Agriculture Investment of JD: Opportunities Brought by Changes of Agricultural Industry
Sources: www.nzdb.com.cn (WeChat ID: nzdbwx)
The China Securities Regulatory Commission (CSRC) recently announced that the IPO application of Jiangsu Flag Chemical Industry Co., Ltd. (stock code: 831223) was approved by the Issuance Examination Committee (IEC) and Jiangsu Flag Chemical would soon go public at the Shenzhen Stock Exchange. This marked that another agricultural corporation funded by JD Capital’s subsidiaries was to enter the capital market. So far, JD Capital has invested in over 30 agricultural projects covering multiple segments such as chemical fertilizers, seeds, pesticides, breeding, produce processing etc. The companies JD Capital invested in include Huifeng Agrochemical, Limin Chemical, Nantong CAC, Shandong Luba, Sword Agrochemicals, Guangxi Tianyuan, Zhongxun Agri-science, Harvin Chemical, Golden Elephant Sincerity Chemical, Hoping Seeds, Zhongmian Seed Technologies, Gifore Agricultural Machinery, Zhongxing Bio-technology, and Beiwang Agro-pastoral.
Head of agriculture investment team from JD Capital said that JD Capital mainly invested in bellwethers that boasted strong R&D strength, economies of scale and channel advantages. Among the agricultural companies JD Capital invests in, four are A-share listed companies, another one company’s IPO application has been approved by CSRC’s IEC and some are waiting for IPO. The Head also mentioned that large-scale production and consumption upgrading would become the two driving forces for China’s agriculture and JD Capital’s future investments would center on these two themes.
Two engines driving China’s agricultural transformation
JD Capital’s agriculture investment team indicated that “China’s agriculture is experiencing tremendous changes. The two groups of people in agriculture, namely the producers and the consumers, are changing gradually and substantively. The interactions between the changes in the two groups will bring a series of opportunities in China’s agricultural industry.”
In terms of changes in agricultural producers, the model of small-scale peasant economy lasting several thousand years in China is to expected to transform. Large-scale and professional agricultural production will be the future, leading to changes along the entire value chain ranging from agricultural inputs, production to processing and circulation. As for changes of consumers, the rise of middle class and changes in Chinese consumption structure and habits will exert profound influences over China’s agriculture.
Considering the transformation trends of producers and consumers, JD Capital divides China’s agriculture into two stages, i.e. “Agriculture China 1.0” and “Agriculture China 2.0”. The former is dominated by small-scale peasant economy and features extensive growth while the latter will be driven by the two engines of “large-scale production” and “consumption upgrading”.
In light of these two transformation trends, JD Capital has invested in over 30 agricultural projects covering multiple segments such as chemical fertilizers, seeds, pesticides, breeding, produce processing, etc.
Agriculture China 1.0
The stage of extensive growth under small-scale peasant economy
Agriculture is the foundation of national economy and grain is a fundamental part of agriculture. During the agriculture 1.0 stage, China had given top priority to feeding 1.3bn Chinese (accounting for 22% of the world population) with only 7% cultivated land in the world. Thus, increasing agricultural output was of paramount significance. The government made efforts to increase grain output continuously through favorable policies of raising price of agricultural product purchase and storage, granting agricultural machinery subsidies and offering tax exemptions, in a way to secure the supply of main produces.
Under this circumstance, rapid development had been witnessed in China’s agricultural chemistry, agricultural machinery and many other aspects. China’s grain output had been increasing for twelve consecutive years. A batch of bellwethers in the segments of chemical fertilizers, pesticides, seeds and agriculture emerged and showed great growth potential.
The team also remarked that “JD Capital made many investments in agricultural projects during Agricultural China 1.0 stage, focusing on bellwethers that boasted strong R&D strength, economies of scale and channel advantages. Many companies delivered an annual growth rate of more than 20% with JD’s investment.” So far, JD Capital has invested in nearly ten pesticide companies, all of which are leading players in the segment.
JD Capital remarked that “the total operating revenue of pesticide companies we invest in takes up 10% of that of China’s pesticide sector as a whole; and the products by these companies range from herbicides, insecticides to bactericides.” Among these companies, many are segmental leaders. For instance, Limin Chemical is China’s biggest carmazine producer; Nantong CAC is China’s biggest 2,4-D herbicide producer; Huifeng Agrochemical is the largest global prochloraz bactericide manufacturer; Guangxi Tianyuan is China’s second largest pesticide preparations producer; Shandong Luba is China’s second biggest paraquat herbicide producer and Sword Agrochemicals is a leading triazole fungicide producer in China.
JD Capital has also invested in leading chemical fertilizer companies such as Harvin Chemical and Golden Elephant Sincerity Chemical, and bellwethers in the seed sector such as Hoping Seeds and Zhongmian Seed Technologies. JD Capital is the investor of Gifore Agricultural Machinery, China’s largest agricultural machinery company franchise and one of the first-batch companies listed on the second board.
JD Capital makes its share of contribution to the development of agricultural modernization in China as an equity investment organization. Meanwhile, it has created hefty returns for investors. Among the invested agricultural companies, four are A-share listed companies, another one company’s IPO application has been approved by CSRC’s IEC and some are waiting for IPO.
