Jiuding Capital Invested in Three Agricultural Companies and Agricultural Investment Warmed Up
2009-01-13
Influenced by global financial crisis and China’s mounting downward economic pressure, investment has become very riskier. Venture capital (VC) funds and private equity (PE) funds eyeing on heavily growing industries have begun to seek for safer investment fields. In this case, agriculture, as a traditional industry, has become a new focus of modern investment, which cannot be evaluated and assessed by investors in accordance with general industrial standards for its wide scope, high risk and great difference.
Jiuding Capital Co., Ltd. (hereinafter referred to as Jiuding Capital) devoted to China’s private equity business has made investments in agricultural industry before many well-known funds shifted their focus to this sector. Jiuding Capital’s Executive President Lei CAI said in an interview with Shanghai Securities News that Jiuding Capital invested almost 200 million yuan in three agricultural companies last year, which has exceeded 700 million yuan currently.
Jiuding Capital Invested almost 150 Million Yuan in Two Pesticide Companies
Ren Yifei, Deputy Director of Investment Department of Jiuding Capital, told reporters that Jiuding Capital, through its subsidiary Beijing Xiaqi Jiuding Investment Center, invested 70 million yuan in Jiangsu Huifeng Agrochemical Co., Ltd (Huifeng) last July. Located in Yancheng City of Jiangsu Province, Huifeng is China’s leading enterprise producing pesticides for genetically modified crops. Based on long-term cooperative relationships with many multinational corporations, Huifeng has become the biggest prochloraz and bromoxynil producer in Asia and a representative hidden champion among China’s pesticide industry. According to information, Huifeng achieved sales revenue of more than 400 million yuan in 2007 and over 1 billion yuan in 2008, and a profit of almost 100 million yuan the same year. Huifeng is under fast development now and plans to float on A-share market this year.
He thought, in spite of the very intense market competition (one product produced by a dozen of companies) among China’s pesticide active ingredient enterprises, Huifeng still has the following advantages: first, it can keep a reasonable profit and stable performance because of it having signed long-term agreements with foreign clients, among which, the appreciation of the yuan and the price fluctuation of active ingredients have been taken into account; secondly, preparation and active ingredient businesses have been developed both at home and abroad although its products are mainly sold overseas; thirdly, it has powerful assets and research capacity and strong cyclical-resistance capacity despite its small size.
Another pesticide company invested by Jiuding Capital is Southwest China’s largest pesticide enterprise. Jiuding Capital came to an agreement with that company last December, so no capital is injected yet and the company name cannot be revealed now. The company is known to achieve sales revenue (preparations) of 550 million yuan in 2007 and almost 800 million yuan in 2008. Jiuding Capital plans to invest about 70 million yuan in that company, accounting for 20% of its equity.
To get through the whole industrial chain to achieve value-added services seems to be Jiuding Capital’s target of pesticide investment. “The two investment projects can collaborate synergistically: Southwest Company can purchase active ingredients from Huifeng. The former company focuses on the nation-wide sales networks, powerful market teams and well-managed platforms, while the later values cost control highly. It is worth mentioning that we are eyeing on a pesticide enterprise engaged in upstream development. If the company can be successfully invested, we’ll own a whole industrial chain. If we do not invest those pesticide companies, the whole industrial chain cannot be integrated. It becomes easy under the drive of a shareholder,” said Director Ren.
Besides, Jiuding Capital is acting as the guide of capital market so as to assist itself in financing, loading, training and tax-planning in secondary markets. Jiuding Capital’s leading team members are from local securities companies and financial institutions, which is very good to impact local capital markets.
Jiuding Capital Invested 30 Million Yuan in Sanchuan Juice
Rizhao Sanchuan Juice Co., Ltd. (Sanchuan) is a true deep-processing agricultural company if the above-mentioned two companies are not real agricultural ones. Recently, Jiuding Capital has invested 30 million yuan in Sanchuan, accounting for 20% of its shares. Liu Jianping, Executive President of Jiuding Capital, thought unlike other juice companies, Sanchuan shall not be affected by inventories and price fall of juices because it has its own production bases in Shandong and Shaanxi, as well as a stable sales channel to be able to control cost.
Jiuding Capital said the good reputation of Sanchuan leader is the decisive reason of this investment. Li Zhongke, former General Manager of SDIC Zhonglu Juice Co., Ltd., has acted as President of Sanchuan since the middle of last year, which has been highly reputed among China’s concentrated juice sector and regarded as No. 1 Juice Person of China. He turned Zhonglu from a small plant into a large company and an A-shared list company. He expects Sanchuan will occupy Chinese market by launching Beilai apple juice previously exported abroad into China’s retail markets.
The insider thought it’s reasonable for Sanchuan to place the apple juices onto Chinese market because of the fall of foreign juice price.
More Industrial Segmentation, Safer “Two Ends”
Agriculture is really a large field comprised of many sub-industries. In production, it can be divided into before-production, in-production and after-production; in circulation, it can be divided into agricultural material circulation and agricultural product circulation, all of which can be subdivided into a great deal of industrial segmentation. We think there are huge investment opportunities among those segmentations on account of the low level of industrialization, marketization and specialization of agriculture in China.
Ren Yifei explained the reasons why Jiuding Capital made investment in above two pesticide companies. He said agricultural materials are mainly composed of seeds, fertilizers, pesticides and farm machinery. In terms of seed market, its capacities are constrained and eight powerful companies have been listed, so it’s not easy to find suitable investment objects. Farm machinery is durable consumer goods, which can only earn profits by market expansion. Moreover, fertilizer industry always suffers server competition due to few varieties and serious homogenization, so fertilizer enterprises have to compete on cost. However, China has a huge pesticide market and unique active ingredient export advantages on land, labor and environmental protection costs.
Some investment organizations found it’s not easy to find suitable projects as imagined although agricultural investment upsurges. It should be more precautious to invest in agricultural projects due to small-scale peasant economy and the risk of agricultural production.
What we are very bullish on are those agricultural enterprises with sound market mechanism and able to operate in accordance with industrial organization. We pay high attention to the two ends of agriculture. The two ends refer to the supporting service segments like pesticide, farm machinery, fertilizer and seed, and after-production segment (deep-processing).
Pure agricultural segment, namely in-production segment, including pig rising and rice growing, is highly constrained to hardly be market-oriented and scale-oriented. Small-scale peasant economy with thousands of years of history is hard to achieve in-production, with higher volatility and weaker industrial chains. Any mode of agricultural industrialization cannot be copied to meet large-scale capital operation. Before production, industrial enterprises, as agricultural-related ones, regard farmers as clients. Lei CAI thought the especially agricultural risks should be avoided and the two ends and circulation, including sales companies of farm machinery, should be emphasized on. Jiuding Capital will invest in large-scale and mature enterprises, especially those able to complete market mechanism and adopt scale operation.
Ren Yifei said there are lots of wholesales markets of agricultural products in China but only one enterprise has been listed. In addition, there are lots of cities with 10 million residents, among which, the markets are generally collected. Each of such cities usually has a market which is worth to invest for stable profit growth.
Lei CAI also said some enterprises work through the whole chain, which can avoid risks and earn profits from different parts. However, the whole chain will be affected if one segment is wrong.