China Agriculture Investment Express


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China Agriculture Investment Express

  1. 1. China Agriculture Investment Express Vol.1 Issue 01 2011Copyright © CCM International Limited
  2. 2. China Agriculture Investment ExpressVol.1 Issue 01.11 Contents Editors Note I Headlines of China Agriculture Investment Express 1101 II Policy & Legislation 1 8 measures promoting China agricultural products logistics 1 Policies on foreign investment in China stricter 1 Laws and regulations on food safety accelerate M&A in food industry 2 Industry dynamic 3 Phosphorus ore resource draws wide attention 3 M&A to continue in feed industry 4 M&A in global agricultural industry increasing 5 Two listed pesticide companies transformed into mining corp. 5 Major domestic M&A in pesticide industry 6 Company dynamic 8 Shandong Kingenda seeks M&A 8 COFCO further strengthens and expands wine market 9 Bright Food shows ambition in domestic and overseas M&A 10 Longping High-Tech: road to industry consolidation 11 China BlueChemical to strengthen profitability through acquisition 12 Price update 13 Agricultural products 13 Agrochemical 14 Food 15 Editors Note Welcome to the first issue of China Agriculture Investment Express. Agriculture is important for China, which draws Chinese Central Governments close attention. With the industrial modernization, Chinese agricultural industry is to develop to be more environmentally friendly, hi-tech-oriented and less resource-dependent. However, agrichemical industries, such as fertilizer and pesticide industries, are facing overcapacity; feed industry requires upgrading and food industry witnesses security crisis. Hence, the government has restricted the chaotic expansion by implementing stricter requirements, such as industrial entry criteria. To maintain long-term development and to develop with stronger competitiveness, companies have to expand their capacities, enrich product portfolios and extend value chain through mergers and acquisitions (M&A) in the coming years. CCM I
  3. 3. China Agriculture Investment ExpressVol.1 Issue 01.11 Headlines of China Agriculture Investment Express 1101 • New policies on logistics will improve agricultural products logistics in China. • The safety review policies on foreign enterprises will be stricter, with some effects on the industry. • Laws and regulations on food safety will accelerate the process of M&A to some extent. • Phosphorus ore resource draws phosphate fertilizer producers wide attention. • M&A in Chinas feed industry will continue in the near future. • Global agricultural giants merger and acquisition(M&A) benefits global agricultural industry. • Huayang Technology and Shandong Dacheng would be transferred into mining companies. • In recent years, M&As in domestic pesticide industry are frequently, and they are having different purposes. • Shandong Kingenda seeks M&A opportunities for long term development. • COFCO actively launches M&A in wine industry to further strengthen its superiority in grape wine sector and develop new fields to improve industrial chain. • Bright Foods serial M&A launched from 2010 show its ambition to expand business, though the results are not satisfactory. • Longping High-Tech is on the road to achieve industry consolidation. • China BlueChemical is to strengthen profitability through acquisition. CCM II
  4. 4. China Agriculture Investment ExpressVol.1 Issue 01.11 Policy & Legislation Policies on foreign investment in China stricter I n 2010, China absorbs foreign investment of USD106 billion (RMB701.72 billion), but the investment in merger and acquisition (M&A) is only 3%, while a total of USD1,122 billion(RMB7,427.64 billion) has been recorded in foreign direct investment in the world, and M&A investment is as high as 70%. This data shows that Chinas foreign direct investment has been on the rise, but the proportion of the M&A inverstment is relatively low. But there is still a trend that investment in M&A will be larger in Chinas foreign capital absorption in the near future. In 2010, China has been cautious in auditing M&A initiated by foreign enterprises, making the proportion of foreign M&A investment reduce to about 3% of the countrys total. In recent years, deal in foreign M&A has increased with the growing laws and regulations of M&A China issued. The Notice of the General Office of the State Council on the Establishment of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the Notice) was released by the State Council of China on February 3, 2011, and the Notice covers agricultural products. The main purpose of the Notice is to FIGURE 1: Chinas foreign direct investment, 2006-2010 improve Chinas foreign policies and regulations system, enhance transparency and promote development of M&A enterprises. Implementing safety review has some effects on Chinas agricultural products. First, it is effective to prevent the foreign enterprises monopolistic conduct in agricultural products and processing industry of agricultural products. Second, it is helpful to stabilize prices of agricultural products. Third, it is effective to promote independent innovation capability of China agricultural enterprises. Then, it is beneficial for resonable utilization of foreign capital concerning agriculture. Fourth, it will better ensure the development of domestic Source: CCM International agricultural enterprises. At present, foreign enterprises continue to control the Chinese key agricultural enterprises, trade and processing enterprises in China agricultural products industry. China agricultural products and market have been brought into global markets by foreign enterprises, then these foreign enterprises form absolute control and pricing. For example, in soybean industry about nearly 60% enterprises are with overseas background, which captures 85% of the Chinese market. In the long run, if foreign enterprises control more on Chinese agricultural industry or establish monopoly, small and medium-sized enterprises in China will be likely to be washed out from the market, and it even threats the supply of agricultural products. And whats worse, it will 8 measures promoting China agricultural products logistics O n June 15, 2011, the State Council promulgated eight measures on promoting the development of logistics industry. These measures are specifically to put forward the development of agricultural products logistics and improve policies on added value tax of agricultural products. Specific measures include: to greatly develop agricultural supermarkets; break the connection between agriculture schools and agricultural enterprises; strictly implement the policies related to fresh agricultural products distribution channels; to speed up development of modern logistics concerning food and cotton. At present, the underdeveloped of agricultural products logistics has blocked the development of agriculture in China. The measures have a great influence on logistics industry of agricultural products and that is good for Chinas CCM 1
