Why to Invest 5 Pesticide Companies Sequentially?
2010-08-20
Recently, Jiuding Capital has completed a new investment in Huizhou Zhongxun Chemical Engineering Co., Ltd., a leading pesticide preparation manufacturer in China. So far, Jiuding Capital has invested 5 companies specializing in pesticide preparations, including Jiangsu Huifeng Agrochemical Co., Ltd, Guangxi Tianyuan Biochemistry Co., Ltd., Limin Chemical Co., Ltd. and Jiangsu Flag Chemical Industry Co., Ltd.
We have made five precise and intensive investments in the pesticide market in short time period, showing that our professional operating capability.
Based on Reverse Thinking
Why do we decide to invest five pesticide companies? We have made mature consideration on all aspects of investment before making decisions.
Undoubtedly, the pesticide market is not the one that grows fast, with small market volume, about tens of billions yuan, so that few PE investors show their interest in it. However, we hold different views. In terms of methodology, we believe that investment needs reverse thinking sometimes, that is, the market which is ignored by others may have a good opportunity for money-making.
Accordingly, Jiuding Capital made a close study on the pesticide market, finding that the modern agriculture has a rigid demand on pesticides and China has took special position in the global market. Favorable conditions such as concentration of landholdings, labor flow, policy support are available in China. Besides, the market has been not dominated by traditional state-owned enterprises any more and its industrial structure is very loose. All above conditions have created a lot of opportunities for investment.
So, we have decided to have access to it.
Our team took the initiative after we made our decision and started to screen qualified investment targets in a great scope.
It is a great challenge for China’s PE companies to find appropriate projects. It is not an easy job to make “proactive investment” in China’s pesticide market as it is not only very professional but very scattered.
Li Weijin, in charge of Jiuding Capital pesticide project, has become an expert of pesticide based on his knowledge accumulated for a long time. We selected our investment targets from about 3000 standard enterprises in China.
At the beginning, we did a thorough research on each project. After that, we changed our way of thinking and started from learning basic knowledge on pesticides. In no time, Li Weijin and his team collected industrial yearbooks, periodicals and even textbooks and worked hard to fix them. We are all aware that we have no basis for dialogue with pesticide companies if we know nothing about the pesticide industry.
Besides, our pesticide team uses every single opportunity to make close contact with pesticide companies. We always directly participate the professional exhibitions, lectures and forums instead of receiving business plans at the investment matching meetings. In recent years, Li Weijin attended China International Agrochemical & Crop Protection Exhibition in Shanghai and the industrial conferences held by China Crop Protection Industry Association. When he passed by some stores that sold pesticides on his business trip, he always stopped to visit them and had a free chat with storekeepers. Accordingly, he has gathered a large amount of first-hand information.
After hard work of Li Weijin and his team members, databases respectively for the pesticide industry, the database for category of pesticides and the database for pesticide enterprise information have been set up. Based their research and hard work, the team has visited pesticide enterprises who can make net profits of more than 200 million yuan. After hard study, our pesticide team members can communicate with pesticide enterprises well, and even are treated as their best friends. The more we know, the more effective information we get from communication. Over time, a virtuous circle has been formed based on continuous accumulation, which helps us to find outstanding enterprises with investment value.
Lay out the Industrial Chain
There are six leading pesticide enterprises universally acknowledged in the world, Dow AgroSciences, Dupont, and Monsanto in U.S., BASF and Bayer in German and Syngenta in Switzerland. There are still some enterprises at the same scale but not comparable to the above six because the former solidly hold the two end of the whole chain and almost monopolize research and development of all new pesticides, with a market share of about 85%.
After research, we find that development of new pesticides and building of the terminal network, both of which will cost a lot in a short time, are not consistent with development level of the domestic pesticide enterprises. However, extending their industrial chain is still the key factor to succeed. Based on this, the basic requirement of Jiuding Capital on investment is that the company has built its competitive, outstanding advantage for one variety or in one field, with some characteristics in the industrial chain and sustainable development capabilities. One of our investment direction is that we will select the companies with characteristics in the pesticide industry chain.
