Think we will see a takeover or company split early next year.
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Yes and Agria would like to pay as little as possible for the other 49%.
Interesting article. But the huge jump in profit for Agria is historical (YE30/06/2011) and relates to the comparison with the time before PGW became an Agria subsidiary. Agria was effectively little more than a shell before this. I don't consider that the huge jump in profitability for Agria relates to any underlying operational improvement for their main investment PGW.
SNOOPY
Have been pondering how this PGW Agria relationship will pan out. I have very little understanding of the way farming works on the ground in China. To try and gain some insight I have been reading Agria's last full year 20F filing (effectively the annual report). The comments under the risk factors include certain risks of doing buiness in China as follows:
"Our growth prospects may be materially and adversely affected if we are unable to develop or acquire new products. The majority of the products provided by our China seeds business are upstream products ultimately used by farmers in China. The profitability of our business depends on sustained and recurring orders from our direct customers, which include distributors, breed improvement and reproductive stations and other intermediaries. Reorder rates are uncertain due to several factors, many of which are beyond our control. These factors include changing customer preferences, competitive price pressures, failure to develop new products to meet the evolving demands of farmers in China, the development of higher quality products by our competitors and general economic conditions. If we are unable to develop or acquire additional products that meet the demands of farmers in China, or if our competitors develop products that are favored by farmers in China, our growth prospects may be materially and adversely affected and our revenues and profitability may decline."
Here are a couple of questions that I posed to myself after reading this.
Is the phrase "demands from farmers in china" synonymous with "preferences from the Chinese government."?
"our direct customers, which include distributors, breed improvement and reproductive stations and other intermediaries."
This indicates to me that farmers are not the direct customers. That means in turn means Agria are not allowed to distribute seeds directly. And I wonder what kind of hurdles these 'breed improvement and reproductive station's impose on sources of seeds?
There seems on paper to be a lot of personal relationships that need to be lubricated to ensure our PGW seeds get to the Chinese farmers, who we desire to ultimately plant them!
SNOOPY
More from the Agria full year 20F report Filed Period 12/31/2010 page 14, outling risk.
"One or more of our distributors could engage in activities that are harmful to our brand and to our business. Our seed products are sold primarily through distributors, and those distributors are responsible for ensuring that our products have the appropriate licenses to be sold to farmers in their provinces. If those distributors do not obtain the appropriate licenses, their sales of our products in those provinces may be illegal, and we may be subject to government sanctions, including confiscation of illegal revenues and a fine of between two and three times the amount of such illegal revenues. Unlicensed sales in a province may also cause a delay for our other distributors in receiving a license from the authorities for their provinces, which could further adversely impact our sales. In addition, distributors may sell our products under another brand licensed in a particular province if our product is not licensed there. If our products are sold under another brand, the purchasers will not be aware of our brand name, and we will be unable to cross-market other seed varieties or other products as effectively to these purchasers. Moreover, our ability to provide appropriate customer service to these purchasers will be negatively affected, and we may be unable to develop our local knowledge of the needs of these purchasers and their environment. Furthermore, if any of our distributors sells inferior seeds produced by other companies under our brand name, our brand and reputation could be harmed, which could make marketing of our branded seeds more difficult."
Blimey, a penalty of two or three times your revenues if you get the paperwork wrong! Looks like there may be issues of brand piracy here too. Yes I know these risks are theoretical. But I think PGW have a hard road ahead of them in China.
SNOOPY
From p10, a comment on the reformation of the seed market in China:
"According to the Opinion on Enhancement of Market Supervision regarding Seed Administration Reform issued by the General Office of the PRC State Council in May 2006, local government agricultural administrative offices were required to separate their governmental administrative functions from seed production activities by the end of June 2007 and, therefore, more privately-owned seed companies may emerge in the future. Our competitors may be better positioned to take advantage of industry consolidation and acquisition opportunities than we are. The reform and restructuring of state-owned equity in seed enterprises will likely lead to the reallocation of market share in the seed industry, and our competitors may increase their market share by participating in the restructuring of state-owned seed companies. Such privatization would likely result in increased numbers of market participants with more efficient and commercially viable business models."
"In addition, the PRC government currently restricts foreign ownership of any domestic seed development and production business to no more than 50%. When and if such restrictions are lifted, multinational corporations engaged in the seed business may expand into the agricultural market in China. These companies have significantly greater financial, technological and other resources than we do and may become our major competitors in China. As competition intensifies, our margins may be compressed by more competitive pricing and we may lose our market share and experience a reduction in our revenues and profit."
It seems like Agria are playing the 'first mover' game and good on them for doing so. It seems clearer to me now why the tie up with PGW was needed. Agria see PGW as their own multinational 'white knight'. My impression though is that the acquisition of a controlling interest in PGW has stretched them to the limit. Agria won't be taking part in any China state owned seed company privatisations for that reason.
SNOOPY
Well we all knew it. But very sobering to see piracy risk for seed sellers laid out in the Agria F20 report (YE 30th June 2011, p11):
"Historically, implementation of PRC intellectual property laws has been lacking, primarily because of ambiguities in PRC law and difficulties of enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as those in the United States or other countries, which increases the risk that we may not be able to adequately protect our intellectual property."
SNOOPY
p14 of the Agria 20F filing confirms my impression:
"For example, both Agria Asia, our subsidiary that ultimately holds our investment in PGW, and PGW had substantial indebtedness as of the date of this annual report (30th June 2011). Depending on the quantum and timing of cash flows arising from its indirect holding in PGW, we may need to refinance some or all of the debt in Agria Asia. Furthermore, New Hope International has the right to sell its shares in Agria Asia to Agria Group Limited, or Agria Group, on the terms and conditions provided in the shareholders agreement at a certain repurchase price determined pursuant to a supplemental agreement entered into between Agria Group and New Hope International in June 2011. The obligation of Agria Group in connection with this put option held by New Hope International may be on terms that are not commercially favorable to us."
I think we can infer from this that Agria's joint venture status with the much larger New Hope has an out clause that is very unfavourable for Agria. If Agria stumbles, then watch the much larger PRC government backed New Hope run. Agria is not the fountain of Asian cash that many PGW shareholders think it is. An outright takeover offer for the rest of PGW will never happen because Agria can't afford it, and I can't see them ever being in a position to afford it.
SNOOPY
From p18 of the Agria report:
"The PRC government has in recent years reduced taxes and increased subsidies and other support across the agricultural industry. For instance, the government subsidizes farmers for their seed purchases, and has increased spending on rural infrastructure. Sales of agricultural products from producers to intermediaries or to farmers are exempt from PRC value-added tax, or VAT."
SNOOPY
...but getting a seed subsidy is not certain!
Also from p18:
"Farmers can buy corn seeds designated as "high-quality" at subsidized prices, but the designation of seeds as "high-quality" is at the discretion of the local government, companies owned by the local government and local private seed companies. Because of local protectionism, this policy could result in preferential treatment for local seed producers, with locally produced seeds being designated as "high-quality", while ours are not designated as such. If such preferential treatment were to occur, the price for our seeds to farmers in those provinces would be higher than the subsidized local seeds, and our sales in those provinces could suffer, which could materially and adversely affect our results of operations."
SNOOPY