  5. 5. China Agriculture Investment ExpressVol.1 Issue 01.11 seriously impact the national economic foundation. resource integration in logistics industry of agricultural products, encourage small and medium-sized agricultural enterprises to strengthen cooperation and improve the inefficient logistics service. The measures benefits the logistics industry related to agricultural products a lot. First of all, they are favorable for solving the problems of packing difficulty, storage and transport difficulty in agricultural products logistics industry at present. Secondly, they are expected to help reduce the cost of manufacturers of agricultural products logistics and improve the profitability of enterprises. Then, the measures will promote the reduction in prices of agricultural products, stablize the prices of agricultural commodities and guarantee security of food. Moreover, they are helpful to reduce tax of agricultural products enterprises. At present, if the difficulties of agricultual products logistics transport are settled, it will enhance enthusiasm of farmers to plant and increase the income of farmers, promoting the development of Chinas agriculture. Data show that fruits and vegetable lose 25% to 30% during picking, transportation and storage in China. Based on this, there are 100 million tonnes of fruits and vegetable rotting in China each year, while the loss rate of fruits and vegetable is controlled under 5% by developed countries, especially for the US whose rate maintains 1% to 2%. What worth mentioning as well is that the loss rate for grain accounts for 12% to 14.8% of total output. Expert said that, low efficiency of the agricultural products logistics hinders the development of Chinese agricultural industry. In the long run, this measures promulgated by Chinese government are beneficial to strengthen the international competitiveness of domestic agricultural enterprises, improve the products and services of agricultural products in China, increase the investment in logistics industry related to agricultural products and improve the logistics network of agricultural products. Laws and regulations on food safety accelerate M&A in food industry A series of laws and regulations on food safety have been released in recent years, which may with small production scale, chaotic management and dispersed distribution difficult for supervision. In accelerate the M&A process in Chinas food industry. order to strengthen the supervision of food industry, They are Food Safety Law of the Peoples Republic of the government raises the market access threshold by China released in 2009, Notice of the General Office implementing the license system. Its reported that of the State Council on Rigorously Cracking Down there are only more than 100 thousand food enterprises on Illegal Adding of Food Additives on 21 April 2011 having the ability to get the license, which means a large and the latest Standards for Uses of Food Additives part of enterprises have to withdraw from the market. (GB2760-2011) coming into force on 20 June 2011 This is a great time for large food enterprises to expand and so on. The promulgation of them is triggered by bushiness through M&A. Take the dairy industry for successive food safety incidents, such as the 2008 example, General Administration of Quality Supervision, melamine scandal, milk tainted by leather protein, Inspection and Quarantine issued an announcement in clenbuterol-tainted pork and steamed buns containing December 2010, requesting all of the dairy enterprises to illegal yellow coloring. These laws and regulations not reapply for the production license. As of 31 March 2011, only restrain food producers from illegally using food only 643 among 1,176 dairy enterprises have passed the additives to ensure civilians health, but also create reexamination, with a passing rate of no more than 55%. the best time for M&A in food industry. And some provisions indirectly increase the production Food Safety Law of of the Peoples Republic of China cost of food enterprises, making those small players and Standards for Uses of Food Additives (GB2760-2011) operation hard to continue and thus providing a great stipulate the process of food production and operation chance for large players to carry out M&A. The Food and the application of food additives, helping eliminate Safety Law stipulates that food producers and operators the hidden danger of food safety in the aspects of man- must possess production equipment in accordance with made pollution and overuse of food additive. Some the food variety and production volume; it also requires of the provisions will accelerate the M&A directly or food producers to check the license and certification of indirectly. suppliers of food raw materials, food additives and other food-related products. Meanwhile, Standards for Uses In the Food Safety Law, the government requires of Food Additives (GB2760-2011) clearly formulates food producers to implement the license system of the application range and application amount of production and operation. At present, there are more food additive. According to the data from National than 400 thousand food enterprises in China, almost Bureau of Statistics of China, there are more than CCM 2
  6. 6. China Agriculture Investment ExpressVol.1 Issue 01.11 2,000 dairy companies in China, but only 1,176 reapply for production license—about 1,000 voluntarily give up the reexamination. One of the reasons is that they cant afford the huge funds needed in production process to meet the requirements of reexamination. In the Food Safety Law, Chinese government requires local governments to encourage large-scale food production, which is beneficial for large enterprises to get policy support and integrate resources of food production. Therefore, launching M&A is one of the effective ways to realize the goal. Henan Province launched a series of positive policies to support the scale development of food enterprises in 2009, such as reducing the tax of leading enterprises, setting up exclusive funds for the upgrade of food enterprises, increasing the amount of funds invested in food-related enterprises to promote scale development from multi-channel. According to the research done by Zero2IPO Researcher Center, one of the most professional and authoritative research institutes in China, totally 52 M&A cases happened in Chinas food and beverage industry from 2009 to Q1 2011; 10 have been finished in Q1 2011, which is half of the whole cases in 2010. Its estimated that the number of future M&A will increase rapidly, promoted by the laws and regulations on food industry. Industry dynamic Phosphorus ore resource draws wide attention W ith the exhausting phosphorus ore resource, phosphate fertilizer producers are to acquire phosphorus ore resource is essential for factory removal and new entrants. phosphorus ore resource to sustain long-term development, driven by the strict entry criteria for On March 25, 2011, Ministry of Industry and phosphate and ammonium production. Information Technology (MIIT) promulgated the exposure draft of the Entry Criteria for Phosphate and China is the second largest phosphorus ore reserves Ammonium Production (the Entry Criteria) which country in the world, only next to Morocco. Among the requires that the factories to remove and new entrants proven phosphorus ore reserves of 16.786 billion tonnes, should have their own phosphorus ore and sulfur ore only about 4.1 billion tonnes with actual economic value resources. can be exploited technically in China, capturing 24% of the total reserves. In addition, only 52% of Chinas According to the Entry Criteria, in principle, the factories phosphorus ore reserves with actual economic