It is common for HK-listed juice manufacturers, such as Tingyi, Uni-President, and China Huiyuan, to reference Nielsen data in their filings. We believe that during the IPO due diligence process, relevant parties will uncover that Garden Fresh reported revenues are materially overstated.

Brand research conducted by the Chinese government supports Euromonitor and Nielsen data

The Ministry of Industry and Information Technology of the PRC publishes the China Brand Power Index annually. This index is designed to capture brand strength and utilizes extensive surveying conducted by the MIIT. In order to make the list, there is a minimum threshold for unaided brand awareness. We think that it is reasonable to expect companies with high unaided brand awareness to also have high market shares. In the table below, we show the 2013 C-BPI rank for the juice industry compared to the rank according to Euromonitor and Nielsen. We have also included two additional companies from the 2012 list which didn’t make the 2013 list. We believe the high degree of overlap between these three sources helps affirm the validity of the data.

Exhibit 6: China Juice Company Rank by China BPI, Euromonitor, and Nielsen Rank C-BPI Euromonitor Nielsen Coca-Cola (Minute Maid) #1, #8 #1 #1 Uni-President #2 #3 #3 Ting Hsin (Tingyi) #3 #2 #2 China Huiyuan #4 #4 #4 Yangshengtang (Nongfu Orchard) #5 #8 #7 Pepsi (Tropicana) #6 #11 #8 Hebei Chengde Lolo #7 n/a n/a Wahaha #9 #6 #6

2012 list: Beijing Shunxin (Qian Shou) #10 #8 Coconut Palm Group (Ye Shu) #12 #5 #5 Source: MIIT, Euromonitor, Nielsen, newman9 analysis

We similarly found a high degree of overlap between these three sources in the 100% juices segment of the market. Unfortunately, the MIIT does not provide a brand index for the nectars segment of the market, although we again found good overlap between Euromonitor and Nielsen.

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Exhibit 7: China 100% Juice Company Rank by China BPI, Euromonitor, and Nielsen Rank C-BPI Euromonitor Nielsen China Huiyuan #1 #1 #1 Yangshengtang (Nongfu Orchard) #2 #6 n/a Ting Hsin (Wei Chuan) #3 #4 #2 Bright Food #4 #7 n/a Liwayway Marketing (Great Lakes) #5 #3 #3 Wahaha #6 n/a n/a Kagome #7 n/a n/a Dole Food #8 #5 #4 Source: MIIT, Euromonitor, Nielsen, newman9 analysis

Channel checks consistent with overstated revenues

Our channel checks are consistent with the Company materially overstating revenues. With the help of our researchers, we had dozens of conversations with distributors, retailers, former employees, competitors, contract manufacturers, and other sources. Additionally, our researchers visited over 80 retail sites to observe the product and speak with retailers. Our researchers’ site visits were conducted both at mom-and-pop stores and modern channel retailers, which have been estimated to be 60% and 40% of revenues, respectively. Company and sell-side reports have suggested Vanguard, Ren Ren Le, 7- Eleven, Wal-Mart, Carrefour, Tesco, Century Mart, and JUSCO are beverage customers so our modern channel site visits and conversations focused on these companies. The site visits were largely focused in Guandong and Zhejiang provinces, which are estimated to be a combined 50% of sales.

In addition to its internal capacity, Garden Fresh has three external contract manufacturers, located in Beijing, Fujian, and Zhejiang. Our researchers were able to identify and speak with sources at all three contract manufacturers and additionally one former contract manufacturer.

While the product does exist and can be found on shelves, the feedback we received was overwhelmingly negative and casts significant doubt on the quantum and direction of reported sales. Specifically some of our observations and feedback:

 A purchasing manager for a large supermarket indicated Garden Fresh is “so small as to be negligible” and that sales volume has been “disappointing.”  A purchasing manager for a another large supermarket suggested Garden Fresh sales were 80% lower than his supermarket had expected and were a tiny fraction of his Huiyuan sales. He felt that the sales levels reported by Garden Fresh were “highly doubtful.”  A distributor said most of his clients “have not come back with second orders,” that he will not order more Garden Fresh products in the near future because they “are not popular,” and that he is thinking about terminating the contract with Garden Fresh.  Another distributor said Garden Fresh products “have not been selling well” as many retailers only purchased from him once since summer 2013 and their first orders were of “small quantity intended to gauge market acceptance.” He suggested he might sever his distributorship.

