Jiuding Capital Invests 80 Million Yuan in Guangxi Tianyuan Biochemical
Hope in fields is the reflection of the hot VC investment among agricultural sectors.
Blue Ridge Capital and KPCB invested 30 million yuan in Jiangxi Tianren Ecology in the middle of last year. What’s more, Xinjiang Condy Agri-Genetics Co., Ltd., the largest seed company in Sinkiang, acquired 65.88 million yuan of venture capital in January.
In February 2009, Jiuding Capital invested 80 million yuan in Guangxi Tianyuan Biochemical Co., Ltd., the largest pesticide company in Southwest China.
Before that, Jiuding Capital has invested 30 million yuan and 70 million yuan in Qingdao Sanchuan Juice Co., Ltd. and Jiangsu Huifeng Agrochemical Co., Ltd. (the largest producer of prochloraz pesticide in Asia) respectively.
“Although we have invested in three agriculture-related companies, it doesn’t mean we only focus on agriculture.” Ren Yifei, Deputy Director of Investment Department of Jiuding Capital, told reporters.
There are lots of investment chances in the agricultural sector. Hence, Jiuding Capital puts 2 billion yuan in above three projects, accounting for 30% of the numbers of its total projects.
Ren Hongwei, Secretary of the Board of Tianyuan, told reporters that it’s not the right time to interview President Li Weiguo during such a sensitive period caused by some change of shareholders.
Pesticide’s Window Period
Agricultural investment can be dated back to the global food crisis.
Mentioned in Inventories of Agricultural Investment Chances in China released by ZeroIPOGroup in November 2008, the investment amount has been increased from 6.4 million US dollars in 2002 to 48 million US dollars in 2007 and 23 million US dollars in the first half of 2008.
Above-mentioned enterprises mainly focus on pre-production and after-production stages. Pre-production mostly includes seeds, fertilizers and machines and after-production includes machine processing. The businesses of Huifeng and Tianyuan are mainly concentrated on pre-production.
How large is the pesticide market in China?
According to figures from an analyst, the revenue of China’s pesticide industry was 108.8 billion yuan by November 2008, a year-on-year increase of 37% and the profits of 10.5 billion yuan, an increase of 119%.
As to pharmaceutical market, although there are no specific figures, the total revenue is estimated within 35-50 billion yuan, among which, the market revenue of paddy pesticides is approximate 20 billion yuan.
Jiuding Capital was seeking for other suitable companies after investing in Huifeng in last June.
Then, Tianyuan, a company specialized in paddy pesticide markets, was eyed on by Jiuding Capital.
Jiuding Capital successfully invested in Tianyuan in the third quarter last year, which can be taken as an industrial case for other investors. “We seek potential enterprises by their ranks.”
In pharmaceutical sector, NPS is the biggest listed company, next by Guangxi Tianyuan Biochemical Co., Ltd., Hailer Pesticides and Chemical Group and Jiangxi Zhengbang Chemical Co., Ltd.
“Besides NPS, we have contacted all other companies,” said Ren Yifei, “but only Tianyuan can meet our standards of investment returns and has the intention to cooperate with us.
Tianyuan, a larger pesticide company next to NPS, reached sales revenue of 800 million in 2008, very close to that of NPS’s 1 billion yuan.
Sales capacity is very important for pesticide companies. Tianyuan’s sales network has been expansible, which attracts us a lot.
Tianyuan sells products through rural capital services, rural capital stations and private channels like individuals. The sellers’ incomes on above platforms are increase by 30% and we will certainly earn more,” Said Ren Yifei.
Jiuding Capital began to investigate Tianyuan after contacting through a friend. It’s known that the PE ratio is within 6~7 times. “The investment price is not high and moderate,” Zhongyi ZHAO told reporters.
When Jiuding Capital contacted with Tianyuan, some institutions also showed their interest. The reason why we get the project is that both of the two companies have similar philosophy and Jiuding Capital is very effective in decision-making and fund transferring,” he said.
He also disclosed that 80 million yuan would be used to purchase pharmaceuticals, perfect sales networks and acquire similar enterprises.
Tianyuan to Catch up with Leading Enterprises
Ren Hongwei, Tianyuan’s Secretary of the Board, told reporters that the capital invested in Tianyuan will help them narrow the gap with industrial leading enterprise NPS.
Actually, Ren Hongwei, Ren Yifei and Zhongyi ZHAO subconsciously compare other pesticide companies with NPS.
In NPS’s Prospectus of 2008, its market share was 1.46%. After expansion and merging, the number is estimated to be 2.5%, and that of Tianyuan is 2%.
However, the two companies position differently: Tianyuan has focused on paddy markets and become China’s biggest paddy pesticide manufacture; NPS mainly focuses on commercial crops. The former mainly specializes in field crops and the varieties are less than that of NPS.