Limin Chemical Co., Ltd., located in Xinyi, Jiangsu, is the company we want to invest. Although overcapacity of herbicides and insecticides is rife, but it is still committed to research and development of insecticide, and now has been the largest manufacturer of farm-oriented insecticides in China, even in Asia, with its products recognized by multinational corporations and sold in all the five continents of the world.
It still has occupied a special position in the chain, with the production level of bactericides such as mancozeb at the top level in the world. It has been the first choice of multinational corporations to cooperate. Besides, it is committed to developing its overseas sales network. Not only it has spent a lot in registering its products in other countries but also has built its own branded sales network in East Africa and North Africa. Therefore, it had great performance in 2009 though the whole industry was in depression. We very much agree its global vision.
Relative to production, what domestic enterprises lack is the capabilities of development and research and marketing. However, Jiangsu Flag Chemical Industry Co., Ltd. is an exception. Since founded only 5 years, it has registered the largest amount of active compounds in China, most of which are original and registered by it exclusively in China. Not only does Pesticide registration cost a lot but also consumes time. It usually takes three or five years to make preparation for it. What is Jiangsu Flag Chemical Industry Co., Ltd. spends several years to get is a strategic asset.
Guangxi Tianyuan Biochemistry Co., Ltd. is the marketing guru highly recognized in the pesticide preparation industry as well as the absolute leader in the rice market. What is its most important advantage is that it has built a nationwide, high-density sales network which almost covers all terminal markets. No other active compound enterprise can do this. However, as a pesticide preparation enterprise, it can not have so many varieties as Jiangsu Flag Chemical Industry Co., Ltd. in a short time.
There is no pesticide enterprise in China with its research and development, production and sales all reaching the top level. However, Jiuding Capital may choose the best in each field. Now, Jiuding Capital has invested in two segments, active compound and pesticide preparation, involved in all stages from research on synthesis path to sales terminals. The companies mentioned above can complement one another very well. If possible, we will certainly make contribution to win-win cooperation among them.
Cultivate the leader for industrial integration
Jiuding Capital focuses on market performance of the variety of the company to invest, but also pays more attention to the unique capabilities the management team has. For example, Jiangsu Huifeng Agrochemical Co., Ltd. which has been the largest manufacturer of prochloraz in the world before invested, has occupied the dominant position for many varieties after two years of development, with its net profits increasing from less than 40 million yuan in 2007 to 112 million yuan in 2009. It has grown into a leader from nobody.
The great-leap-forward development of the company invested shows that what we invest is not only money. One of the most important investment ideas is that we never invest those that only feel satisfied with our financial strength as we believe that what is the most valuable is the value-added services after investment.
Li Weijin has been an expert in the pesticide field. Under his leadership, his team members often visit the companies with the market information and the industrial trends event the investment has finished, and know their needs and work out solutions together. They also make many practical and efficient contributions to talent introduction, liability structure improvement, capitalized operation and implementation of mergers and acquisitions in order to enhance capabilities of development and research and sales.
Besides natural growth, what Jiuding Capital really expects is the company we invest can conduct industrial integration. Different from a majority of investment organizations, we always insist that that helping the company we invest to be listed is not a destination for investment but a starting , not an objective of development but an approach. Being listed is just a way to expand the financing channel and to build a platform for acquisition and integration. What Jiuding Capital wants to see is the company we invest is able to perform the industrial integration for deep development after listed.
Actually, the pesticide industry is on the way of integration. Since the financial crisis, many listed companies such as Lier Chemical Co., Ltd. and NOPOSION Corporation have started to grab the market by virtue of their capital advantages. We estimate that the integration will be strengthened and accelerated in the future as emerging private pesticide companies at home will enter into the capital market. We also estimate that the active compound sector will be divided up by twenty or thirty large enterprises with the market volume of more than 2 billion yuan. Besides NOPOSION Corporation, there must be other pesticide preparation companies with the annual sales volume of more than 1 billion yuan. We believe that pesticide companies we have invested will benefit from industrial integration in our joint effort.
(Edited by Zhongbin HU )