Review of Celestial Nutrifoods

With the demise of a popular growth China stock -FerroChina, think it is time that we take a good look at some other good China stock.

I have decided on Celestial, as it is a stock that I personally own, its valuation extremely cheap at current price, and it involves convertible bonds which is a popular method to raise cash by listed companies recently, but which also causes their prices to tumble after.

Let's take a good look at the convertible bonds of Celestial. It works this way:

1. Issued 12 June 2006 and up for redemption in 5 years on 12 June 2011.
2. A total of S$235,000,000 loaned.
3. Bond-holders can either convert the bonds to shares at the conversion price of $2.47, or redeem full on the maturity date (12 June 2011) at 129.263% of principal amount, or they have an option to redeem full on 12 June 2009 at 116.65%. Both provide same yield of 5.2%
4. The bonds do not bear any interest during the 5 years.
5. If fully converted, it will result in 91,439,689 additional shares, which is about 15.3% of the total current shares.

From the above, it clearly shows that it is in Celestial's best interest that all bond-holders will convert their bonds to shares, so that they will not have to cough up a large sum of money to repay the bond-holders. With Celestial currently trading at a price of around $0.30, I doubt that will happen, as investors will only convert when trading price is higher than their conversion price.

With current weak market sentiment, and where most bond-holders are institutional investors, in which most will need money in view of credit crunch, I have great reason to believe that most bond-holders will redeem the bonds on 12 June 2009, which means Celestial has 8 months to cough up a sum of S$274 million or RMB 1260.4 million

Let us take a look at Celestial cash flow. As of 2nd quarter 2008, it has about RMB 1651.1 million of cash, of which RMB 603 million has been invested in a new facility in Aug 2008, and left with RMB 1048 million. Based on FY 07 balance sheet, its current liabilities is around RMB 503 million, but that should be well covered by its trade receivables (assuming there is no default) of around 450 million.

Celestial net cash provided by operating activities is ard 450 million based on FY07. Adding together its trade receivables, operating cash and cash will yield RMB 1948 million. Its debt due by June 09 will be RMB 1763.4, inclusive of the payback to bond-holders. With this, I have reason to believe that Celestial has the ability to service its debt even if all the bond-holders choose to redeem on Jun 09.

What if all the bond-holders do a conversion to shares and results in dilution? The converted shares are about 15% of total shares. Celestial Historical PE is 2.2, its NAV per share is around $0.59, and price to NAV is only 0.478. Its price to revenue is 0.513 and current ratio is healthy at 4.325. Thus it can be seen that though it is to current shareholders' disadvantage if the bonds are fully converted, the fear has been overplayed as with the dilution, PE is still below 5 and price is still below NAV.

Thus I believe that there is no reason for Celestial to drop to its current low price.

Actually my only fear is not on the repayment of bonds, but what if melamine is found in Celestial's products as well? This will be disastrous. Let's wait for the tainted milk saga to settle down first....