Agria Corporation (NYSE:GRO), a Beijing-based agricultural biotechnology firm, filed Friday with the SEC for an initial public offering on the NYSE. Led by Credit Suisse Securities, the offering is expected to bring in US$175 million. The company intends to trade under the symbol "GRO".
The company's F-1 filing reports that Agria was formed in Jan. 2004 by acquiring control of mainland China based agricultural firm Primalights III Agriculture Development Co., Ltd. (P3A). The company states that due to restrictions on foreign ownership of seed development and production businesses, Agria Corp. exercises effective control of P3A through contractual agreements between P3A, P3A's primary shareholders, and Aero-Biotech Science & Technology Co., Ltd. (Agria China).
Agria China is a wholly owned subsidiary of Agria Corp. based in the PRC. Agria's. primary products are corn seed, seedlings, and sheep breeding. The company's corn seed products are grown in seven provinces in China through contractual arrangements with village collectives and seed production companies. The sheep breeding products including sheep semen, sheep embryos, and live sheep are developed in five breeding bases located in Shanxi province. The seedlings business consists of a variety of seedlings including raspberry, blackberry, date and white bark pine sold to various customers including municipal governments and commercial nurseries.
The company reports that for the six months ending June 30, 2007, revenues were US$36.7 million, up less than 4% from the same period last year. Corn seeds accounted for 48% of revenues, sheep breeding 40% and seedlings 12%. Operating margins were 52%, and net profit margins were 51%. Agria spent less than 1% of revenues on research and development in 2006. On completion of the IPO, the company reports that the proceeds will be allocated as follows:
approximately $50 million to fund expansion of production capacity through leasing of additional land and acquisitions of new facilities and equipment;
approximately $27 million to repay the shareholder's loan;
approximately $15 million to fund establishment of a research and development center and expansion of research and development capability;
approximately $3.5 million to repay all of its bank loans; and
the remainder for general corporate purposes, including funding potential strategic acquisitions.
Agria's risks include those typical for an agricultural firm, include disease, inclement weather and government regulation. Another area of concern is its "effective control" of P3A. The company reports that:
P3A has four record shareholders, consisting of Ms. Juan Li who is the wife of Mr. Guanglin Lai, our chairman of the board of directors, our co-chief executive officer and a beneficial owner of our ordinary shares, Mr. Zhaohua Qian who is our director and a beneficial owner of our ordinary shares, Mr. Zhixin Xue who is our chief operating officer and director, and Mr. Mingshe Zhang who has been involved in the management of P3A.
P3A is the primary source of revenue for Agria Corp.. Due to the restrictions on foreign ownership of seed development and production businesses, the company is dependent on P3A to operate in the PRC. Should the contractual relationship between Agria and P3A sour, the revenue flows of the company could be impaired. In the event of a contract dispute, experience has shown that in Chinese courts the rights of domestic owners can take precedence over those of foreign investors. Demand in China for agricultural products is high and growing. China is becoming a food export powerhouse. According to the USDA, Chinese agricultural exports to the US reached US$2.6 billion in 2006, a 20-fold increase over the past quarter century.
In addition, the rising middle class in China is demanding greater variety and quality in their food. The typical Chinese diet previously was dominated by pork, rice, wheat flour, and eggs. Growing incomes and a more varied "Westernized" diet is increasing demand for meat, poultry, seafood and alternate grains. Filling this demand will lead to success for many foreign and domestic Chinese firms. However, investing in Chinese companies requires due diligence and an understanding of operating conditions in the PRC, and this is certainly the case with Agria Corp.