China Agriculture Investment Express

China Agriculture Investment Express
Vol.1 Issue 01 2011
Copyright CCM International Limited
Vol.1 Issue 01.11
Contents
Editor's Note Headlines of China Agriculture Investment Express 1101 I II
Policy & Legislation

8 measures promoting China agricultural products logistics Policies on foreign investment in China stricter Laws and regulations on food safety accelerate M&A in food industry
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Industry dynamic
Phosphorus ore resource draws wide attention M&A to continue in feed industry M&A in global agricultural industry increasing Two listed pesticide companies transformed into mining corp. Major domestic M&A in pesticide industry
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Company dynamic
Shandong Kingenda seeks M&A COFCO further strengthens and expands wine market Bright Food shows ambition in domestic and overseas M&A Longping High-Tech: road to industry consolidation China BlueChemical to strengthen profitability through acquisition
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Price update
Agricultural products Agrochemical Food
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Editor's Note
Welcome to the first issue of China Agriculture Investment Express. Agriculture is important for China, which draws Chinese Central Government's close attention. With the industrial modernization, Chinese agricultural industry is to develop to be more environmentally friendly, hi-tech-oriented and less resource-dependent. However, agrichemical industries, such as fertilizer and pesticide industries, are facing overcapacity; feed industry requires upgrading and food industry witnesses security crisis. Hence, the government has restricted the chaotic expansion by implementing stricter requirements, such as industrial entry criteria. To maintain long-term development and to develop with stronger competitiveness, companies have to expand their capacities, enrich product portfolios and extend value chain through mergers and acquisitions (M&A) in the coming years.
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Headlines of China Agriculture Investment Express 1101

New policies on logistics will improve agricultural products logistics in China. The safety review policies on foreign enterprises will be stricter, with some effects on the industry. Laws and regulations on food safety will accelerate the process of M&A to some extent. Phosphorus ore resource draws phosphate fertilizer producers' wide attention. M&A in China's feed industry will continue in the near future. Global agricultural giants' merger and acquisition(M&A) benefits global agricultural industry. Huayang Technology and Shandong Dacheng would be transferred into mining companies. In recent years, M&As in domestic pesticide industry are frequently, and they are having different purposes. Shandong Kingenda seeks M&A opportunities for long term development. COFCO actively launches M&A in wine industry to further strengthen its superiority in grape wine sector and develop new fields to improve industrial chain. Bright Food's serial M&A launched from 2010 show its ambition to expand business, though the results are not satisfactory. Longping High-Tech is on the road to achieve industry consolidation. China BlueChemical is to strengthen profitability through acquisition.
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Policy & Legislation

Policies on foreign investment in China stricter
n 2010, China absorbs foreign investment of USD106 billion (RMB701.72 billion), but the investment in merger and acquisition (M&A) is only 3%, while a total of USD1,122 billion(RMB7,427.64 billion) has been recorded in foreign direct investment in the world, and M&A investment is as high as 70%. This data shows that China's foreign direct investment has been on the rise, but the proportion of the M&A inverstment is relatively low. But there is still a trend that investment in M&A will be larger in China's foreign capital absorption in the near future. In 2010, China has been cautious in auditing M&A initiated by foreign enterprises, making the proportion of foreign M&A investment reduce to about 3% of the country's total.