value can to remove and new entrants are not allowed to build new be exploited under current technology. wet process phosphoric acid (WPA), monoammonium phosphate (MAP) and diammonium phosphate (DAP) China exploited 68.07 FIGURE 2: Price of phosphorus ore, 2008-2010 million tonnes of phosphorus ore in 2010, increasing by 18.5% over last year, but China totally consumed 67.17 million tonnes of phosphorus ore in the same year, soaring by 17.2% year on year. Driven by the soaring demand and exhausting resource, phosphorus ore price has seen an uptrend with fluctuation during 2008 to 2010, which brought many risks Source: CCM International to phosphate fertilizer producers. And only the phosphate fertilizer producers projects or expansions within three years. Besides, if holding ample phosphorus ore resource can avoid the the existing compound fertilizer production plants are risk of phosphorus ore price fluctuation. located in county-level ecological protection areas, scenic areas, nature reserves, cultural heritage protection areas, Besides being beneficial for long-term development, etc., they have to relocate. CCM 3
  7. 7. China Agriculture Investment ExpressVol.1 Issue 01.11 By the end of 2010, there were 466 phosphate fertilizer producers in China, with the total production capacity of over 21.00 million tonnes per year and the output of 17.01 million tonnes (100%P2O5) in 2010; while the apparent consumption volume was only 14.75 million tonnes (100%P2O5). That is to say, Chinas phosphate fertilizer industry is facing overcapacity. The most important is that many phosphate fertilizer producers that have to relocate their plants have no phosphorus ore resource of their own. To sustain long-term development, phosphate fertilizer producers will pay more attention to phosphorus ore resource. M&A to continue in feed industry I n February 2011, the leading feed enterprise in the world Nutreco Group purchased 100% shares funds, so they were squeezed out of the market. As predicted, the number of feed enterprises in China will of Zhuhai Shihai Feed Co., Ltd. (Zhuhai Shihai)— decline continuously in the future. And it will reduce the a leading aquaculture feed company in China— cost of M&A for large feed enterprises. Thus, its a great at a fancy price, attracting much attention in feed time for the expansion of large enterprises and the industry. Some other M&A cases also happened integration in feed industry. during 2010-2011. Its estimated that this M&A trend will continue in Chinas feed industry. Besides the current situation of feed industry in China, some of government regulations are favorable to Currently, China is the second largest feed production large feed enterprises expansion. Measures for the country in the world. And feed industry plays an Examination of Feed Production Enterprises, issued on important role in the development of national economy. 1 May 2007 by the Ministry of Agriculture, emphasizes However, the degree of feed enterprises scale is much and standardizes the feed production to protect the lower than the US, the largest feed production country product quality. The regulation puts some pressure around the world. As of 2006, there have been more on feed enterprises; unqualified enterprises have to than 10,000 small-scale feed enterprises in China, but withdraw from the market. Small feed enterprises are on only five have an annual output exceeding one million a sticky wicket due to lack of sufficient funds to meet the tonnes. The total output of top ten feed enterprises just requirements, while the raised threshold is beneficial for accounts for 22% of the nations total. large feed enterprises. Through the M&A wave during 2005-2007, the number Moreover, feed industrys development depends on the of small feed enterprises declined apparently. In 2007, development of breeding industry. In breeding industry, there were 15,400 feed enterprises in the whole nation, small-scale enterprises and farmers are gradually but the figure reduced to 13,600 in 2008—almost 2,000 quitting due to the high production cost, while large- feed enterprises disappeared. scale breeding enterprises are forming, which will further intensify in the coming few years. At the same Since 2008, the cost of raw materials and labor has time, the strong demand for meat, eggs, and dairy risen dramatically. The high production cost and products will drive the expansion of breeding industry. economic crisis in 2008 exerted great pressure on the All these are beneficial for large feed enterprises to development of feed industry, especially those small develop and enlarge scale. enterprises who couldnt afford the high cost and lacked TABLE 1: M&A cases in Chinas feed industry, 2005-2011 Source: CCM International CCM 4
  8. 8. China Agriculture Investment ExpressVol.1 Issue 01.11 Because the feed industry is easily impacted by market fluctuation and meager profit, feed enterprises have to extend industrial chain to reduce the risk. Thus, feed enterprises would choose to acquire some breeding enterprises. However, there is a strange situation in Chinas feed industry. Its reported that some foreign-owned enterprises attempted to enter the breeding industry through investing in feed industry, because its difficult for them to pass the certification auditing in breeding industry under the protection of Chinese government. Amidst M&A cases in Chinas feed industry, its not difficult to see that foreign-owned enterprises direct acquisition of domestic enterprises is rare: only three cases during 2005-2011. High acquisition costs but low profit are the reasons. Its estimated that foreign-owned enterprises will take over some large feed enterprises when Chinas feed industry develops to a better stage. But joint investment together with domestic feed enterprises in feed industry is a common cooperation method. Therefore, M&A will still happen among domestic feed enterprises. And the M&A will continue in domestic feed industry in the future to further promote the industrial integration. M&A in global agricultural According to CCM Internationals survey, the enterprises involved in the M&A share some common industry increasing characteristics. First, some of them are shortage of raw materials. Second, they have solid financial strength I n recent years, merger and acquisition (M&A) activities among global agricultural enterprises and own rich experiences in the industry. Third, they conduct M&A with the purpose of expanding industrial have increased year by year. In 2008, the worlds chain. largest oil producer Bunge acquired the worlds largest corn processor, namely America Corn For the target company in the M&A, advanced Products International, Inc., which was driven by the production technologies, rich administrative experience increasing global grain demand and the rising food and capital will be introduced, helping boost technology price. Moreover, less profit has been gained from level and R&D capability of the target company. the industry and M&A will absolutely help Bunge to expand its business. However, in the long run, it will to some extent threaten grain security of the target country. Take China which Many reasons are accountable for the increasing M&A has vast land and huge pupulation for example, its activities in global agricultural enterprises. Nowadays, complex situation makes the Chinese Goverment has the