Chinese Ag Solution Provider Agria: A Compelling IPO

| About: Agria Corporation (GRO)

Agria Corporation is a China based agri-solutions provider engaged in research and development, production and sale of upstream agricultural products. The company currently provides corn seeds, sheep breeding and seedling products. Company generates all its revenues from China, which not only is the fastest growing economy in world but also is the world's second largest corn producer and houses the most sheep and goats in the world.

Company's products:

* Corn seed

Company sells its own four proprietary corn seeds varieties along with four varieties of corn seed produced by other seed companies and four popular generic corn seeds varieties. Company has four proprietary corn seed varieties developed through acquisition and self-development efforts, and more than 20 are currently being tested by the relevant government agency for yield and other characteristics.

* Sheep breeding products

Sheep breeding business consists primarily of the production and sale of frozen semen, embryos, breeder sheep and Primalights III hybrid sheep.

* Seedling products

Produces and sells four types of seedlings, blackberries and raspberries, dates and white bark pine.

Industry, Growth and Outlook

Corn seed: China is the second largest corn producer in world. Corn production in China has grown at a CAGR of 4.3% from 2000 to 2005. Despite this healthy growth, production of corn is not able to match demand resulting in reduction in exports which shows a decline of 81% in 2006 as compare to 2003. Main growth drivers for corn consumption in China is industrial use followed by animal feed due to rising economy and lifestyle.

Despite the healthy growth, China's per capita consumption of corn is still low as compare to other major corn production companies like U.S., Brazil and Mexico, which leaves lots of possibility for future growth. Moreover, the average corn price in China increased by 42.3% from RMB0.96 ($0.13) per kilogram in 2000 to RMB1.36 ($0.18) per kilogram in 2006 which can lead to further scale up of area under corn production. Industry outlook is positive.

Sheep breeding products

China consumes more mutton and wool than any other country. Compared to the sheep/goat flocks of developed countries, China's flocks on average produce lower quality and quantity of wool and meat. China has been improving the quality of its sheep/goat flocks, which has created significant demand for breeder sheep/breeder goats and related cost-effective breeding products. Industry outlook is positive.

Seedling products

The rapid urbanization, rising affluence and deteriorating environmental conditions in China have increased the need for urban tree planting. Many local governments in China responded by planting trees in public places. In addition, property developers are also responding to consumer demand for more green space within their property developments. The China Forestry Bureau forbids the transplanting of natural forest, and therefore, new trees to be planted in China must be cultivated from seedlings. Chinese government is introducing and providing support to a number of tree planting programs in rural areas.

The demand for fruit berries for human consumption is increasing due to the increased disposable income of Chinese consumers and the increasing recognition of the nutritional benefits of fruit berries. Industry outlook is positive.


Company faces competition from local national and regional producers as well as from multinational companies which normally have much stronger financials and much larger product portfolios than Agria.

Customers/industries served

Company's end customers includes farmers for corn seeds, and government agencies, farmers and sheep farms for sheep breeding products. Municipal agencies and seedling companies are end customers for Seedling products.

Company Growth

The farmland to which company has access increased from approximately 5,000 acres as of December 31, 2004 to approximately 27,000 acres as of June 30, 2007.

Company's total revenues increased from RMB152.3 million in 2004 to RMB489.7 million ($64.3 million) in 2006, representing a compound annual growth rate, or CAGR, of 79.3%.

Its net income increased from RMB57.8 million in 2004 to RMB253.9 million ($33.4 million) in 2006, representing a CAGR of 109.6%.Valuation/Offer value ($ In million)

At offer price of $15.5 per share company ADS's are available at PE of nearly 26 (annualizing first half FY 2007)

Company/Industry expectations (these are assumptions - company may perform differently)

With the sudden rise in the Chinese economy, the demand for corn and its end products is expected to rise at moderate pace which can lead to high demand for quality hybrid seeds, also due to high price of corn the area under corn cultivation is expected to rise constantly with time. demand to quality hybrid seeds is also likely to rise constantly.

China is the biggest consumer of mutton and wool in world. China had approximately 171 million sheep and 196 million goats, the largest flocks of their kind. This kind of demand and availability of largest flock in world throwaways a big opportunity for companies that provides breed enhancer products as the China's flocks on average produce lower quality and quantity of wool and meat as compare to other countries and requires significant improvement.

Local & national Governments emphasis on improve the quality and quantity of country's agricultural and farming products will lead to constant growth in hybrid seed and animal breed improvement industries.

Due to all above factors, the company is also like to show growth in revenues although it may not able be to maintain its past growth due to higher base and rising competition.


* Complex corporate structure.

* Seasonal in nature.

* High dependence on Chinese market.

* Operating margins are high and can come under pressure with rising competition.

* Company currently enjoy tax holidays for almost all of its operations, in future any change in tax law can revoke this tax holiday.

* Company has shown a significant growth in revenues and profits in recent past, in future this type of growth may not happen.

* Company is R&D base company and any delay or failure in product development can hit company adversely.

* Introduction of any competitive high quality products at low price by other companies can hit company adversely.

* Company generate 50% of its revenues from sale of corn seeds, any significant fall in corn prices due to any reason can effect corn seed demand negatively.

* Company's Corn seed business is not showing any growth in revenues since last 18 months and margins are under pressure. Its Sheep breeding and Seedling products business is showing moderate revenue growth but margins are under pressure.

* Since company operates in agri sector its financial performance can vary not only quarter to quarter but also sometimes year to year also because of factor like drought, low price of products etc. Its other business are not so seasonal.


* History of high growth.

* Company is R&D based - it develops its own varieties and sell them to end users.

* High operating margins.

* Company has a strong product pipeline with nearly 20 hybrid varieties of corn under development (being tested by the relevant government agency for yield and other characteristics).

* Company generates all its revenues from china which not only is the fastest growing economy in world but also is the world's second largest corn producer and also house the most number of sheep and goats in the world.

* Company's revenue mix is changing in favor of sheep breading and seeding, which yields high margins and is much less seasonal as compared to corn seeding business.

* Proceeds will be used by company to enhance production capacities, increase spending on R&D, for debt repayment and will make balance sheet stronger.

Disclosure: Author has no position in Agria