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 Convenience store owners advised Garden Fresh “does not sell well” while some corner shops even suggested Garden Fresh loquat juice sales are “shrinking.”  A provincial manager at a large competitor indicated industry participants don’t recognize the name and he doubts Garden Fresh actually achieved the sales the Company reported.  A regional sales manager at another competitor indicated that he “almost doesn’t see Garden Fresh products.” He thought that Garden Fresh would be at most 1/3 to 1/2 the size of his company (his company does juice sales of around RMB 250 million) and that the sales figures as reported by Garden Fresh are “way too high.”  Typically Garden Fresh products had only a couple facings on shelves and were found in unfavorable locations such as the bottom of the gondola. We also heard and observed that production dates printed on bottles suggest slow turns. Most of the bottles we checked during July/August 2014 had 2013 production dates.  It was very difficult to locate the products in Chengdu. This strikes us as odd given the Company’s purported success at the Chengdu Trade Exhibition and also its local production facility (the Sichuan facility is located in Chengdu City). What little product we found in Chengdu was produced by a contract manufacturer, not by Garden Fresh. Given high transportation costs in the beverage industry, we think it makes little sense to use anything other than the Chengdu facility to supply Chengdu retailers (unless of course the Chengdu facility is sitting idle…which we believe that to be the case as we will discuss later).  A source at a former contract manufacturer suggested production volumes were never particularly high given the seasonal nature of loquat and that the relationship has now come to an end.  A source at a current contract manufacturer indicated the contract with Garden Fresh is relatively small and believed that sales of the loquat products have not been good.  A source at a second current contract manufacturer said that while the arrangement is still ongoing, it is with significantly less volume than before. The source further mentioned that he is not optimistic about Garden Fresh’s business and that many brands have tried to sell loquat juice and failed.  A source at a third current contract manufacturer indicated that the orders from Garden Fresh have been quite small.

Is this the feedback you would expect to hear about a rapidly growing brand with reported sales implying it should be in the top 10 of the overall market or top 2 of its target segments? We think this feedback is not consistent with Company reported financials, but rather is quite consistent with our suspicion of materially misrepresented financials.

Garden Fresh factories are sitting idle…

Our researchers visited the Company’s three beverage production sites located in Sichuan, Hubei, and Anhui. There was little indication that the Sichuan factory was even operating during the two days our

13 | P a g e researchers observed the factory. During the first day, the gate was closed and no vehicles entered or exited the complex. Our researchers saw 5 workers leave between 12:00-1:30pm, 4 enter around 2:30pm, and then 5 leave around 6pm. On the second day, one mid-size truck with a packaging company’s name on the door entered the factory. Sources suggested the factory currently operates at less than 10,000 tonnes, compared to purported capacity of 70,000-100,000 tonnes.10 Recall that the product we found in Chengdu had been produced by a contract manufacturer – we are thus not surprised that the Sichuan factory is essentially idle.

Our researchers similarly found no sign of production within the Hubei factory, which was supposed to be operational in 4Q13 and have up to 200,000 tonnes capacity this year. During the first day, there were no wagons or trucks entering or exiting the main gate. On the second day, an empty truck entered the complex at 9am and remained idle while workers loaded small red boxes onto the vehicle. We do not know what was in the boxes, but we doubt it was juice products. The truck remained at the factory that evening.

For reference, we would have expected to see much more activity. Output of 70,000 tonnes per year translates to approximately 560,000 bottles per day making the assumptions that we are talking about 500 mL bottles, 1 fl. oz. weighs 1 oz., and production is done 24 hours per day, 5 days a week. This would translate to about 37,000 cartons (15 bottles/carton) which would each have something like 0.5 cubic feet of volume. If typical delivery vans have some 125-300 cubic feet of cargo volume, we would have expected to see about 60-150 delivery vans per day. You can play around with the assumptions, but we think it would be very difficult to reconcile stated capacity with one van sitting idle for two days at each site.

Construction at Anhui has clearly yet to commence. The land is vacant, not even completely fenced off, and livestock was grazing within the targeted land. According to local sources, the land needs to be leveled before construction can even begin. Local sources assumed that construction has been delayed due to financial problems on the part of Sino Grandness.

Loquats have a short shelf life and the fruit is fragile, which means fresh loquats need to be processed into concentrate within 1 or 2 days after being harvested. As such, it is important for a loquat concentrate producer to be in close proximity to fresh loquat supply. At Sichuan, our researchers only saw a few loquat plants growing in the farmland nearby. Local farmers indicated the quality of the loquat is not as good as found elsewhere and given loquat prices farmers prefer to grow other fruits and vegetables. There were only 200-300 loquat trees in the farmland opposite the Hubei factory, and local farmers indicated the fruits from these trees are too sour for consumption.

10 While there is some conflicting information on capacity at Sichuan, we will refer to the 70,000 tonne number going forward.