competition in global agricultural industry becomes to be greatly aware of the grain security and know the more intense, leading to the reduction of profit and the market well. increase of risk. M&A will facilitate the enterprises to expand their market share and enhance their status But on the whole, M&A is of great significance, making in the global stage. For example, Sinochem corp resource allocation more efficient, optimizing industry purchased Makhteshim Agan Group with a bid to structrue, and promoting development of global increase market share in May 2011. agricultural industry. Two listed pesticide companies transformed into mining corp. S handong Huayang Technology Co., Ltd. (Huayang Technology) and Shandong Dacheng Pesticide Co., Ltd. (Shandong Dacheng) have gained profit sources through restructuring with mining enterprises. And then, they will both be restructured into mining companies. On 9 Feb. 2011, Huayang Technology revealed the result of its public auction. Zibo Hongda Mining Co., Ltd. (Zibo Hongda), a big mining company in Shandong Province, has successfully bid for Huayang Technologys 20.38% equities, totally about 31 million shares. Zibo Hongda has become the largest shareholder of Huayang Technology after the transaction accomplished successfully. In April 2011, Huayang Technology released a motion about assets reorganization, according to which it will buy assets of Zibo Hongda through selling its own major assets and issuing shares, so as to transform from an enterprise suffering from serious deficit to an iron ore mining company. Huayang Technology is mainly engaged in the production of pesticides and chemical raw materials, power generation and electricity sale. Zibo Hongda is a large-scale enterprise whose main business is iron ore mining, selection, mining investment and development of mineral resources. Zibo Hongdas purpose of bidding for Huayang CCM 5
  9. 9. China Agriculture Investment ExpressVol.1 Issue 01.11 Technologys equities clearly aims at the access to capital Shandong Dachengs main business will be changed market financing platform and backdoor listing. to iron mining, production and sale of iron powder. Shandong Hualian will get backdoor listing after the The same restructuring has also happened in Shandong reorganization is completed successfully, making access Dacheng Pesticide Co., Ltd. (Shandong Dacheng). to capital market financing platform. On 18 Jan. 2011, Shandong Dacheng Pesticide Co., In these two cases, the restructuring companies are Ltd. (Shandong Dacheng), a listed pesticide company, listed pesticide companies. Because of the significant said it will launch major assets reorganization. It is decline in pesticides overall profitability, listed pesticide not until 25 March 2011 that China National Chemical companies are becoming the objects of some large Corporation (ChemChina), the biggest shareholder of enterprises backdoor listing, for accessing the financing Shandong Dacheng, selected a united transferee body to platform of the capital market. This happens under purchase Shandong Dachengs state-owned shares. The certain policy backgrounds. united transferee body consists of Shandong Yinshan Investment Co., Ltd. (Yinshan Investment), Dongli Town In recent years, the listed companies have been facing Collective Assets Management Center (Management many difficulties impacted by the international financial Center) and Beijing Huiquan International Investment crisis, the cyclical adjustment of pesticide and chemical Co., Ltd. (Huiquan International). On 31 March industry, the rising raw material price and the weak 2011, Shandong Dacheng announced a major assets profitability. In August 2010, the State Council issued the restructuring plan, and the counterpart is Shandong Opinions of the State Council on Promoting Enterprise Hualian Mining Co., Ltd. (Shandong Hualian), whose Merger and Restructuring and proposed to support controlling shareholder is the joint transferee. This the corporate M&A through taking advantage of the plan shows that Shandong Dacheng will gain Shandong capital market. The State Council also supports eligible Hualians 100% shares. And then, Shandong Dacheng enterprises financing of M&A though issuing stocks, will be turned into a mining company whose main bonds, convertible bonds, etc. The listed companies business is iron ore mining & dressing. are encouraged to use equity, cash and other financial innovations as payment means of M&A to broaden The core business of Shandong Dacheng is chemical financing channels and improve the efficiency of M&A pesticides, production and sale of basic chemical in capital market. The State Council also encourages raw materials before the assets reorganization. After and supports private enterprises to participate in the the completion of assets reorganization, Shandong competitive fields of state-owned enterprises reform, Dacheng will sell out all its original assets and liabilities, restructuring and reorganization, which promotes the and Shandong Hualian will become a wholly-owned development of non-public economy and SMEs. subsidiary of Shandong Dacheng. From then on, Major domestic M&A in pesticide Agrochemical mainly produce more than fifty kinds of products, including three serials of pesticide (herbicides, industry insecticides and bactericide), acyl chloride series of intermediates (for pesticide, medicine and dye) and I n recent 2-3 years, domestic pesticide companies are restructuring frequently, and many companies phosgenation series of intermediates (for pesticide, medicine and dye), etc. After the acquisition completes have implemented the M&A. It has become a successfully, Lier Chemical could improve the product consensus in the industry that M&A can improve mix, enhance the ability to resist risks and expand its the industrial concentration and enhance the sales network and business scale. competitiveness of the enterprises. However, M&A between different enterprises have different purposes. That Noposion shares the equity of Jiangsu Changlong Farm Chemicals Co., Ltd. (Changlong Farm Chemical) is Such as Shenzhen Noposion Pesticide Co., Ltd. an important step for Noposion to extend the upstream (Noposion), Lier Chemical Co., Ltd.(Lier Chemical) industry chain, to enhance its long-term competitive and other listed companies, their acquisition strategy advantages in pesticide field. Changlong Farm Chemical generally is, looking for companies with complementary is one of the advanced companies in pesticide technical strengths, diversifing products and expanding business field, and it is also a medium-sized technical company to increase profits. with mature technology in China. It has perfect product mix and beneficial phosgene resources. Through this To analyze the case that Lier Chemical acquired Jiangsu acquisition, on one hand, Noposion can gain a reliable Kuaida Agrochemical Co., Ltd. (Kuaida Agrochemical), source of pesticide technical and accelerate the industrial Lier Chemical’s main products are chloropyridines speed of pesticide formulations; on the other hand, serial and its product mix is single. At present, Kuaida this case has played a positive role in ensuring the CCM 6
