(Aug 28): Gary Loh, executive chairman of SunMoon Food Co, has spent the better part of the last decade restructuring what started as an apple-growing company. He sold off assets, cut down debt and cleaned up the balance sheet so that the company could continue as a listed entity.

In the middle of last year, with the restructuring more or less completed, SunMoon was brought to the attention of the head of a large local fund, who sent Loh a congratulatory message. An underling was dispatched to take a closer look at the company. Although SunMoon was in much better shape and poised for growth, Loh was told that the fund would not be making an investment after all because “you are too small”.

Two months later, Loh attended another meeting. He found himself seated across from Zhang Ye, CEO of Shanghai Yiguo E-commerce Co. Yiguo is a leading e-commerce seller of fruits, vegetables and, increasingly, other foodstuff. Its controlling shareholder is Chinese e-commerce giant Alibaba Group Holding. Just over the past year, Yiguo has received a total of US$800 million ($1.1 billion) in new investment — mainly from Alibaba or its subsidiaries but also from US private- equity firm KKR & Co and investment bank Goldman Sachs Group. Yiguo is putting some of those funds into SunMoon.

On Oct 7, SunMoon announced that Yiguo would be subscribing for more than 333 million new shares at 4.5 cents each. With the completion of the placement on July 5 this year, Yiguo’s $15 million investment has made it SunMoon’s largest shareholder, with a 51% stake. Within three years, Yiguo has the option to put in another $9 million — through the exercise of warrants at 5.4 cents each — to bring its total stake to more than 60%. Loh’s stake has fallen from 25.32% to 11.21%.

Yiguo will be leveraging SunMoon to source for fruits: durians from Thailand, cherries from Chile and avocadoes from Mexico, for instance. These will be exported to China for the parent company to sell. Loh says the years he spent building up ties with various fruit suppliers and traders are now paying off, as Yiguo brings with it both the market and working capital. SunMoon intends to use the funds raised from Yiguo to expand its network of logistics and distribution centres in various parts of China.

Expanding its network SunMoon was known as FHTK and once owned apple and pear plantations as well as processing and distribution facilities. After acquiring control of SunMoon in 2007, Loh decided to focus the business on the asset-light sourcing and distribution segment.

To him, there are three distinct parts to the fruit supply industry: people who sell, people who pack and people who grow. Going by conventional business sense, says Loh, a company that can own all the elements of the supply chain can therefore capture the maximum margin in between.

However, each segment also has different investment requirements and cash flow generation potential. Loh says a plantation owner might enjoy a margin of 20%, a packer 12% and the consumer-facing seller another 5%. Companies selling to consumers can, however, enjoy very quick turnover. On the other hand, packing companies will have some of their cash tied up in inventories. And plantations require even higher upfront investments and a long wait for a cash return. “Different phases require different capital structures. To say I want to capture margins at every stage so that my total will go up is [unrealistic],” says Loh.

As a subsidiary of Yiguo, SunMoon can continue to focus on growing its distribution network, he says, adding that key discussions with Yiguo have not been about how much margins SunMoon should aim to make but rather how the company can expand its product range, open up more channels and elevate SunMoon’s brand value both in China and around the world.

Yiguo is not just an e-commerce player selling to Chinese consumers. It is also a wholesaler and distributor to major physical retail outlets in which Alibaba owns stakes. They include the Suning Commerce Group Co, which started as a consumer electronics goods chain but has since diversified into convenience stores. In August 2015, Alibaba bought a 20% stake in Suning for US$4.6 billion. Then, last November, it bought a stake in supermarket chain Sanjiang Shopping Club Co for US$305 million. In May, Alibaba became the second-largest shareholder, with an 18% stake, in Lianhua Supermarket Holdings Co, which runs 3,600 stores across China.

Closer to home, Alibaba paid a total of US$2 billion for an 83% stake in regional e-commerce player Lazada, which owns Singapore-based online grocer RedMart. SunMoon could eventually tap Alibaba’s retail network to expand its presence.

Changing earnings profile For now, sales generated by Yiguo alone should be enough to keep SunMoon busy. On any given evening, Yiguo processes some 100,000 orders from Shanghai residents. Items sold might range from an RMB85 ($17.40) box of nine Thai coconuts, to RMB99 for nine Mexican avocados, to a 250ml bottle of walnut oil from France, to a 7cm-long piece of truffle from Yunnan province. “It can be quite a mad house,” says Loh, referring to stock-picking during the frenzied peak hours at Yiguo’s facilities.

Loh is hopeful that all the activity will eventually lead to SunMoon’s turning profitable. For the three months to June 30, the company posted losses of $548,000, an improvement from losses of $1 million in the year-earlier period. Revenue in the same period was up 42% y-o-y to $6.2 million. Nearly two months into the completion of SunMoon’s share placement to Yiguo, Loh is seeing a pickup in sales momentum.

Following the placement, SunMoon has changed its financial year-end to March to align with that of its parent company. Its previous financial year-end was end-December. Loh expects SunMoon to be profitable for the 15-month FY ending March 2018. “The real action will start in 2018,” he adds. By then, SunMoon’s earnings profile would have changed a lot. Southeast Asia currently accounts for 80% of the company’s revenue, with most of that coming from Indonesia. Over time, China will become SunMoon’s largest market.

Eyeing a dual listing SunMoon has been making losses for the last three financial years and, as such, is hardly a popular stock. Trading volume has picked up somewhat since the placement announcement but the company’s share price remains confined within a tight range. Year-to-date, Sun- Moon shares are up 5.2%. They closed at 10.1 cents on Aug 23, giving the company a market value of $72.7 million.

With its Alibaba connections, Loh thinks SunMoon may be able to garner better valuations in Hong Kong and he is open to the idea of a listing there. The company need not delist from Singapore, he says, but could pursue a dual listing, as train parts maker Midas Holdings and motion control components manufacturer ISDN Holdings have done.

He hopes to attract more investors who can accept SunMoon’s new asset-light business model. He says many local investors are obsessed with the company’s low net tangible assets figure. “This is not a company with [net tangible assets]; I have no NTA. Do you look at Apple’s NTA? They don’t own factories. Uber? Airbnb? What NTA? They don’t see where the company’s brand is going.”

Following the restructuring and Yiguo’s investment, Loh says “quite a few investors” have knocked on his door. “People are starting to notice us. We are not going out to tell people what our potential is. What we are saying is what we are doing, and we let the results show.”

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