Fancy pesticide in your frozen dumplings? Or how about a rat’s head in your prawn crackers? Made-in-China products are getting a bad rep but at least this company is pretty safe from it.

For Synear Food, which makes frozen food like dumplings and desserts, the bad reputation of Chinese products worldwide is not going to affect its business since it sells its products in China.

But inflation is. Just like other food producers, Synear has to cope with higher raw material prices, despite raising its selling prices. It is affected by the rising prices of main raw materials such as pork, flour and packaging materials. This has caused its FY2007 gross profit margin to go down 1.4 percentage points to 32.2%.

Inflation in China was at 8.7% in February and at its highest in 12 years, due to higher food prices. Even the government has made tackling inflation its first priority. But like the previous efforts to cool down the economy or the property sector, it will take time for measures to work.

In the meantime, inflation will definitely affect Synear’s profit margins for this year if its move to increase the sales of its new and premium brand products do not work.

One day after it released its earnings report on 25 February, Synear saw a spike in trading volume and its stock plunged. A report by CIMB-GK had drastically downgraded the stock from OUTPERFORM to TRADING SELL due to the company’s increasing costs overshadowing its management’s aggressive expansion plans.

As if things can’t get any worse, Synear Food announced yesterday that it joins the list of Chinese companies affected by the severe snowstorms in China. It said the recent snowstorm in January had affected the transportation and sales of its products to southern China. It also said its sales in Northern China are not enough to fully offset the impact of the snowstorm.

It is expecting sales for Q1 2008 to be lower year-on-year, although it still expects the figure to be higher than the previous quarter.

But the group does have aggressive growth plans – it is intending to buy land outside six cities in China to build cold storage warehouses and stock more raw materials. And it is building an industrial district in Henan province to increase its production capacity.

The company is using its IPO proceeds of RMB 1.14 bln and is borrowing from banks to fund its expansion plans.

In yet another aggressive move, the company signed on Jackie Chan as its brand spokesperson in July last year. I’m thinking this is just for the lead-up to the Olympics, for which Jackie Chan is also a spokesperson. But how much are they paying him? From Synear’s FY2007 report, selling and distribution costs shot up 54% to RMB 207 mln due to TV ads and billboard advertising. I’m thinking that includes Jackie Chan’s massive fees as well.

This company’s aggressive trait can cut both ways. Analysts are downgrading their calls on this stock, but Synear seems to be betting on sales during the Olympics to make its FY2008 a good year, despite thinning profit margins. And after the Olympics, who knows?

- Tan Jin San