  10. 10. China Agriculture Investment ExpressVol.1 Issue 01.11 pesticide technical supply and reducing the risk in raw material procurement. The pesticide product registration and product patents owned by Fujian Sino-dashing Bio-engineering Co., Ltd. Sino-dashing have great potential profitability. The purpose of Noposions acquisition of Sino-dashing is to further improve its national distribution base, to form a multi-brand company and to accelerate development. And the purpose of Noposions acquisition of Jinan Leeder Chemical Co., Ltd. Jinan Leeder Chemical is to further improve its product mix and accelerate the R&D, production and sale of herbicide products . Three distinct common features can be found from these M&A cases: first, both sides have strong complementarity in product species to meet each others demand from the upstream or downstream industry chains. Second, the target enterprise has some advantages in R&D; Third, listed companies can expand the market through off-site acquisition. However, some of the companies’ M&A aim at obtaining a new profit source or backdoor listing, such as the M&A between Zibo Hongda Mining Co., Ltd. (Zibo Hongda) and Shandong Huayang Science and Technology Co., Ltd. (Huayang Technology), Shandong Hualian Mining Co., Ltd. (Shandong Hualian) and Shandong Dacheng Pesticide Co., Ltd. (Shandong Dacheng). The M&A purpose of Zibo Hongda and Shandong Hualian is backdoor listing to gain access to the capital market financing platform while Huayang Technology and Shandong Dachang are to obtain a new profit source. No matter what purposes they have on earth, they are practicers of the M&A which is greatly encouraged by the authority. TABLE 2: Major Domestic M&A in Pesticide Industry, 2009-2011 Source: CCM International CCM 7
  11. 11. China Agriculture Investment ExpressVol.1 Issue 01.11 Company dynamic Shandong Kingenda seeks M&A O n April 26, 2011, Shandong Kingenta Ecological Engineering Co., Ltd. (Shandong Kingenta) Besides expansion, Shandong Kingenta is seeking for merger & acquisition targets, expecting to enlarge its released its operation performance in Q1 2011, production capacity within a short time. showing a 28.5% growth in net income year-on-year. As for the merger & acquisition targets, Shandong At present, Shandong Kingenta is the largest controlled Kingenta prefers nitrogenous or phosphate fertilizer release fertilizers (CRFs) producer in China, with the producers and compound fertilizer producers, according production capacity of 600,000t/a. to Shandong Kingenta. By 2010, China has been the largest production and Thats primarily because nitrogenous or phosphate consumption country of CRFs in the world, with the fertilizer is the main raw material of CRFs. Cooperating production capacity of about 2.5 million tonnes per with nitrogenous or phosphate fertilizer producers will year, composing nearly one third of the worlds total. help Shandong Kingenta to extend to the upstream to save production cost. And cooperating with compound However, CRFs output of 700,000 tonnes only takes up fertilizer producers will help Shandong Kingenta to 0.7% of the national total fertilizer output in 2010. Being strengthen the compound fertilizer production. gradually accepted by the government and farmers, development of CRFs is to witness a faster growth in the Meanwhile, Shandong Kingenta prefers to cooperate coming years. with companies in Shandong, Guangxi, Guangdong, Hunan, Hubei and Northeast China, which indicates In the Guiding Catalog of Industrial Structure that Shandong Kingenta aims to capture a larger market Adjustment (2011 edition), development of CRFs is share in these regions. classified as one of the encouraged items for the first time, which indicates that the development of CRFs will About Shandong Kingenta speed up during the 12th Five-Year Plan (2011-2015). Founded in 1998 and specialized in the R&D, To capture larger market share, Shandong Kingenta is manufacturing and marketing of compound fertilizers, to add investment to enlarge its production capacity, controlled release fertilizers (CRFs) and new types of including expansion and merger & acquisition. fertilizers, now Shandong Kingenta is the largest CRFs producer in China and the National Key High-tech In September 2010, Shandong Kingenta got listed on Enterprise. Shenzhen Stock Exchange to raise USD105.92 million (USD1=RMB6.74) for a new CRFs production line with In 2011, Shandong Kingenta has assets of USD674 capacity of 600,000t/a. When the new production million, nearly 3000 employees and holds 3.0 million t/ line launches in Sep. 2012, Shandong Kingentas CRFs a fertilizer production capacity. production capacity will be doubled. TABLE 3: Shandong Kingentas performance, 2009-Q1 2011, USD Note: USD1=RMB6.47 Source: CCM International CCM 8
  12. 12. China Agriculture Investment ExpressVol.1 Issue 01.11 COFCO further strengthens and expands wine market C OFCO Wine & Spirits Co., Ltd. (COFCO W&S), a subsidiary of China Oil & Foodstuffs Corporation Grape wine sector is just a part of the wine industry chain to COFCO W&S. In order to further expand (COFCO), respectively acquired Chateau de Viaud its business, COFCO W&S plans to enter the liquor in Feb. 2011 and four of the six fields and a winery sector. During 2009-2010, a succession of "rumors" of Bisquertt Vineyard in Sept. 2010. Chateau de have come out that COFCO W&S has negotiated the Viaud is a French wine producer in the Bordeaux cooperation matters with several national well-known Region, while Bisquertt Vineyard is one of the top ten liquor enterprises such as Guizhou Chun Liquor Factory winemakers in Chile. (Guizhou Chun), Shaanxi Bai Shui Du Kang Liquor Co., Ltd. (Bai Shui Du Kang) and Shaanxi Xifeng Alcohol From the two M&A activities, it can be found that Co., Ltd. (Xifeng Alcohol). Though some confirmed COFCO mainly focuses on productive assets like negotiations (with Guizhou Chun and Xifeng Alcohol) vineyards and wineries. It shows the companys were unsuccessful, it indicates the strong decision of determination to strengthen its ability to control the COFCO W&S to enter the liquor sector. upstream of grape wine industry and the distribution of grape resource worldwide. Meanwhile, its beneficial Though its not difficult for COFCO W&S to build a new for COFCO W&S to form a broad product mix under the liquor factory to achieve its goals, the cost of production tight supply of every quality grape in domestic market. and management will be much more expensive than directly acquiring well-known liquor enterprises. Thus, Besides, COFCO W&S will utilize foreign grape resources COFCO W&S took a series of actions in liquor industry. of high quality to launch a new brand of high-end grape However, theres something beyond the obvious. wine in order to consolidate its leading position in Actually, COFCO W&S hopes to not only perfect its domestic grape wine industry. And this will be helpful wine industry chain but also enter the high-end market for its entering the international market. In recent three of liquor industry via the M&A of well-known liquor years, the consumption market of high-end grape wine enterprises. This is all propelled by the high profit in has witnessed booming development with an annual high-end liquor industry. Its reported that the gross average growth rate of around 50%. Just depending on profit margin of many high-end liquor products exceeds the mid-end and low-end products is unfavorable to 70%. The margin of Kweichow Moutai Co., Ltd. (Moutai) COFCO W&S while competing with other leading grape even comes up