Agriculture China 2.0
Large-scale production + consumption upgrading
Despite the rapid growth during the agriculture 1.0 stage, there are still many problems cannot afford to be ignored in China’s agricultural industry. The small-scale peasant economy lasted several thousand years in China, and for a long time the cultivated land owned by Chinese agricultural laborers per capita was only 1/140 of that in the US. China’s agricultural production was of small scale and low profitability. Peasant households tend to take farming as their parergon. The agricultural production is managed in an extensive way and the excessive use of fertilizers and pesticides is commonly seen.
The extremely scattered agricultural production model makes the circulation channels of agricultural materials fragmented. JD Capital’s agriculture investment team said that “it is common to find hundreds of brands of agricultural materials in one single township, for there are always 40-50 agricultural material retail stores, each store having several brands. The highly segmented channels lead to a fragmented landscape for upstream agricultural material producers.” Taking the pesticide sector as an example, top five global pesticide players take up 63% market share (vs. 11% market share held by China’s top five pesticide companies in domestic counterpart market). Low industrial concentration is also the culprit of many problems in China’s agricultural material companies such as small scales, weak R&D strength and disordered competition.
“So to speak, large-scale production and consumption upgrade will become the two driving forces for China’s agriculture and JD Capital’s future investments will center on these two themes.”
The trend of large-scale production
Since 2000, 15mn people move from villages to cities in China every year. As of 2015, China’s urbanization rate had reached 58%. “The urbanization rate of developed countries is 70%~80%, suggesting that a gap still remains between China and the developed in this aspect.” The team thus believes that the rate will continue to increase. Influenced by urbanization and aging population, China’s rural labor force has been dwindling as labor force costs keeping raising. Rural land circulation (or the transfer of the land-use right) is expected to speed up. Besides, such new-style agricultural operators as household farms, expert growers, cooperatives, industrial bellwethers and etc. will emerge in batches.
The production modes of these new agricultural practitioners will be different from the conventional ones. After large-scale operation is introduced, more machines and equipment will be adopted to reduce the labor cost of farming. Operators are to accelerate the usage of information, thus contributing to the development of smart agriculture. JD Capital believes that agricultural production will transform from labor intensive to capital and technology intensive and Chinese farmers will become more professional.
The changes in operators will also lead to the changes in the entire agricultural service system. The team said that “new agricultural operators will be more rational about the input-output ratio and pay greater attention to agricultural material costs. They will also expect more of the comprehensive services offered by agricultural materials companies. Besides, as more and more agricultural households are moving away from rural areas, a large number of agricultural material dealers will stop their businesses, contributing to the consolidation of agricultural materials channels and upstream producers. Dealers and producers without technology and cost advantages or failing to provide satisfying services will be eliminated. The agricultural material industry would thus become more concentrated. Some outstanding agricultural material players should develop into comprehensive service providers onwards, offering farmers complete solutions and realizing leapfrog development through M&A.”
Therefore, JD Capital, together with leading players that have strong R&D strength, large scales, advantageous channels and good services, is promoting the consolidation of the agricultural material sector through M&A and by virtue of capital market’s strength. “Agriculture plays an important role in China. We believe that, among our investees, there must will be some world class agricultural brands, just like Monsanto, Sygenta and Agrium.”
The trend of consumption upgrading
China’s GDP per capita reached US$3,000 and >US$ 7,000 in 2008 and 2014, respectively. According to Credit Suisse’s report in 2015, the number of Chinese middle class amounted to 109mn. A new consumption group represented by the middle class is emerging, with their consumption structure and habit very different from that of traditional consumers, which could thus exert profound influence on China’s agriculture.
“The percentage of rice, noodles and edible oils in Chinese diet consumption is descending while that of meat, eggs, milk, fruits and vegetables tends to ascend. This will boost the development of breeding and fruits & vegetable planting industry in China as well as the demand for cold chain logistics,” as remarked by JD Capital, “In order to seize the development opportunity of the breeding industry, we invested in Xinxin Livestock, Jiahe Agricultural Stockbreeding and other leading companies, and established an Rmb20bn logistics industry investment fund with HNA Logistics for the investment in cold chain logistics and other logistics segments.”
As the middle-class consumers attach more importance to food safety, organic agriculture is to embrace great development opportunities. In 2015, JD Capital took stake in Beiwang Food. Mainly engaged in the production of organic pork products, Beiwang Food boasts many pig breeding centers, cold chain distribution networks and service systems in many cities. “It is our belief that Beiwang Food will enjoy stellar growth prospects thanks to its strong supply chain management expertise as well as outstanding sales network and marketing management.” In addition to providing investments, JD Capital helps its investees establish new production centers and nationwide sales networks.
“Consumers might not be familiar with JD Capital, but JD Capital is prevalent in consumers’ life. Every rice, vegetable and meat might be the product of our investees,” the team said, “The agricultural industry might witness more changes than any other industries in China over the next few decades. Big changes always bring about tremendous opportunities. JD Capital will continue to work on the industry to seize opportunities driven by large-scale production and consumption upgrading, work with leading players to promote industrial transformation and development, and bring greater investment returns for our investors.”