In recent years, deal in foreign M&A has increased with the growing laws and regulations of M&A China issued. The Notice of the General Office of the State Council on the Establishment of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the Notice) was released by the State Council of China on February 3, 2011, and the Notice covers agricultural products. The main purpose of the Notice is to improve China's foreign policies and regulations system, enhance transparency and promote development of M&A enterprises. Implementing safety review has some effects on China's agricultural products. First, it is effective to prevent the foreign enterprises' monopolistic conduct in agricultural products and processing industry of agricultural products. Second, it is helpful to stabilize prices of agricultural products. Third, it is effective to promote independent innovation capability of China agricultural enterprises. Then, it is beneficial for resonable utilization of foreign capital concerning agriculture. Fourth, it will better ensure the development of domestic agricultural enterprises. FIGURE 1: China's foreign direct investment, 2006-2010
Source: CCM International
At present, foreign enterprises continue to control the Chinese key agricultural enterprises, trade and processing enterprises in China agricultural products industry. China agricultural products and market have been brought into global markets by foreign enterprises, then these foreign enterprises form absolute control and pricing. For example, in soybean industry about nearly 60% enterprises are with overseas background, which captures 85% of the Chinese market. In the long run, if foreign enterprises control more on Chinese agricultural industry or establish monopoly, small and medium-sized enterprises in China will be likely to be washed out from the market, and it even threats the supply of agricultural products. And what's worse, it will
n June 15, 2011, the State Council promulgated eight measures on promoting the development of logistics industry. These measures are specifically to put forward the development of agricultural products logistics and improve policies on added value tax of agricultural products. Specific measures include: to greatly develop agricultural supermarkets; break the connection between agriculture schools and agricultural enterprises; strictly implement the policies related to fresh agricultural products distribution channels; to speed up development of modern logistics concerning food and cotton. At present, the underdeveloped of agricultural products logistics has blocked the development of agriculture in China. The measures have a great influence on logistics industry of agricultural products and that is good for China's
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8 measures promoting China agricultural products logistics
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seriously impact the national economic foundation. resource integration in logistics industry of agricultural products, encourage small and medium-sized agricultural enterprises to strengthen cooperation and improve the inefficient logistics service. The measures benefits the logistics industry related to agricultural products a lot. First of all, they are favorable for solving the problems of packing difficulty, storage and transport difficulty in agricultural products logistics industry at present. Secondly, they are expected to help reduce the cost of manufacturers of agricultural products logistics and improve the profitability of enterprises. Then, the measures will promote the reduction in prices of agricultural products, stablize the prices of agricultural commodities and guarantee security of food. Moreover, they are helpful to reduce tax of agricultural products enterprises. At present, if the difficulties of agricultual products logistics transport are settled, it will enhance enthusiasm of farmers to plant and increase the income of farmers, promoting the development of China's agriculture. Data show that fruits and vegetable lose 25% to 30% during picking, transportation and storage in China. Based on this, there are 100 million tonnes of fruits and vegetable rotting in China each year, while the loss rate of fruits and vegetable is controlled under 5% by developed countries, especially for the US whose rate maintains 1% to 2%. What worth mentioning as well is that the loss rate for grain accounts for 12% to 14.8% of total output. Expert said that, low efficiency of the agricultural products logistics hinders the development of Chinese agricultural industry. In the long run, this measures promulgated by Chinese government are beneficial to strengthen the international competitiveness of domestic agricultural enterprises, improve the products and services of agricultural products in China, increase the investment in logistics industry related to agricultural products and improve the logistics network of agricultural products.
series of laws and regulations on food safety have been released in recent years, which may accelerate the M&A process in China's food industry. They are Food Safety Law of the People's Republic of China released in 2009, Notice of the General Office of the State Council on Rigorously Cracking Down on Illegal Adding of Food Additives on 21 April 2011 and the latest Standards for Uses of Food Additives (GB2760-2011) coming into force on 20 June 2011 and so on. The promulgation of them is triggered by successive food safety incidents, such as the 2008 melamine scandal, milk tainted by leather protein, clenbuterol-tainted pork and steamed buns containing illegal yellow coloring. These laws and regulations not only restrain food producers from illegally using food additives to ensure civilians' health, but also create the best time for M&A in food industry. Food Safety Law of of the People's Republic of China and Standards for Uses of Food Additives (GB2760-2011) stipulate the process of food production and operation and the application of food additives, helping eliminate the hidden danger of food safety in the aspects of manmade pollution and overuse of food additive. Some of the provisions will accelerate the M&A directly or indirectly. In the Food Safety Law, the government requires food producers to implement the license system of production and operation. At present, there are more than 400 thousand food enterprises in China, almost