to 90%; leading liquor enterprises gross wine enterprises in domestic market. Therefore, getting profit margins in domestic market have always kept an high profit ratio and improving competitiveness are the average growth rate of around 30% in recent years. key purposes for COFCOs active launches of M&A in grape wine industry. Owing to the above reasons, COFCO W&S wont give up seeking for reasonable liquor wine partners to Moreover, taking over the two foreign vineyards favours achieve its goals. As to the grape wine sector, COFCO COFCO to learn the advanced experience in order to W&S declared in April 2011 that it will finish two M&A further promote the development of domestic grape of large vineyards in the US and Australia this year to wine business and enhance its international influence. strengthen its leading position in the first group in the world and further realize its strategic development. TABLE 4: M&A activities of COFCO W&S in grape wine industry, 2010-2011 Source: CCM International TABLE 5: Some of rumors about COFCO W&S intending to acquire liquor eterprises, 2009-2010 Source: CCM International CCM 9
  13. 13. China Agriculture Investment ExpressVol.1 Issue 01.11 Bright Food shows ambition in domestic and overseas M&A A s a large conglomerate in Chinas food industry, Bright Food (Group) Co., Ltd. (Bright Food) has To lay a global resource network and get high-quality been carrying out M&A since 2010 after integrating resources, Bright Dairy & Food Co., Ltd. (Bright Dairy), its inner assets in 2009. It indicates the companys a subsidiary of Bright Food, is actively finding suitable ambition of business expansion even thought the overseas investees. It invests in overseas companies results are barely satisfactory—only one of the five because there are few excellent dairy companies left overseas M&A gets successful, while the rest ends in after several integration in the dairy industry after the failure. 2008 melamine scandal, and high-quality raw milk is limited in China, while the price of imported premium Bright Foods launching large-scale M&A in 2010 is milk powder is relatively low. In Oct. 2010, Bright not a whim but an overall consideration to extend its Dairy successfully bought the 51% shares of Synlait food industrial chain from planting to sales of end Milk Limited (Synlait Milk), recording a big step for its products as well as ensure its leading position in food internationalization. Now it can provide high-end infant industry. Through M&A in different industries, it hopes formula for domestic customers with the help of foreign to achieve full food industrial chain, make full use of the bases of high-quality raw milk. Synlait Milk is one of the high-quality resources of companies it merges, establish suppliers of high value-added milk power worldwide, extensive sales networks in the world and enter the through the share purchase Bright Food sets foot in high-end market to get high profit in food industry. It high-end products and upstream resource industry. can be found that Bright Foods six M&A from 2010 Though its attempt to acquire the French company to now are all related to its core business and target Yoplait in March 2011 failed, it should not prevent resource-intensive enterprises. Bright Foods strategy of getting resources by capital methods. In 2009, Bright Food purchased 60% shares of Yunnan Yinmore Sugar Co., Ltd. (Yunnan Yinmore). This deal Besides, Bright Food expects to acquire global leading promoted Bright Foods sales volume of sugar to reach enterprises to smoothly enter overseas high-end food 2.1 million tonnes and sales revenue beyond USD1.5 market. It hoped to enter overseas high-end food market billion (RMB10 billion) that year. Also, it helps the by acquiring the world-largest producer of vitamins and company extend sales networks of sugar to Northeast health products in the US—General Nutrition Centres, China and Northwest China and obtain a market share Inc. who owns around 7,100 stores worldwide, and up to 18% in domestic market. The successful in this made full use of the latters global sales network, but M&A further strengthens Bright Foods leading position finally gave it up. in China and makes it the largest sugar producer and marketer. Bright Food gets some advantages to successfully launch M&A. Firstly, as the largest food group in Its reported that Bright Food has early began to China at present and a state-owned enterprise, Bright prepare for the acquisition of sugar enterprises in Food is easy to get financial and policy support from other countries worldwide, which indicates its interest government and strive for external financial support. in foods upstream industry. Given the success in its Secondly, Bright Foods food industrial chain is acquisition of CSR Limited (CSR) in 2010, Bright Food relatively complete, which is helpful for it to utilize and would have got 45% of CSRs capacity of raw sugar in integrate external resources to optimize own resource Australia and become one of the top three players in advantages. Also, Bright Foods advanced management sugar industry in the world, but it failed. and organization level is beneficial for it to merge domestic enterprises. The same situation also happened in wine industry and rice industry. Bright Food enters liquor industry after However, the failure in some M&A also expose its merging Sichuan Quanxing Distillery Co., Ltd. (Sichuan disadvantages. First of all, lacking experiences in M&A Quanxing). Its reported that Bright Food is also seeking makes it stand in a weak position while competing with for wine resource in Australia. As to rice industry, leading investors around the world. Secondly, lower Bright Rice Co., Ltd. (Bright Rice), a subsidiary of management and technology level compared with global Bright Food, is ready to change its current self-sufficient leading enterprises is another reason for its failure. production mode to a market-oriented one after large- Thirdly, owing to language barrier, background and scale restructuring in 2010, and M&A will be the main cultural difference, its rare for East Asia countries to channel to achieve its goal. At present, Bright Rice succeed in merging Euro-American enterprises; even has been looking for partners in Anhui Province and Bright Food cant be exempted. northern Jiangsu Province to negotiate its purchase of their rice assets, laying the foundation for its future full Though most of its M&A carried out from 2010 are food industrial chain. declared to be a failure, Bright Food wont stop its M&A CCM 10
