Agria Corporation Slumps on IPO

Agria Corp. (NYSE: GRO) a Beijing-based provider of agricultural products, fell over 26% on its NYSE debut yesterday. Agria shares priced at US$16.50 Tuesday night. After hitting a high of US$17, shares fell steadily throughout the session to close near their low at US$12.06, down nearly 27% on the day.

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's initial filing highlighted some red flags. The company reported 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. Despite characterizing itself as firm specializing in agricultural research and development, Agria spent less than 1% of revenues on R&D in 2006.The company's ownership structure was also troublesome in regards to its "effective control" of III Agriculture Development Co. Ltd. or P3A, its primary Chinese subsidiary. 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.

Disclosure: none