SunMoon Food - DBS Research 2016-10-10: Small Mid Caps Radar Explorations

SunMoon Food - DBS Vickers 2016-10-10: Small Mid Caps Radar Explorations SUNMOON FOOD COMPANY LIMITED AAJ.SI

SunMoon Food - Small Mid Caps Radar Explorations

  • SunMoon, a global distributor and marketer of fresh fruits, vegetables and products, has an asset-light, consumer-centric and brand-focused business model. SunMoon’s strategy is to tap on its expanding distribution network, growing geographical area and increasing product range.
  • The proposed entry of Yiguo E-Commerce, which has a strategic partnership with Alibaba, not only provides working capital for SunMoon but also fast-tracks its expansion plan in China. 
  • FY16F is still expected to be loss making as the group has just emerged from a lengthy debt restructuring exercise. But with the entry of Yiguo, sales could surge fivefold from < $20m in FY15 to about S$100m in FY17F with shorter cash conversion cycle and the asset light business model. 
  • SunMoon also plans to expand further into higher-margin, non-perishable products like jelly and fruit snacks.

Asset-light business model 

  • Mainboard-listed SunMoon was embroiled in a lengthy debt restructuring from 2008 to October 2015. 
  • The group has since shifted towards an asset-light consumer-centric and brand-focused business model by tapping on its strong brand equity and expanding on the distribution network of over 13,000 points of sales across Asia and the Middle East, geographical area and product range (Network x Geography x Product) business model.

Targeting China, the largest and fastest-growing market in Asia-Pacific. 

  • To gain access to China, SunMoon is working with Harvest Season, a fast-growing wholesale and retail fruit business with six retail stores in the PRC that are supplemented by an online sales channel. This partnership has since attracted the attention of Shanghai Yiguo Ecommerce Co. Ltd (Yiguo), a leading fresh food ecommerce player in China. Just last week, Yiguo has proposed to invest S$24m (including warrant conversion) in SunMoon. SunMoon will place out 333.3m new shares at 4.5 cents per share with free warrants to Yiguo on the basis of one warrant for every two placement shares subscribed, with an exercise price of 5.4 cents per share. Post placement, Yiguo will own a 51% stake in the enlarged share capital of SunMoon.

Leveraging on Yiguo, which has a strategic partnership with Alibaba. 

  • Yiguo was established in 2005, and does global sourcing of products in various categories including fruits, vegetables, seafood, meat, poultry & eggs, pantry & beverage, and desserts. Yiguo has been in a strategic partnership with since 2014. The partnership with helps Yiguo to capitalise on Alibaba’s huge user traffic, strong fresh food online platforms, and rich online operation experiences.

Vertical integration, expanding both upstream and downstream 

  • The entry of Yiguo will help SunMoon to fasttrack its expansion plan, and to further cement SunMoon as a global distributor and marketer of branded high-quality fruits and food products. 
  • SunMoon will be able to leverage on Yiguo’s network, infrastructure and logistic strengths to further expand its B2B channels and B2C ambitions. Yiguo's dominant ecommerce position in China will also allow SunMoon to expand its footprint in the China marketplace, as well as to rapidly increase its supply sources. SunMoon can tap into Yiguo’s suppliers and increase its range of fruit products.

Putting in place ERP system to support growing network, geography and products 

  • SunMoon has selected NetSuite OneWorld, a cloud-based Enterprise Resource Planning (ERP) software, for its ERP needs and to implement solutions that support SunMoon’s Network x Geography x Product strategy. The move will help SunMoon manage and optimise its expanding network and geography, and transform from a traditional trading company into a consumer-centric distributor and marketer of branded high-quality fruits, vegetables and products.

Expanding to higher-margin non-perishable products 

  • SunMoon has plans to increase production of higher margin non-perishable products, packaged in the form of juices or snacks.

Strong brand name; well-positioned to meet growing demand 

  • SunMoon’s products come with the SunMoon Quality Assurance, backed by internationally recognised accreditations such as HACCP; Good Manufacturing Practice (GMP); AIB (Excellent), ISO 22000, Halal and Kosher Certification. With its strong brand equity, SunMoon is well positioned to meet increasing global demand for premium-grade agricultural produce and fuel growth in existing and new markets.

Key Risks 

Yiguo not able to come on board 

  • The entry of Yiguo would not only provide working capital for SunMoon but also fast-track its expansion plan in China. Failure to get Yiguo on board could delay SunMoon’s expansion plan in China and also the rest of the world.

Longer-than-expected cash conversion cycle 

  • The cash conversion cycle (CCC) is an efficiency ratio that measures the number of days which a company’s cash is tied up in inventories and accounts receivable, and is aimed at assessing how effective a company is at managing its working capital. In simple terms, it is how quickly a dollar paid to a supplier is converted into a dollar (or more) received from a customer. A longer-than-expected CCC could affect the group’s cashflow.

Target Price: N/A

Ling Lee Keng DBS Vickers | 2016-10-10
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