  14. 14. China Agriculture Investment ExpressVol.1 Issue 01.11 steps. Bright Food expresses its development directions on 19th January, 2011 that it will continuously take M&A as an important measure to realize the growth targets. Its said that a series of M&A are being actively promoted in wine, dairy product, sugar and health product industry. TABLE 6: M&A cases of Bright Food, 2009-2011 Source: CCM International Longping High-Tech: road to industry consolidation I n April 2011, Longping High-Tech has purchased 28% shares of Sichuan Longping, starting to solve firm determination of the administrators to develop Longping High-Tech. the problem of minority shareholders on the road to achieve industry consolidation. On 18 April 2011, the State Council Meeting discussed and approved the Suggestions for Accelerating On 15 April 2011, Yuan Longping High-Tech Agriculture Development of Modern Crop Seed Industry (the Co., Ltd. (Longping High-Tech) said it will purchase Suggestions). It emphasized that China must: adhere to 28% equities of Sichuan Longping High-Tech Seeds the integration of crop seed industry resources; improve Co., Ltd. (Sichuan Longping) with USD8.27 million. the support of policy and investment; rapidly enhance After the transaction was completed successfully, the technological innovation capability in crop seed Longping High-Tech became the largest shareholder industry, the competitiveness of enterprises, the seed of Sichuan Longping, holding 80% of its total equities. supply capability and the supervision of the market; Longping High-Tech expresses that the purpose of this construct an integrated morden crop seed industry purchase is to gradually increase its holding proportion system. of subsidiaries and to achieve industry consolidation progressively. Longping High-Techs superiority, on one hand is to set a high technical barrier, on the other hand is expected Shareholders of Sichuan Longping before the purchase: to become the focus of national policy support. In 2011, Longping High-Tech held 52% shares, individual it has frequently taken some actions in rationalizing the shareholder Liao Peizhong held 30% shares and equity relationship and the industry. individual shareholder Huang Weicui held 18% shares. In Feb. 2011, Longping High-Tech revealed that the Shareholders of Sichuan Longping after the purchase: equities of Changsha Xindaxin Weimai Agriculture Longping High-Tech holds 80% shares and individual Co., Ltd. (Xindaxin Weimai), the largest shareholder of shareholder Liao Peizhong holds 20% shares. Longping Hing-Tech, would be transferred. Vilmorin Hong Kong Limited (VHK), the second largest All along, Longping High-Tech holds low-percentage shareholder of Xindaxin Weimai and a subsidiary of equity in its five subsidiaries which earn more profits. Vilmorin & Cie, would sell its shares of Xindaxin Weimai In these five subsidiaries, a minority of shareholders to Hunan Xindaxin Co., Ltd. (Xindaxin), and after hold a large proportion of shares and the profits this is finished, the share structure of these companies are concentrated in the hands of the subsidiaries would be greatly changed. Xindaxin has become the sole supervisors. It resulted in the net profit outflow of shareholder of Xindaxin Weimai. And then, Xindaxin Longping High-Tech, whats worse, many operations Weimai has been transformed from a Sino-foreign joint couldn’t meet the requirements of the head office, and venture into a domestic company. Prior to that, because thus the company failed to form a scale economy. It is of VHKs foreign background, Longping High-Tech is a widely believed that, Longping High-Techs expansion Sino-foreign joint venture, which makes it hard to enjoy of its equity in Sichuan Longping this time means great the policy support. After the transfer of its shareholder significance for Longping High-Tech to build a bigger equities, Longping High-Tech has been changed into a seed group; it is just the beginning of Longping High- domestic company, which qualifies the company to fully Techs internal assets reorganization. It also shows the enjoy the states policy support. Meanwhile, Longping CCM 11
  15. 15. China Agriculture Investment ExpressVol.1 Issue 01.11 High-Tech released a report on 10 Feb. 2011 saying that it had signed an agreement with VHK on 27 Jan. to set up a joint venture for the development of corn seed, wheat seed and its other seed business. FIGURE 3: Shareholders of Sichuan Longping before the FIGURE 4: Shareholders of Sichuan Longping after the purchase, 2011 purchase, 2011 Source: CCM International Source: CCM International China BlueChemical to strengthen profitability through acquisition C hina BlueChemical Ltd. (CBC) benefits from its acquisitions TABLE 7: China BlueChemicals acquisitions, 2006-2010 within value chain. Now, China BlueChemical Ltd. (CBC) has become one of the largest fertilizer producers in China, mainly by mergers and acquisitions to expand its production capacity and enrich its product mix. Before 2006, CBC only operated urea capacity of 1.32 million tonnes per year, while it expanded its urea capacity to 1.84 million tonnes per year after acquiring Inner MongoliaTianye Chemical (Group) Co., Ltd. in March 2006. And CBC has been successfully engaged in phosphate fertilizer production by acquiring Hubei Dayukou Chemical Co., Ltd. (DYK Chemical) in Feb. 2009. In more detail, CBC has achieved not only capacity expansion but also expansion within value chain to consolidate its competitiveness. Leveraging on the acquired phosphorus ore (ZHJ Mining) and coal (Huahe Chemical) resources for Note: * means acquired by China National Offshore Oil Corporation (CNOOC), the parent constructing vertically integrated company of CBC. Source: CCM International phosphorus fertilizer and coal-based Primarily thanks to a series of acquisitions, CBC has urea production bases, CBC will be able to keep its gained high profits for six years. competitiveness in low cost. And the acquisition of Guangxi Fudao AMP helps CBC to cut distribution cost In 2011, CBC is to seek merger and acquisition and capture larger market share. opportunities that match its development strategies both in China and overseas. CCM 12
  16. 16. China Agriculture Investment ExpressVol.1 Issue 01.11 CBC aims to become the largest chemical fertilizer manufacturer and the most effective resources-processing enterprise in domestic chemical industry, and it has also geared up for competing in the international market. TABLE 8: China BlueChemicals performance, 2005-2010, million USD Note: On 28 Feb. 2009, CBC acquired 83.17% and 100% equity interest of DYK Chemical and ZHJ Mining respectively. As the three parities are all ultimately controlled by CNOOC before and after the acquisition, CBC chose to refer to the principles set out in Accounting Guideline when preparing the consolidated financial statements as if the acquisition had occurred from the date when the combining entities first came under the control of CNOOC, and the consideration was regarded as the deemed distribution to CNOOC, thus restarted the 2008 consolidated financial statements. USD1=RMB6.47 Source: China BlueChemicals Report Price update Agricultural products In the near future, the market price of corn will keep stable then experience an uptrend. The prices of five agricultural products and analysis in June, 2011, including wheat, corn, soybean, rapeseed, -- Soybean peanut. During the first five months of 2011, the total import of -- Wheat Chinese corn fell 1% to 1,941 million tonnes compared with August to Dec. of 2010. On one hand, the During the period from May 2010 to June 2010, price dealers are now spending the inventory; on the other of wheat kept stable. And it is expected to steadily rise hand, driven by the influence of pig disease and the in the next half of this year and the increase rate will weather, the filling of pigs has been put off so that the not surpass 5%. consumption of soybean did not see increase. The purchase process of winter wheat has been In the near future, the price of soybean is anticipated to simplified this year and the market prospect is good. see little change. -- Corn -- Rapeseed At present, domestic price of corn kept stable. The price The planting area of rapeseed has been reduced this in both northeast China and North China was at a high year compared with last year and the growth period of level, and it slightly increased in southern China owing rapeseed was also affected by cold weather and spring to the intense market demand. drought, leading to a decline in total output of rapeseed. Therefore, since the rapeseed has been on the market, CCM 13
