SINGAPORE (Apr 23): Food products company United Food Holdings was the best-performing counter on the Singapore Exchange last year, rising 1,132.1% to close at 34.5 cents on Dec 29. The stock has not done as well this year, however, closing on April 17 at 24 cents, down 31.4% so far this year. That is slightly below its book value per share of RMB1.18 as at end-December.
Shares in United Food spiked last year after the company announced in January a placement of 22 million new shares at 3.8 cents each to two private investors. Christine Mak bought 14.3 million shares, giving her a 10.8% stake at the time. Ip Ka Kit bought 7.7 million shares, giving him a 5.8% stake in the company. According to United Food’s announcement, Mak and Ip were introduced to the company by its non-executive chairman Song Yanan.
The placement was completed on Feb 20, 2017. By then, the shares had gained as much as 383.3% to close at 14.5 cents. On paper, Mak and Ip were sitting on a 281.6% gain.
On Feb 21, SGX queried United Food about the unusual trading activity of its stock. The company responded that it was not aware of any information not previously disclosed that might explain the trading. It said, however, that “as previously announced on Nov 14, 2016, with the expertise of the existing management team and the recent strategic investors, the group is well positioned to explore strategic acquisitions when appropriate to augment and extend its existing business operations, and enhance the overall financial performance of the group”.
The same day, the company guided that it would report a loss for its fourth quarter and full year ending Dec 31. United Food subsequently reported a loss of RMB229.3 million for FY2016, owing mainly to a decrease in the selling prices of animal feed products and an increase in the cost of goods sold.
Announcing acquisitions
Shares in United Food continued to rise over the course of 2017, hitting a high of 40 cents on Aug 13. The company was able to take advantage of this appreciation by raising more money and announcing an acquisition that was funded partially by shares.
On April 21, 2017, United Food announced a memorandum of understanding in relation to a proposed acquisition of an 80% stake in Really Time Trading for RMB16 million. Really Time Trading’s subsidiary trades, procures and distributes food products, kitchenware, food additives and food-related packaging products and materials in Hong Kong, China and Southeast Asia. United Food said the acquisition was in alignment with its plans to diversify and expand into complementary businesses in the agricultural and food production industry. The acquisition was to be paid for with a refundable RMB15 million cash deposit, and the issue of 615,065 shares at 33 cents each. The acquisition was completed on Aug 22.
On July 12, United Food announced a placement of 25.8 million shares to three private investors: Gu Yulin, Liu Jun and Ting Cheng-Fa. The placement shares were priced at 39 cents each, a 3.75% premium to the volume-weighted average price of 37.59 cents on July 12, raising $10 million. These investors were also introduced by Song.
On Oct 5, United Food announced its intention to buy 80% stakes in three companies: Hebei Xingrun Shengwu Keji Gufen researches, manufactures and sells food and animal feed additives and cosmetics, and also sells medical equipment; Chengde Purun Shengwu Zhiyao researches, develops and manufactures animal feed with traditional Chinese medicine extracts; and Benchmark Trade is an investment holding company that has been granted a licence by HBXR to manufacture the antioxidant L-Ascorbyl Palmitate outside China.
The acquisitions would cost United Food RMB120 million to RMB35 million in cash and RMB85 million in zero coupon convertible bonds, convertible at a price of 45 cents. At the time, shares in United Food were trading at 37 cents each. The target companies came with a profit guarantee of RMB25 million for FY2018, FY2019 and FY2020.
Continuing losses
United Food was listed in 2001 and formerly operated pig-rearing, soybean processing and feed production businesses. Its pig-rearing division ceased operations in 2014 and its soybean processing division ceased operations in 2015.
In FY2017 ended Dec 31, the company reclassified assets related to these three divisions as assets held for sale. As a result, losses from continuing operations narrowed to RMB3.1 million ($646,700) — versus RMB4.9 million in FY2016. This figure reflects the inclusion of Really Time Trading. The trading business generated revenue of RMB34.9 million in FY2017 and operating earnings of RMB2 million.
However, the soybean processing and feed production businesses continued to generate losses. For FY2017, feed production generated revenue of RMB133.9 million and losses of RMB6 million. Soybean processing did not generate revenue but sustained losses of RMB18.5 million as United Food continued to incur administrative expenses.
At a special general meeting on March 29, 2018, shareholders gave approval for assets related to United Food’s soybean processing, feed production and pig-rearing business segments to be sold. The buyer is expected to pay RMB75 million for the assets.
Should this disposal and United Food’s remaining acquisition plans proceed, the company will be on a much stronger footing. The three target companies are profitable, and United Food will also have additional cash from the sale of its assets. As at end-December, United Food had cash and cash equivalents of RMB63 million and unsecured shortterm debt of RMB321,000. At current levels, the company has a market capitalisation of $37.9 million.