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Laws and regulations on food safety accelerate M&A in food industry

with small production scale, chaotic management and dispersed distribution difficult for supervision. In order to strengthen the supervision of food industry, the government raises the market access threshold by implementing the license system. It's reported that there are only more than 100 thousand food enterprises having the ability to get the license, which means a large part of enterprises have to withdraw from the market. This is a great time for large food enterprises to expand bushiness through M&A. Take the dairy industry for example, General Administration of Quality Supervision, Inspection and Quarantine issued an announcement in December 2010, requesting all of the dairy enterprises to reapply for the production license. As of 31 March 2011, only 643 among 1,176 dairy enterprises have passed the reexamination, with a passing rate of no more than 55%. And some provisions indirectly increase the production cost of food enterprises, making those small players' operation hard to continue and thus providing a great chance for large players to carry out M&A. The Food Safety Law stipulates that food producers and operators must possess production equipment in accordance with the food variety and production volume; it also requires food producers to check the license and certification of suppliers of food raw materials, food additives and other food-related products. Meanwhile, Standards for Uses of Food Additives (GB2760-2011) clearly formulates the application range and application amount of food additive. According to the data from National Bureau of Statistics of China, there are more than
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2,000 dairy companies in China, but only 1,176 reapply for production licenseabout 1,000 voluntarily give up the reexamination. One of the reasons is that they can't afford the huge funds needed in production process to meet the requirements of reexamination. In the Food Safety Law, Chinese government requires local governments to encourage large-scale food production, which is beneficial for large enterprises to get policy support and integrate resources of food production. Therefore, launching M&A is one of the effective ways to realize the goal. Henan Province launched a series of positive policies to support the scale development of food enterprises in 2009, such as reducing the tax of leading enterprises, setting up exclusive funds for the upgrade of food enterprises, increasing the amount of funds invested in food-related enterprises to promote scale development from multi-channel. According to the research done by Zero2IPO Researcher Center, one of the most professional and authoritative research institutes in China, totally 52 M&A cases happened in China's food and beverage industry from 2009 to Q1 2011; 10 have been finished in Q1 2011, which is half of the whole cases in 2010. It's estimated that the number of future M&A will increase rapidly, promoted by the laws and regulations on food industry.
Industry dynamic
Phosphorus ore resource draws wide attention
ith the exhausting phosphorus ore resource, phosphate fertilizer producers are to acquire phosphorus ore resource to sustain long-term development, driven by the strict entry criteria for phosphate and ammonium production. China is the second largest phosphorus ore reserves country in the world, only next to Morocco. Among the proven phosphorus ore reserves of 16.786 billion tonnes, only about 4.1 billion tonnes with actual economic value can be exploited technically in China, capturing 24% of the total reserves. In addition, only 52% of China's phosphorus ore reserves with actual economic value can be exploited under current technology. China exploited 68.07 million tonnes of phosphorus ore in 2010, increasing by 18.5% over last year, but China totally consumed 67.17 million tonnes of phosphorus ore in the same year, soaring by 17.2% year on year.
phosphorus ore resource is essential for factory removal and new entrants. On March 25, 2011, Ministry of Industry and Information Technology (MIIT) promulgated the exposure draft of the Entry Criteria for Phosphate and Ammonium Production (the Entry Criteria) which requires that the factories to remove and new entrants should have their own phosphorus ore and sulfur ore resources. According to the Entry Criteria, in principle, the factories to remove and new entrants are not allowed to build new wet process phosphoric acid (WPA), monoammonium phosphate (MAP) and diammonium phosphate (DAP)
FIGURE 2: Price of phosphorus ore, 2008-2010
Driven by the soaring demand and exhausting resource, phosphorus ore price has seen an uptrend with fluctuation during 2008 to 2010, which brought many risks Source: CCM International to phosphate fertilizer producers. And only the phosphate fertilizer producers projects or expansions within three years. Besides, if holding ample phosphorus ore resource can avoid the the existing compound fertilizer production plants are risk of phosphorus ore price fluctuation. located in county-level ecological protection areas, scenic areas, nature reserves, cultural heritage protection areas, Besides being beneficial for long-term development, etc., they have to relocate.
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By the end of 2010, there were 466 phosphate fertilizer producers in China, with the total production capacity of over 21.00 million tonnes per year and the output of 17.01 million tonnes (100%P2O5) in 2010; while the apparent consumption volume was only 14.75 million tonnes (100%P2O5). That is to say, China's phosphate fertilizer industry is facing overcapacity. The most important is that many phosphate fertilizer producers that have to relocate their plants have no phosphorus ore resource of their own. To sustain long-term development, phosphate fertilizer producers will pay more attention to phosphorus ore resource.
M&A to continue in feed industry
n February 2011, the leading feed enterprise in the world Nutreco Group purchased 100% shares of Zhuhai Shihai Feed Co., Ltd. (Zhuhai Shihai) a leading aquaculture feed company in China at a fancy price, attracting much attention in feed industry. Some other M&A cases also happened during 2010-2011. It's estimated that this M&A trend will continue in China's feed industry.
funds, so they were squeezed out of the market. As predicted, the number of feed enterprises in China will decline continuously in the future. And it will reduce the cost of M&A for large feed enterprises. Thus, it's a great time for the expansion of large enterprises and the integration in feed industry. Besides the current situation of feed industry in China, some of government regulations are favorable to large feed enterprises' expansion. Measures for the Examination of Feed Production Enterprises, issued on 1 May 2007 by the Ministry of Agriculture, emphasizes and standardizes the feed production to protect the product quality. The regulation puts some pressure on feed enterprises; unqualified enterprises have to withdraw from the market. Small feed enterprises are on a sticky wicket due to lack of sufficient funds to meet the requirements, while the raised threshold is beneficial for large feed enterprises. Moreover, feed industry's development depends on the development of breeding industry. In breeding industry, small-scale enterprises and farmers are gradually quitting due to the high production cost, while largescale breeding enterprises are forming, which will further intensify in the coming few years. At the same time, the strong demand for meat, eggs, and dairy products will drive the expansion of breeding industry. All these are beneficial for large feed enterprises to develop and enlarge scale.
Currently, China is the second largest feed production country in the world. And feed industry plays an important role in the development of national economy. However, the degree of feed enterprises' scale is much lower than the US, the largest feed production country around the world. As of 2006, there have been more than 10,000 small-scale feed enterprises in China, but only five have an annual output exceeding one million tonnes. The total output of top ten feed enterprises just accounts for 22% of the nation's total. Through the M&A wave during 2005-2007, the number of small feed enterprises declined apparently. In 2007, there were 15,400 feed enterprises in the whole nation, but the figure reduced to 13,600 in 2008almost 2,000 feed enterprises disappeared. Since 2008, the cost of raw materials and labor has risen dramatically. The high production cost and economic crisis in 2008 exerted great pressure on the development of feed industry, especially those small enterprises who couldn't afford the high cost and lacked
TABLE 1: M&A cases in China's feed industry, 2005-2011
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Because the feed industry is easily impacted by market fluctuation and meager profit, feed enterprises have to extend industrial chain to reduce the risk. Thus, feed enterprises would choose to acquire some breeding enterprises. However, there is a strange situation in China's feed industry. It's reported that some foreign-owned enterprises attempted to enter the breeding industry through investing in feed industry, because it's difficult for them to pass the certification auditing in breeding industry under the protection of Chinese government. Amidst M&A cases in China's feed industry, it's not difficult to see that foreign-owned enterprises' direct acquisition of domestic enterprises is rare: only three cases during 2005-2011. High acquisition costs but low profit are the reasons. It's estimated that foreign-owned enterprises will take over some large feed enterprises when China's feed industry develops to a better stage. But joint investment together with domestic feed enterprises in feed industry is a common cooperation method. Therefore, M&A will still happen among domestic feed enterprises. And the M&A will continue in domestic feed industry in the future to further promote the industrial integration.
M&A in global agricultural industry increasing
n recent years, merger and acquisition (M&A) activities among global agricultural enterprises have increased year by year. In 2008, the world's largest oil producer Bunge acquired the world's largest corn processor, namely America Corn Products International, Inc., which was driven by the increasing global grain demand and the rising food price. Moreover, less profit has been gained from the industry and M&A will absolutely help Bunge to expand its business.
According to CCM International's survey, the enterprises involved in the M&A share some common characteristics. First, some of them are shortage of raw materials. Second, they have solid financial strength and own rich experiences in the industry. Third, they conduct M&A with the purpose of expanding industrial chain. For the target company in the M&A, advanced production technologies, rich administrative experience and capital will be introduced, helping boost technology level and R&D capability of the target company. However, in the long run, it will to some extent threaten grain security of the target country. Take China which has vast land and huge pupulation for example, its complex situation makes the Chinese Goverment has to be greatly aware of the grain security and know the market well. But on the whole, M&A is of great significance, making resource allocation more efficient, optimizing industry structrue, and promoting development of global agricultural industry.
Many reasons are accountable for the increasing M&A activities in global agricultural enterprises. Nowadays, the competition in global agricultural industry becomes more intense, leading to the reduction of profit and the increase of risk. M&A will facilitate the enterprises to expand their market share and enhance their status in the global stage. For example, Sinochem corp purchased Makhteshim Agan Group with a bid to increase market share in May 2011.