Tianyuan’s products have been involved in basic fields of pesticide pharmaceuticals. To sum up, Tianyuan’s product structure is as follows: 70% of total products are pesticides for field crops, 70% of the field crop pesticide for paddies, and 70% of paddies insecticides.
NPS has reached a growth rate exceeding 50% in three consecutive years after listed in Shenzhen Small & Medium Enterprise Board in 2008, while Tianyuan was increased rapidly, too. In 2001, the sales of Taiyuan were only 25% of NPS, but it reached almost 80% in 2008, a very rapid increase.
The market shares of the two companies will be further enlarged, because a series of policies about forbidden high-toxic pesticides, business approval, extension approval, production permit and product registration have been issued by Chinese government since 2007 to limit the survival conditions of small and medium pharmaceutical enterprises without any licenses.
Especially, the increase of the registration fees from previous thousands of yuan to current 500,000-600,000 yuan makes the sales of single products be increased significantly, which is very difficult for those SMEs to achieve.
According to statistics from ChinaCCM.com, more than 4,000 companies are capable of manufacturing pesticides, but only 2,200 have the three agricultural certificates, that is, Production License of Pesticide or Approval Documents, Pesticide Standard and Pesticide Registration Certificate. The market share of those seceded companies had been occupied by industrial top-ranked companies.
In future, the market share of the top 20 will remain at approximately 40%,” an analyst who focused on pesticide industry told the reporter.
Jiuding Capital also analyzed that the amounts of pharmaceuticals were never changed a lot in a short time and the demand on pesticides was fluctuated slightly. The fast increase of Tianyuan and NPS was caused by the structural adjustment, rather than the growth of whole industry.
Besides the two companies, a few companies also can achieve a 20%~30% of increase,” said Ren Yifei. Impacted by Chinese policies, the leading pesticide enterprises will have more chances than the SMEs.
After the industrial thresholds were highly improved, Tianyuan has begun to merger other companies for acquiring their agricultural certificates and fields, reducing competitions and sharing their brands, channels and background services. Tianyuan has acquired some small-sized pesticide manufacturers and research centers in Jiangxi, Henan, Tianjin, Guizhou, and so on. Previously, the production process of pesticide pharmaceuticals was not complex and the required capital amount was low, which brought chances for SMEs without certificates. However, the increase of registration fee and the prohibition of high-toxic pesticide limit their development and the industry’s window period appears.
The pesticide consumption per unit area in China is about 8.7 US dollars/hectares, approximately equal to 1/4 of the USA, 1/7 of Korea, 1/15 of France and 1/18 of Japan, so there is a still greater development space.
Analysts pointed out that the pharmaceutical companies can be stronger based on complete sales networks, effective deliveries and fund flows, and capital and technical support for downstream dealers.
In addition, the price fluctuation of upstream drugs of pharmaceutical companies can incur risks.
The proportion of NPS’s primary pesticide chemicals in its main business cost was 55.08%, 56.05% and 54.29% in 2005-2007.In the Prospectus, it’s mentioned that the price rise of primary chemicals in 2005 lead to a lower margin, but the drop of the price in 2006 and 2007 achieved a higher margin.
It’s also pointed out that pharmaceutical companies can avoid some losses by rising price due to the lower bargaining ability of peasants and purchasing primary chemicals in slack season.
Who We Are?
Jiuding Capital Co., Ltd., founded in 2007, was still unknown in spite of investing 5 projects in that year.
It began to be widely noted in 2008 after investing 6 projects worth tens of millions yuan, including Gold Cup Electric, Sanchuan Juice, Henan Billions Chemicals, Linoya Electronic and Tianyuan Biochemical.
With a staff of 20, Jiuding Capital is in possession of five-phased funds totaling 2 billion yuan, and has been engaged in Pre-IPO and long-term investment.
“When investing, safety and profit are what we focus on,” said Zhongyi ZHAO.
The 10 investment projects have very stable profitability, although growth is not very fast.
To some extent, this is because the field is the industry closely related to the life of human beings, including foods, drugs (pesticides), cosmetics, restaurants and retails and competitive recurrent product industries.
Taking Henan Billions Chemicals for example, it is a recurrent industry with low profits. The reason we invest in it is that it survived until the industry was in deep recession. As an exported-based company, it can still achieve a profit of more than 30 million yuan although the external environment was not good.
“The company will earn more when the market rebound periodically,” said Ren Yifei.
For Tianyuan, we think it is a high-growth company.
Jiuding Capital decides to invest in agricultural companies for several reasons:
1. Agricultural market is very huge and has spaces to grow and integrate.
2. The agricultural market has been controlled by state-owned enterprises before, but now it has changed. Small private enterprises could develop fast after being funded.
3. The rigid demands of most agricultural products ensure those enterprises un-impacted. Besides, most of its team members lived in rural areas, so they intend to contribute to agriculture.