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…and we believe the Company overstated its external capacity…

The company has indicated that its total capacity is 280,000 tonnes per annum, which is comprised of 70,000 tonnes of internal capacity at Sichuan and 210,000 tonnes of external capacity (based on Company reports, presumably 70,000 tonnes at each of three contract manufacturers). Our research suggests the three contract manufacturers are Beijing QSL Beverages, Fujian Tianhai, and Zhongshan Tianchen. Based on records found online for these three contract manufacturers, and corroborated through conversations with sources at the manufacturers, we believe the company has significantly overstated external production capacity.11

Exhibit 8: Beverage Contract Manufacturer Capacity Capacity Manufacturer (tonnes) Beijing QSL Beverages 50,000 Fujian Tianhai 20,000 Zhongshan Tianchen 60,000 Total 130,000 Source: Company websites, newman9 analysis

Keep in mind the 130,000 tonnes represents the total production capacity of the contract manufacturers. Based on sources at the manufacturers, these companies produce non-juice drink products, utilize some of the capacity for their own brands, and perform contract manufacturing for a number of other companies. As such, Garden Fresh can only be a subset of this 130,000 tonnes of capacity. In fact, look back at the commentary we received from contract manufacturers during our channel checks – we believe Garden Fresh is likely a rather small subset of this capacity.

…which can only mean reported sales are overstated

Reported sales of RMB 1.382 billion would translate to 200,000-276,000 tonnes at an ASP of RMB 5,000- 7,000 per tonne.12 For simplicity we will call it 250,000 tonnes. The Company only has one production site up and running, with reported capacity of 70,000 tonnes. When our investigators visited that site, it was essentially idle, and our researchers were told it is operating at less than 10,000 tonnes. That leaves 240,000 tonnes which must come from contract manufacturing. Garden Fresh has claimed to have 210,000 tonnes of contract manufacturing capacity, but we believe the contract manufacturers likely have closer to 130,000 tonnes of total capacity, only part of which is used for juice beverages and third party brands. Furthermore, sources at contract manufacturers indicate that Garden Fresh volumes are small. If the Company’s factories are idle, the Company has overstated contract manufacturing

11 In this chart, Zhongshan Tianchen stated capacity of 20,000 bottles per hour is converted to 60,000 tonnes per annum based on an assumed production schedule of 24 hours per day, 5 days per week. We have also assumed that these are 500mL bottles (16.9 fl. oz.) and have made the simplifying assumption that 1 fl. oz. = 1 oz. 12 Our channel checks suggested the wholesale ASP for a 450mL bottle of mixed loquat juice is about RMB 2.20 and the ASP for a 500mL bottle of 50% loquat juice is about 3.50. Assuming 1 fl. oz. = 1 oz., we get an ASP of about RMB 5,100-7,300 before factoring in discounts and promotions. As a check, OSK had assumed an ASP of RMB 4,600 per tonne in early 2013.

15 | P a g e capacity, and Garden Fresh is a small portion of the contract manufacturers’ business, then the Company must have overstated reported sales.

Garden Fresh reported sales do not make sense when benchmarking key metrics to industry peers

Based on our field work, we believe the industry does average sales per salesperson of RMB 1-1.5 million, which is also consistent with benchmarking to some key peers.13 However, Garden Fresh purportedly does sales per salesperson of RMB 4.6 million. Furthermore, despite exhibiting 3x the productivity of peers, Garden Fresh sales people appear to get paid about half. The net effect is that the Garden Fresh “sales return on sales labor” is 6x that reported by industry peers. (This can be alternately stated as industry peers report sales personnel expense as almost 6% of revenue compared to Garden Fresh at less than 1% of revenue.)

Exhibit 9: China Beverage Peers Salesforce Metrics Garden Tingyi UPC Coca-Cola Huiyuan Average Fresh

Total revenue (RMB m) (excl. water) 22,337 15,152 34,678 3,672 1,382

Sales personnel 20,000 9,750 20,000 2,500 300 Sales per sales person (RMB m) 1.1 1.6 1.7 1.5 1.5 4.6

Total employee cost of sales personnel 1,557 830 1,557 237 13 Cost per sales person (RMB thousand) 77.9 85.1 77.9 94.8 83.9 42.8

Sales return on sales person employee cost 14.3 18.3 22.3 15.5 17.6 107.7 6.1x Cost of sales personnel as % Total revenue 7.0% 5.5% 4.5% 6.5% 5.8% 0.9% 6.3x Source: Company filings, UBS reports, newman9 analysis

Measured as a percentage of sales, industry peers spend 4x as much as Garden Fresh on advertising & promotion. This is completely counterintuitive. Large companies have established brands and A&P scale, and thus should have lower A&P as a percentage of sales compared to Garden Fresh.