  17. 17. China Agriculture Investment ExpressVol.1 Issue 01.11 the price of rapeseed has been generally high with the Price of agricultural products in China, 24 June, 2011 growing planting cost. In the near future, the price of rapeseed will still maintain high level. -- Peanut In 2011, the planting situation of peanut is not optimistic, leading the price to easily rise. In May 2011, the price of peanut is rising sharply. In the near future, the price of peanut will rise due to the tight market supply. Source: CCM International Agrochemical Agrochemical price review and analysis in June 2011, including fungicide, insecticide, herbicide and key raw material. Market price of main pesticides in China in June 2011 Source: CCM International -- Fungicide market In June 2011, prices of fungicide products have kept stable generally. The current price of carbendazim and mancozeb are USD5410/t, USD3,794/t separately. Due to the shortage of raw materials, the reduction of manufacturers and the increasing foreign demand, the price of tebuconazole technical is up to USD13,377/t, while it was USD12,896/t in May 2011. CCM 14
  18. 18. China Agriculture Investment ExpressVol.1 Issue 01.11 -- Insecticide market In June 2011, prices of insecticide products have kept stable generally. The price of lambda-cyhalothrin technical has been staying at USD28,594/t. The price of abamectin technical remains at USD86,553/t while the price of chlorpyrifos keeps stable at USD5,873/t. Due to the reduction in the manufacturer number and the increase in government purchase orders. The price of Imidacloprid technical is reported to up to USD17,774/t from USD17,692/t in May 2011. -- Herbicide market In June 2011, prices of herbicide products have also kept stable generally. The price of paraquat is USD2,161/t. The price of pendimethalin has dropped to USD7,679/t, and that of the nicosulfuron remains at USD31,635/t. Due to the high production cost and depressed market, the price of glyphosate technical has declined slightly to USD3,369/ t from USD3,460/t in May 2011. Market price of some key raw materials in China in June 2011 Source: CCM International -- Raw material market In June 2011, the prices of raw materials have witnessed an overall increase. Attributed to the higher operating rate of yellow phosphorus and the prosperity of the downstream demand, the price of yellow phosphorus has increased to USD2,318/t in June 2011. In this period, the market price of ethylenediamine is USD7,960/t, and the price of pyridine remains at USD4,482/t. Food Price of sugar by regions in China, 24 June 2011 The prices of five food products and analysis in June, 2011, including sugar, peanut oil, soybean oil, rapeseed oil and raw milk. -- Sugar Because the production of sugar is limited by the seasons, and now it is the time for the growth of sugar cane and beet and every sugar enterprises have small inventory. The average price is USD10.55 higher than in 24th May and the price of sugar may increase in the next few months from this time on, which is predictedly driven by the strong consumption in summer. Source: CCM International CCM 15
  19. 19. China Agriculture Investment ExpressVol.1 Issue 01.11 However, as the government has kept putting a oil. The government turns to purchase rapeseed to considerable amount of reserve sugar into the market fullfill stock instead of selling rapeseed oil on 7th June, since early 2011, for example on 31st May, it put 2011. 250,000 tonnes on the market, the price of sugar will not increase in a large range. Therefore, the price of rapeseed oil will also post increase in the future. -- Grain oil Mainstream price of several grain oil in China, 24 June 2011 -- Raw milk In Q1 and Q2 in 2011, the price of raw milk kept relatively stable but witnessed a slight decrease in Q2. This is because usually Q2 and Q3 is the peak production season for raw milk and the supply is sufficient. Owing to the impact from reauditing the production licenses of dairy enterprises by related departments, part of small enterprises have to stop the Source: CCM International dairy production, which leads to the decline in demand for raw milk. Therefore, the price of raw milk will drop accordingly in a short time. Owing to peanut oils higher price than other grain oils and bleak market demand, the volume of market Average price of raw milk in China, Jan.-May 2011 transaction was limited in the past months. Its estimated that the trend will continue in the next few months. Therefore, the price of peanut oil will stay stable because of the rigid demand. The price of soybean oil may not take an uptrend in the next few months. Because the supply of soybean is sufficient for the market demand. The governments measure on limiting price of small packing soybean oil may not end in the next few weeks, so it may prevent the price from rising to some extent. Moreover, the Source: CCM International strong demand for soybean meal, which consumes more soybean than soybean oil, may also drive soybean oils price to rise. Owing to the high cost of rapeseed planting and declining profit for farmers, the planting area of rapeseed is dropping. The insufficient supply for rapeseed may expectedly push up the price of rapeseed CCM 16
  20. 20. Journalist: Zaoqun Chen, Bang Deng, Rongli WeiEditor: Emma ChenChief Editor: Norman Lai, Hongxiang DuPublisher: CCM International LimitedDisclaimer:1. CCM guarantees that the information contained in the report is accurate and reliable tothe best of its knowledge and its experience. CCM defines the report as a consulting productto provide information and does not guarantee its content 100% equals the reality. CCMshall not have any obligations to assume any possible damages or consequences that causedby subscribers any corporate decisions that related to subscribers own understanding andutilization of the report.2. Single User License means that there shall be only ONE person for subscribers to receive,access and utilize the report. Subscribers can present the findings of the report that marked thesource from CCM to their internal colleagues for their internal communication and usage, butcannot share the whole report to the same audience. Any distribution, re-sell and disclosureof the report as well as its partial content to any third party are prohibited for subscribers,including but not limited to their parent companies or subsidiaries.3. Corporate License means that subscribers shall not distribute, re-sell or disclose the report toany third party without CCMs prior written consent, except to subscribers affiliates controlledby the subscribers with ownership of more than 50% of shares.If you have ANY questions on the report, please feel free to contact us through the ways listedbelow. Any comments from you is well appreciated.CCM International LimitedAddress: 17th Floor, Huihua Commercial & Trade Building, No.80 Xianlie ZhongRoad Guangzhou, 510070, P.R.ChinaTel: +86-20-37616606Fax: +86-20-37616968Email: