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Origin Agritech Limited (NASDAQ:SEED)

Roth Capital Conference

February 20, 2007 3:00 pm ET

Executives

Gengchen Han - Chairman and CEO

Irving Kau - VP Finance

Presentation

Moderator

Ladies and gentlemen thank you again for being here in the China Track today. Our next presenters are here from Origin Agritech, and we certainly appreciate the attendance today. And, I don’t think we've said enough during the presentations today. It's just how much we appreciate the management team from China joining us as many of you know or probably all of you know it's Chinese New Year, which is very much a family time here in China. So, we really do appreciate the members of the management joining us from China.

With us today is Chairman and CEO of Origin Agritech, Dr. Han. I think many of you know Dr. Han. And also making the presentation will be Irving Kau, who is VP of Finance. And with no further ado, Irving, please take it away.

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Irving Kau

How is everyone doing today? That’s good. Well, I will just introduce myself. My name is Irving Kau. I am the new VP of Finance for the company. I just wanted to run through some of the presentation for the company. This is our extensive disclaimer. I will save you the pain of reading that. This is our company snapshot.

We are one of the largest vertically integrated crop seed companies in China. We produce hybrid corn, cotton, rice, and canola seeds. We are headquartered in Beijing with over 750 employees.

I just wanted to highlight the first bullet here. We've demonstrated revenue and earnings performance while in our expansive growth phase. This includes period of becoming a publicly traded company, raising capital via an offering and the extracts for warrants, and making significant equity investments in three other companies.

This was all done in an industry with significant barriers to entry, in which we believe we have a product development advantage. Our pipeline growth over the last year jumped from 39 hybrid products to 97 this year.

This is a summary of our Origin businesses. We own 95% to Denong, roughly 35% of Jilin and 34% of Biocentury Transgene. To highlight our base business in the first bullet, we increased seed shift in FY '06 by 16.8% in the base business. We also increased revenue by 24.1% due to a combination of unit shift and pricing increase. We acquired Denong in FY '06 to bolster our strategic position in the Southern region of China and enhance our live seed production.

While Denong was a drag on our gross margins and our earnings last year, we expect the company to add it to our bottom line going forward as we finish restructuring their sales staff and fully integrating their business with our base company.

Of note, we generated $1.5 million in equity earnings in the Jilin joint venture in the sixth month of ownership during the prime selling season. Acquisition of these rights to Jilin cost the company roughly $4 million. This is an example of one of the most stellar cases of acquisition potential in China, spending $4 million to gain $1.5 million in year one towards the bottom line.

As a note, Denong cost us $6 million or roughly $25 million in annual revenue. Of course, our investment in Transgene is geared towards preparing Origin for the potential government approval of GMO food crop seeds in China. This is a chart showing our revenue and over the past few years our revenue growth has been consistent, and we expect that revenue for the fiscal year ended 2007 will increase to $80 million to $90 million.

You will note that the year ended December 2005 was impacted approximately by $22.5 million in deferred revenues, which hit the income statement in 2006. This is our net income in the bottom line. Again, we showed consistent growth.

Again in 2005, that number was impacted by $22.5 million in deferred revenues, which later hit in 2006. Of note, also in 2002, the drought conditions made us able to sell our crop seeds at higher margins and thus gave us increased profits during that time period.

To give you some of the background on our seed products, we have a re-occurring revenue stream -- that new seeds are required every season. The trace of the hybrid seeds disappear in the second generation. This allows the organization to have some product stickiness, as consumers which tend to be a conservative group prefer to remain with the same company, brands, or seed products. As you know, these are not genetically modified seeds and we would be discussing this more later. The Origin is involved in this and will eventually lead China in this.

Next, the slide demonstrates our increased ability to develop the hybrid seed products and this ability has increased over time. We believe this trend will continue. Our product portfolio improves our sales and marketing position and improves our gross margin, as we do not need to pay a licensing fee on the proprietary products.

Next slide highlights our hybrid seed production. We have 100,000 production farmers localized in primarily two main provinces in China. We have 212 full-time technicians, 500 temporary agronomists. As mentioned before, we have 97 different hybrid that we sold into the market in 2006. Also, we are the first Chinese company in the industry to receive ISO 9001:2000 certification.

We also have a national license to sell in any province in China. Our ability to distribute to massive amount of small farms just simply sets us apart. In addition, what we don’t mention here is we have a 24-hour call center. We also send out a technician within 48 hours if we are not able to help them over the phone.

I just want to take a minute and look at this map. This map illustrates the breadth of our operation. In addition to our headquarters, we have 14 Distribution Centers, 8 Conditioning Plants, 10 Breeding Stations, and 2 Joint Ventures, Jilin in the North and Biocentury in the South.

If I may, I am going to slip back a few slides and give you a picture. First picture at the top is some of our production farms. Then, the next three slides show our production facility and the really expansive nature of them. And, the last slide shows our headquarters in Beijing.

We operate in a $3.4 billion crop seed industry. The market, as we know, is highly fragmented with many local, national, and regional competitors and sort of a snapshot for the future, just a summary of the GMO landscape in China. Roughly 80% of the Bt cotton in China uses the Biocentury gene, in which Origin owns a 34% interest. We expect to lead the GMO acceptance in the marketplace as the government approves corn rice and other food products for GMO production.

Sort of to walk you through the process approval for the hybrid seeds, for those of you who are not familiar with the hybrid seed market in China. It's similar to the FDA approval process in the US. It takes six years to bring a hybrid to market after R&D. You must obtain licenses for both production and distribution. And as mentioned before, we have a national license. The government has two cycles of stringent regulatory review, which includes the fact that the seed must increase 8% yield versus the control group and also be in the top six of all hybrids being tested. This is on top of all the net relationship. The company must have fruitfully developed products throughout China.

This next slide summarizes our business model. We seek to develop a strong seed portfolio. We efficiently shepherd the products through regulatory approvals, ensure production of the highest quality seed, and position our brand as a premium brand in the market. We then effectively distribute these products to build a strong marketing and customer service infrastructure to create more stickiness with our customer base.

This is our track record of success. We expect eight new seed approvals in 2007. We also have increasing number of higher margin proprietary seeds, as I showed earlier in the slide before. We have a good balance between early- and late-stage new hybrids. And our corn base is now diversified by our rice, canola, and cotton seed lines. And of note, we have 164 seeds currently in various stages of testing, which represents our near-term product pipeline.

This represents the growth focus for our company. First and foremost, we plan to grow organically and improving the number of proprietary seeds introduced into the market. We believe with these higher margins that we can receive on the seed products and the ability to develop this in-house in conjunction with academic centers and Biocentury Transgene, we will be able to continually grow this for larger portion of our revenues.

Secondly, we plan to take advantage of the dynamic nature of the seed industry, which we believe is currently undergoing consolidation. Many of these are inefficiently managed competitors and we view them as undervalued assets going forward. And so, we are able to capitalize that on the acquisition strategy.

As on appropriate apples-to-apples basis, you can see how our company grew in '06 versus '05. The company increased revenues from $25 million plus in the nine months of '05 to over $66 million in the nine months of '06. And on the bottom-line, I want to emphasize that the same occurred from over $4 million to over $9.6 million.

This is our balance sheet. As you can see, we increased our cash and equivalents to $36 million at the end of September from $29 million at the end of calendar year '05. Of note, it is not shown here, but we also have minimal long-term debt on the balance sheet.

To give you a background on our management and I realize this is sort of a brief overview. Our management has significant experience in China and US. And our management team is led by Gengchen Han, a very capable leader with a deep understanding of the technology in the marketplace. He is a (inaudible) from Iowa State University, and has a 20 years of industry experience.

Here are some of our investment conclusions. We are profitable and cash flow positive. And, we're a growing leader in a fragmented industry. We've a proven track record of success in an industry with significant barriers. These barriers include seed development timeline, seed production quality, distribution base, marketplace, brand perception, and an industry relationship base.

We believe we see products to be important to the infrastructure build out of China, allowing the country to grow high-quality food and seed products to a fast-growing nation. We believe we have the track record, vision, positioning, and strategy to execute to build this company for the long-term.

Thank you. And we'll now open the floor for questions.

Question-and-Answer Session

Unidentified Audience Member

I believe, the corn-based ethanol production is beginning to ramp up in China similarly as it is here in the US. Can you comment on what sort of demand increase do you see specifically on the corn side of as it links to additional acres being planted for a corn-based ethanol?

Gengchen Han

I have a good answer to question here. Ethanol actually in China also develop over the [crops], but I think it's mostly in Northeastern China. The one probably you said where margins is in Northeastern farmers (inaudible) is corn growing because China in last few years has imported [sorghum] from other countries like Argentina and Brazil. I have seen the same [level] of increase exceeded in a quantitative demand.

Unidentified Audience Member

[Question Inaudible]

Gengchen Han

No, general corn and other fodder crops are not approved in China yet. No other, general corn will be approved. But we don't have the restriction on the farmers who have to plan it like a 20% ready discount and other 80% discount. Since the Chinese farmer is very small, therefore the restriction on each farmer had one way (inaudible) later. They just can't do it. For general cotton, it is almost that the planted cotton in whole area is almost 100%. Even now some farmer, they don't plant over a small area. They just become a (inaudible). As you know, the general corn is growing probably in three-to five-year timeframe.

Unidentified Audience Member

Your hybrid seeds are developed for yield as well as for nutritional value. And second question is that besides China market, you go to other markets for this seed, is it something that's so uniquely different that other people started following that?

Gengchen Han

For hybrid, it's probably of economical relevance. It's yield and for corn basically seeds is mostly for yield. For the first hybrid rice, this is probably not quality and the cotton is probably (inaudible). For the international market of certain criteria, especially for the hybrid rice and the corn, we think our product will have competitive advantage in Southeast Asia and in the neighboring countries of China. We're looking for that and the pricing of hybrid there.

Unidentified Audience Member

[Question Inaudible]

Irving Kau

Well, I can walk you through one transaction which may help. What's important to understand here is that the company takes a 10% to 30% deposit on the seeds prior to the finish of the production of the seed. That then goes into the benefits from customers on the balance sheet. Then, once the entire order is placed by the distributor, who is a customer to Origin, the remainder of the 70% to 90% of that sum is collected and then booked at cash as advance from customer on the balance sheet. Once the product is shipped as we see it with very little incidence of return, it is then booked as a deferred revenue. And after the entire contract is fulfilled and the final type is set, then it becomes full-fledged revenue.

Unidentified Audience Member

[Question Inaudible].

Irving Kau

For that contract, correct.

Unidentified Audience Member

[Question Inaudible].

Irving Kau

That is correct.

Unidentified Audience Member

[Question Inaudible].

Irving Kau

Around the ready seeds in China this summer, they haven't had much of the effect on accountability.

Gengchen Han

The general, basically was most probably used and sold during the current year. But again as I mentioned, the food crop is not approved in China. And also in cotton, it's only Bt cotton been approved in China. So, I think that the (inaudible) and we import a lot [sorghum]. As you know, 60% of [sorghum] is imported from other countries.

Moderator

Okay. That's all the time we have right now. Dr. Han and Irving will be next door in the breakout room directly behind the [Cirius]. Thank you very much.

TRANSCRIPT SPONSOR

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China Direct (ticker: CHND.OB) is a diversified management and consulting company. Our mission is to create a platform to empower medium sized Chinese entities to effectively compete in the global economy. As your direct link to China, our organization serves as a vehicle to allow investors to participate directly in the rapid growth of the Chinese economy.

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