Exhibit 10: China Beverage Peers Advertising & Promotion Garden Tingyi UPC Coca-Cola Huiyuan Average Fresh

Total revenue (RMB m) (excl. water) 22,337 15,152 34,678 3,672 1,382

Total A&P spending 3,100 2,121 8,568 830 60 A&P as % Total revenue 13.9% 14.0% 24.7% 22.6% 18.8% 4.3% 4.3x Source: Company filings, UBS reports, newman9 analysis

13 The benchmarking in this section leverages company filings and the UBS report “China Huiyuan Juice Group: Upstream exposure deserves a valuation discount” dated April 28, 2014.

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Margins are unbelievably high relative to peers

Garden Fresh reported EBIT margins of 25-30% are nearly on the levels of competitors’ Gross Margins of 30-35%. Garden Fresh’s 2013 reported EBIT margin of 27.8% was 7.9x the median EBIT margin of peers. Miraculously, these margins have been achieved while relying on contract manufacturers for 80% of volume and lacking internal puree capabilities. Moreover, these margins have been achieved by a new entrant in a competitive market where some peers have even seen EBIT margin pressure for several years.

Exhibit 11: China Beverage Peers EBIT Margins 35.0%

30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

0.0% 2010 2011 2012 2013

Tingyi - Beverages Segment Uni-President - Beverages Segment China Huiyuan Sino Grandness - Beverages Segment Source: Company filings, newman9 analysis

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VEGETABLE CANNING BUSINESS

Now that we have taken an in-depth look at the beverages business, we can quickly touch on the canned vegetable business.

Sino Grandness appears to have overstated its market for asparagus…

Asparagus is the largest non-beverage product, having represented about 45% of non-beverage sales from FY2006-FY2013.14 In its IPO prospectus, Sino Grandness suggests in 2008 “exports of canned asparagus by China amounted to approximately 305,000 tonnes, with a value of approximately US$279.2 million.”15 We were unable to obtain a copy of the research report the Company cited for this statistic.16 However, we were able to find other and arguably more reputable research and data. According to UN Comtrade data, China exports of prepared or preserved asparagus (commodity code 200560) were 76,237 tonnes in 2008, suggesting Sino Grandness overstated Chinese exports of canned asparagus by 4x.

Exhibit 12: Overstatement of China Vegetable Exports Sino Grandness FY08 Asparagus Sales (RMB mill.) 149,262 % of Total Sales 45%

China Exports of Canned Asparagus (tonnes): Per Sino Grandness IPO Prospectus 305,000 Per UN Comtrade Database (code 200560) 76,237 Sino Grandness Market Size Overstatement 4.0x Source: UN Comtrade Database, Company filings, newman9 analysis

…and Sino Grandness reported asparagus sales have completely bucked market trends

According to UN Comtrade data, Chinese canned asparagus export volumes have been in steady decline since 2005 until the recent uptick in 2013. From 2005-2013, China canned asparagus exports tonnes have fallen nearly 50%. Increasing asparagus prices led to export value growth from ’05-‘07, but value subsequently declined over 40% from 2007 to 2013. Despite market value declines of 40% from 2007 to 2013, Sino Grandness reported a 127% increase in asparagus sales. We estimate that Sino Grandness must have had 33-40% value share of Chinese exports in the last two years.17 This is

14 Company filings, newman9 analysis 15 Sino Grandness IPO Prospectus, page 96 16 The research report is “Industry Report on Canned Fruits and Vegetables in the PRC” by Beijing Hua Jing Zong Heng Information Centre, referenced on page 96 of the Sino Grandness IPO Prospectus. 17 Sources: UN Comtrade, Company filings, newman9 analysis. Note that in this analysis, we have assumed all Sino Grandness asparagus sales were export sales. We believe this is a reasonable assumption given there is little domestic consumption of canned asparagus as Chinese consumers consider it unhealthy and the Sino Grandness CEO has indicated there isn’t much of a domestic market for the types of vegetables they export. Furthermore, the company’s increase in “Canned Products – Domestic” from 2011-2013 of RMB 162.6 million closely mirrors the increase in “Canned Fruits” sales of RMB 180.7 million. This is also corroborated by the company’s statement in 2011 that it “intends to leverage on its growing distributor and retail base in China to roll out more own-branded canned products, especially canned fruits under its own-branded ‘Grandness’ (‘振鹏达’) label.”

18 | P a g e inconsistent with the feedback of a former employee who indicated Sino Grandness relinquished its #1 spot over that timeframe (and in fact became the #3 company in the space).

Exhibit 13: China Canned Asparagus Exports FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 China prepared/preserved asparagus exports Tonnes netweight 106,072 85,910 97,169 76,237 66,468 60,488 62,200 51,992 54,458 '05-'13: (49%) Traded value (US$ thousands) 126,447 165,378 261,985 172,887 101,049 112,631 136,482 122,120 154,817 '07-'13: (41%)

Sino Grandness asparagus sales Total Asparagus Sales (RMB) 71,672 137,953 149,262 183,162 204,245 273,155 308,472 313,763 '07-'13: 127%

CNYUSD 0.125 0.131 0.144 0.146 0.148 0.155 0.159 0.163 Total Asparagus Sales (US$) 8,990 18,135 21,483 26,811 30,179 42,271 48,893 51,034

Sino Grandness Implied Export Value Share 5.4% 6.9% 12.4% 26.5% 26.8% 31.0% 40.0% 33.0% Source: UN Comtrade Database, Company filings, newman9 analysis

In 2008, reported sales volumes are inconsistent with market trends, production volumes, employee headcount, and a former employee’s recollection of events

In 2008, Sino Grandness production volumes decreased by 35% year-over-year from 17,557 tonnes to 11,364 tonnes. However, sales volumes increased 31% year-over-year from 16,844 tonnes to 22,026 tonnes. As discussed in the MD&A section of the IPO prospectus, Sino Grandness was purportedly able to acquire a bunch of finished goods from third party suppliers for resale in the international market. Revenue from sales of canned products purchased from third party suppliers increased from 10.5% of sales in FY2007 to 68.1% in FY2008 and 79.0% in 1Q2009. We find it odd that a) these internal production cuts came at the same time IPO due diligence would have been carried out and b) that the third party sourcing had very little impact on mix adjusted Gross Profit / Tonne.

We also find it odd that China canned asparagus exports were down 22% year-over-year, internal production volumes decreased 35% year-over-year, and full-time employees decreased 40% year- over-year. And yet, reported sales volumes increased 31% year-over-year. When we spoke to a former employee responsible for all canned vegetable exports, he recounted that Sino Grandness experienced large sales declines in 2008 as a result of the market environment which led to idle capacity and layoffs, and that third party purchases were cut to virtually zero.

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Exhibit 14: Sales Volumes Inconsistent with Market, Production, and Employees 1.40

1.30

1.20

1.10

1.00

0.90

Index(2007=1.00) 0.80

0.70

0.60

0.50 2007 2008

Chinese Exports of Canned Asparagus Sino Grandness Vegetable Production Sino Grandness Full-Time Employees Sino Grandness Reported Volumes

Source: UN Comtrade Database, Company filings, newman9 analysis

Sino Grandness Canned Vegetable & Fruits margins seem too good to be true

The operating margins reported by the Canned Vegetable & Fruits segment are unbelievable. Owning a cement box and hiring a bunch of temporary workers to put asparagus into jars for the private label needs of a concentrated group of Western world discounters wouldn’t seem like it should earn high margins.

But Sino Grandness is purportedly able to make quite enviable margins in this business. According to data from Bloomberg, Sino Grandness operating margins are decidedly the highest of the 35 publicly traded companies deriving at least 40% of revenues from canned food manufacturing and with a market capitalization of over $50 million. Sino Grandess group operating margins were 26.2% last year which are nearly 5x the peer median of 5.6%. Sino Grandness margins are 900-1,200bp higher than the next four companies, which have large branded or specialty products businesses.

A closer look at the Canned Vegetable & Fruits segment in particular shows that not only does Sino Grandness achieve segment margins 4x higher than the median of other public fruit & vegetable canning companies, its margins are even higher than global branded packaged food manufacturers.

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Exhibit 15: Operating Margins for Branded Food Manufacturing and Fruit & Vegetable Canning Companies

Source: Company filings, Bloomberg, newman9 analysis. We have used latest fiscal year available, Del Monte Foods from FY10. Refers to consolidated group margins, except for Sino Grandness (Canned Vegetable and Fruits segment), Unilever (Foods and Refreshments segments), Del Monte Foods (Consumer Products segment with a pro rata adjustment for unallocated costs), Viscofan (Canned Vegetables segment). Margins have been adjusted for non-recurring/extraordinary costs where practical.

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WHERE IS THE CASH?

In its IPO prospectus, Sino Grandness indicated it was going to pay out 20% of net profits in the form of dividends. However, the reality is that the company has paid only two small dividends, one in FY2010 (11% of net profit) and one in FY2011 (8% of net profit). Sino Grandness has never generated free cash flow. Since 2006, the company has generated cumulative reported net profits of RMB 1.1 billion. Meanwhile, cumulative free cash flow has been negative RMB 463 million, leading to share or convertible bond issuances every year since going public in 2009.

Exhibit 16: Sino Grandness Summary Financials Cumulative FY2006- FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2013

Net profit 11 41 53 66 117 150 290 400 1,128

Net cash generated from operating activities 7 (25) 50 16 78 94 66 109 395 +Acquisition of property, plant and equipment (9) (11) (60) (65) (90) (154) (174) (249) (813) +Deposit for land use rights - - - - (46) (0) - - (46) +Proceeds from disposal of property, plant and equipment - 0 - 0 0 0 - 0 0 =Free Cash Flow (2) (36) (10) (49) (59) (59) (108) (140) (463)

Issue of shares (net of share issue costs) - 2 - 92 34 - - 115 243 Net proceeds from issue of convertible bonds - - - - - 81 239 - 320 Total share and convertible bond issuances - 2 - 92 34 81 239 115 563

Dividend paid - - - - (13) (12) - - (25) Dividend as % of Net profit - - - - 11% 8% - - 2% Source: Company filings, newman9 analysis

Where have all the reported net profits gone? Accounts receivable and capital expenditures.

Accounts Receivable keep growing and are largely past due

Since FY2006, total accounts receivable have grown by RMB 876 million, from RMB 45 million to RMB 921 million. Days sales outstanding has increased from 27 days in FY2006 to 86 days in FY2013. China days sales outstanding was 101 days in FY2013. This does not seem unreasonable given the Company says receivables are usually due in 60-90 days, but during our channel checks we have heard that many distributors are required to pay cash on delivery or even a couple weeks in advance which leads us to question the legitimacy of receivables.

Unsurprisingly, trade receivables past due over one month and not impaired has risen from RMB 16 million (28% of receivables) in 2008 to RMB 444 million (70% of trade receivables) in 2013.18 How many of these receivables will never be collected?

18 IPO prospectus pg. A-42 and FY13 annual report pg. 78. In the 2009, 2010, and 2011 annual reports, all trade receivables appear as “past due and not impaired.” In the 2012 annual report, the Company discloses “trade receivables neither past due nor impaired” as well as “trade receivables past due and not impaired,” with the latter referring only to trade receivables past due over 1 month or more. Due to an erroneous footnote in the 2013 annual report, for 2013 we have estimated past due receivables as total trade receivables (RMB 633.4 million) less “trade

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These numbers are at least according to what the company originally reported. The accounts receivable discussion brings us to some questions regarding internal controls that we will come back to shortly.

Capital Expenditures are questionable

We believe that reported capital expenditures are questionable and we have a couple observations regarding capex.

Capital expenditures keep inflating without the Company providing updates on capex plans. This makes capex analysis difficult and provides a great opportunity to create a capex “hole.” The Sichuan beverages production facility was originally supposed to cost RMB 25-30m and Hubei was supposed to cost RMB 150m for a total of RMB 175-180 million. Through 2013, reported beverage segment capex has been RMB 541 million, which is 3x what the company originally told investors.

Granted reported capacity has increased from what was originally announced. However, we do not put much weight in increased capex from purportedly increased capacity. As previously discussed, our site visits found the Sichuan facility essentially idle. Hubei was supposed to be operational by the end of 2013. As of August 2014, we have been unable to find any indication that the facility is up and running and the Company is now talking about needing to “reapply certain certifications” before production can commence. After RMB 541 million of beverages capex, the Company still reportedly admits to being reliant on contract manufacturers for most of its volume.

It’s not clear the company has even purchased what it has said. Investor relations representative Parry Ng published a video to showcase Sino Grandness’ plant in Sichuan. We find it odd that the video starts with filled bottles coming out of a wall. If you look around on Youtube, you’ll find a plethora of these videos showcasing juice filling lines and they almost all start at the beginning of the line as one might expect. So instead of showcasing a juice production and bottling operation, Sino Grandness has simply shown us a labeling and boxing operation. Where is the raw material processing equipment? Where is the filling equipment? We find it odd that in 2014 analysts are still coming back from site visits without pictures of raw materials processing or filling equipment.

We’d also point out that to us this looks like low throughput cheap Chinese equipment which would not cost anywhere near the RMB 100 million per line the company has indicated to analysts.19 This line appears to be operating at a rate of approximately 16,000 BPH as measured by the rate bottles are

receivables neither past due nor impaired” (RMB 189.4 million). Performing this same calculation for 2012 results in a “trade receivables past due and not impaired” estimate of RMB 279.6 million which is consistent with the amount disclosed on pg. 70 of the FY12 annual report. See Appendix I for additional detail. 19 This can also be triangulated by the following: RMB 540.6 million in total Beverage segment capex less RMB 46.2 million for Hubei land rights, RMB 189.9 million for Hubei factory & warehouse premises, and RMB 38.9 million for Sichuan factory & warehouse premises leaves RMB 265.6 million for other items which would mainly be plant and machinery. This is supposed to be for capacity of 270,000 tonnes which equates to roughly RMB 100 million per 100,000 tonne line.

23 | P a g e being moved into the boxes. We received quotes from Chinese suppliers and believe we could build a 16,000-20,000 BPH line, including fresh fruit processing, water treatment, bottle blowing, juice mixing, filling, and packing, for less than RMB 10 million.

Upstream integration – the next capex black hole?

It looks like Sino Grandness has found another great way to ensure it never generates cash flow – moving upstream into the farming business. This is a highly capital intensive and low transparency industry which has been a contentious area to say the least (see Chaoda Modern, China Minzhong, Asian Citrus, and others). At the 2013 EGM, the company reportedly said it would explore owning loquat plantations. While the company announced a planned RMB 600 million investment to build a plant in Anhui, other accounts have suggested it will actually be a RMB 900 million investment and include a 5,000-acre raw material production base.

Concerns over internal controls

As previously mentioned, examining the Company’s audited financial documents has led us to questions regarding internal controls and audit procedures. Through the years, there are multiple instances of obvious errors published in these documents. We find it alarming that some of these errors occurred in 2013 under the new (and first) CFO and relate to areas of particular interest to potential Garden Fresh IPO investors, such as accounts receivable or convertible bonds.

Some of the more salient errors that we have found in financial documents include:  In the 2013 annual report, footnote 12 suggests there are RMB 189.4 million “trade receivables neither past due nor impaired” and another RMB 74.3 million “trade receivables past due and not impaired.” These do not come close to summing to RMB 633.4 million of total trade receivables.  The above resulted in the Company filing a corrigendum which suggests there are RMB 559.2 million of “trade receivables neither past due nor impaired” and RMB 74.4 million of “trade receivables past due and not impaired” which approximately foots to the previously disclosed RMB 633.4 million. However, the Company has erroneously included RMB 153,500 receivables “past due over 6 months” as not impaired. These receivables were already impaired in 2011 so could not reappear in the corrigendum without an income statement entry.  The age analysis disclosed in the corrigendum reclassifies 2012 receivables and is not consistent with previous receivables disclosure. Either the Company has had erroneous footnotes to the audited financial statements for the last five years, or there is another error in the corrigendum.  In the 2013 annual report, the Company has a newly disclosed “maximum redemption amount payable” for each of the revised redemption amount scenarios. The Company has only factored

24 | P a g e in one year of compounding which is highly misleading as it dramatically understates the actual maximum redemption amount in each scenario. The Company discloses a maximum redemption liability of RMB 449 million (RMB 125 million and RMB 324 million) compared to the actual maximum redemption amount of RMB 723 million (RMB 195 million and RMB 527 million). The math has been clear to analysts for years.

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CONVERTIBLE BONDS, LISTING, AND VALUATION

In early 2011, Sino Grandness announced that it wanted to list Taiwan Depository Receipts on the TSE “to have ready access to the different equity markets in the Asia Pacific region.” This plan was later abandoned, and the Garden Fresh subsidiary instead issued convertible bonds with onerous terms. The first tranche was issued to Sun Hung Kai in 2011 and the second tranche to Goldman Sachs in 2012.

Sino Grandness has positioned Goldman’s convertible bond investment as a “an endorsement of the management…[and] growth prospects” of Garden Fresh. We believe that abandoning plans to list in Taiwan and instead issuing incredibly onerous convertible bonds is in fact indicative of a lack of faith in management and the growth prospects.

Put it this way. Even if this is a fraud, convertible bondholders are probably going to make decent money. They have a true “heads I win, tails you lose” situation. If Garden Fresh were to list at the valuation assumed by management, convertible bondholders will roughly triple their money. If Garden Fresh doesn’t list, convertible bondholders will make a 20-25% IRR as long as there are enough assets to cover their RMB 723 million.

It’s likely that there are some real assets here. If we mark the cash, inventories, receivables, and PP&E down by 50%, convertible bond holders will be covered for their RMB 723 million and earn a quite respectable 20-25% IRR on their original investment of RMB 330 million. Equity holders on the other hand will be left with virtually nothing.

Cracks are already emerging

We believe there are signs of stress with the Company’s listing and financial situation. As previously stated, the Company has not yet filed a Form A1 which needed to happen by now in order to IPO by October. Sell-side accounts have suggested management is “non-committal” on the dates of application and listing. While the Company has purportedly retained a top-tier investment bank and Big 4 auditor, management has declined to reveal its sponsors due to a “non-disclosure agreement.” The Company failed to provide any useful update on the IPO process along with the recent results. Instead, the Company put out a press release disclosing discussions with an unidentified “potential” strategic investor about “possible” investment that may or may not materialize which we thought reeked of desperation.

Meanwhile, in a bit of ironic déjà vu, it looks like Garden Fresh is trying to get through the IPO due diligence process with most of its production capacity idle (as was the case in the 2009 Sino Grandness IPO) as it apparently needs to “reapply certain certifications” under Garden Fresh rather than Sino Grandness. The work at the Anhui hasn’t even begun to begin, which locals presume is due to financial stress.

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Valuation

Analyst price targets range from S$0.76 to S$1.25. CEO Huang Yupeng has talked about a S$750 million value for Garden Fresh based on a 15x price-earnings ratio. Analysts don’t seem to have gone that far, as illustrated by OSK using 12x to value Garden Fresh, which they view as conservative relative to HK peers at >20x. Even ignoring the fact that we believe actual sales are significantly lower than reported sales, earnings multiple comparisons to HK peers aren’t fair since margins are abnormally high here.

Valuing Sino Grandness is tricky since we don’t believe the audited financial statements. We think that the shares are worthless. We think that Garden Fresh reported sales are at least 5x overstated and more likely overstated by 15-25x or more. What follows is our attempt to conservatively value the Company, illustrating that the equity is most likely worthless.

If we assume reported Garden Fresh sales of RMB 1.382 billion are 5x overstated, that gives us adjusted sales of RMB 275 million. According to data compiled from Bloomberg, global non-alcoholic beverages companies trade at a median EV/Sales of 1.35x. If we apply an EV / Sales multiple of 1.5x to our (best case) estimate for adjusted sales, we get a value of RMB 415 million for Garden Fresh.

We also believe the earnings of the canned vegetable business are overstated. If we make no adjustments and apply a “suspected fraud” 3x price-earnings multiple to reported NOPAT (reported EBIT assuming 27.9% tax rate), that gives us a value of RMB 411 million for the canned vegetable segment bringing total enterprise value to RMB 826 million. (For reference, Sino Grandness EV was about RMB 460 million in 3Q10). We get a similar RMB 903 million enterprise value if we value the cash and land use rights at book and then mark down inventories, receivables, and PP&E by 50%. Adjusting the convertible bonds to reflect the full liability gives us an equity value of RMB 95-180 million which translates to an equity value per share of S$0.03 to S$0.06 before factoring in any capital raise.

The problem is the company will need to pay RMB 723 million to convertible bondholders. Additionally, the company has a RMB 600 million capex project at Anhui, but only has RMB 60 million in cash, bringing total capital requirements to RMB 1.26 billion. This capital requirement is 7-13x our generous estimate of the pre-capital raise equity value of RMB 95-180 million. We therefore believe such a large share issuance is required that the stock is virtually worthless.

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Exhibit 17: Sino Grandness Multiples Valuation Reported Adjustment Adjusted Value Sales Factor Sales EV / Sales (RMB m) Garden Fresh 1,382 5.0x 276 1.5x 415

Reported NOPAT (EBIT @ Adjustment Adjusted Value 27.9% tax) Factor Earnings P / E (RMB m) Canned Vegetable & Fruits 137 n/a 137 3.0x 411

Value (RMB m) Sino Grandness EV 826

Reported cash 60 Reported debt (426) Adjustment for convertibles (365) Equity Value pre capital raise (RMB) 95 Shares o/s 587 Equity value per share (RMB) 0.16

CNYSGD 0.204 Equity Value pre capital raise (SG$) 19 Equity value per share (SG$) SG$0.03 Source: Company filings, Bloomberg, newman9 analysis

Exhibit 18: Sino Grandness Asset Based Valuation

Reported Adjusted 2Q14 Discount Adj. Value Inventories 203 (50%) (102) 102 Trade and other receivables 1,083 (50%) (541) 541 Cash and cash equivalents 60 0% 0 60 Total current assets 1,346 703

Property, plant and equipment 796 (50%) (398) 398 Land use rights 54 0% 0 54 Subsidy 0 0% 0 0 Deferred tax assets 2 0% 0 2 Total non-current assets 853 454

Total Assets 2,199 1,158

Trade and other payables 105 0% 0 105 Note payable 45 0% 0 45 Current tax payable 62 0% 0 62 Bank borrowings 23 0% 0 23 Deferred tax liabilities 20 0% 0 20 Total Liabilities, ex Converts 255 255

Value pre convertible bonds 1,944 903 Convertible bonds 358 365 723

Equity Value pre capital raise (RMB) 1,585 180

CNYSGD 0.204 0.204 Equity Value pre capital raise (SG$) 323 37 Equity value per share (SG$) SG$0.55 SG$0.06 Source: Company filings, Bloomberg, newman9 analysis

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APPENDIX I

Exhibit 19: Past Due Receivables Analysis FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 Trade receivables 9 89 57 145 173 210 427 633 Trade receivables past due over 1 month and not impaired 16 62 85 122 280 444 Trade receivables past due over 1 month and not impaired as % trade receivables 28% 43% 49% 58% 65% 70% Source: Company filings, newman9 analysis

2009 annual report:

2010 annual report:

2011 annual report:

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2012 annual report:

2013 annual report:

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