Two listed pesticide companies transformed into mining corp.
handong Huayang Technology Co., Ltd. (Huayang Technology) and Shandong Dacheng Pesticide Co., Ltd. (Shandong Dacheng) have gained profit sources through restructuring with mining enterprises. And then, they will both be restructured into mining companies.
On 9 Feb. 2011, Huayang Technology revealed the result of its public auction. Zibo Hongda Mining Co., Ltd. (Zibo Hongda), a big mining company in Shandong Province, has successfully bid for Huayang Technology's 20.38% equities, totally about 31 million shares. Zibo Hongda has become the largest shareholder of Huayang Technology after the transaction accomplished successfully. In April 2011, Huayang Technology released a motion about assets reorganization, according to which it will buy assets of Zibo Hongda through selling its own major assets and issuing shares, so as to transform from an enterprise suffering from serious deficit to an iron ore mining company. Huayang Technology is mainly engaged in the production of pesticides and chemical raw materials, power generation and electricity sale. Zibo Hongda is a large-scale enterprise whose main business is iron ore mining, selection, mining investment and development of mineral resources. Zibo Hongda's purpose of bidding for Huayang
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Technology's equities clearly aims at the access to capital market financing platform and backdoor listing. The same restructuring has also happened in Shandong Dacheng Pesticide Co., Ltd. (Shandong Dacheng). On 18 Jan. 2011, Shandong Dacheng Pesticide Co., Ltd. (Shandong Dacheng), a listed pesticide company, said it will launch major assets reorganization. It is not until 25 March 2011 that China National Chemical Corporation (ChemChina), the biggest shareholder of Shandong Dacheng, selected a united transferee body to purchase Shandong Dacheng's state-owned shares. The united transferee body consists of Shandong Yinshan Investment Co., Ltd. (Yinshan Investment), Dongli Town Collective Assets Management Center (Management Center) and Beijing Huiquan International Investment Co., Ltd. (Huiquan International). On 31 March 2011, Shandong Dacheng announced a major assets restructuring plan, and the counterpart is Shandong Hualian Mining Co., Ltd. (Shandong Hualian), whose controlling shareholder is the joint transferee. This plan shows that Shandong Dacheng will gain Shandong Hualian's 100% shares. And then, Shandong Dacheng will be turned into a mining company whose main business is iron ore mining & dressing. The core business of Shandong Dacheng is chemical pesticides, production and sale of basic chemical raw materials before the assets reorganization. After the completion of assets reorganization, Shandong Dacheng will sell out all its original assets and liabilities, and Shandong Hualian will become a wholly-owned subsidiary of Shandong Dacheng. From then on,
Shandong Dacheng's main business will be changed to iron mining, production and sale of iron powder. Shandong Hualian will get backdoor listing after the reorganization is completed successfully, making access to capital market financing platform. In these two cases, the restructuring companies are listed pesticide companies. Because of the significant decline in pesticides' overall profitability, listed pesticide companies are becoming the objects of some large enterprises' backdoor listing, for accessing the financing platform of the capital market. This happens under certain policy backgrounds. In recent years, the listed companies have been facing many difficulties impacted by the international financial crisis, the cyclical adjustment of pesticide and chemical industry, the rising raw material price and the weak profitability. In August 2010, the State Council issued the Opinions of the State Council on Promoting Enterprise Merger and Restructuring and proposed to support the corporate M&A through taking advantage of the capital market. The State Council also supports eligible enterprises' financing of M&A though issuing stocks, bonds, convertible bonds, etc. The listed companies are encouraged to use equity, cash and other financial innovations as payment means of M&A to broaden financing channels and improve the efficiency of M&A in capital market. The State Council also encourages and supports private enterprises to participate in the competitive fields of state-owned enterprises' reform, restructuring and reorganization, which promotes the development of non-public economy and SMEs.
Major domestic M&A in pesticide industry
n recent 2-3 years, domestic pesticide companies are restructuring frequently, and many companies have implemented the M&A. It has become a consensus in the industry that M&A can improve the industrial concentration and enhance the competitiveness of the enterprises. However, M&A between different enterprises have different purposes.
Agrochemical mainly produce more than fifty kinds of products, including three serials of pesticide (herbicides, insecticides and bactericide), acyl chloride series of intermediates (for pesticide, medicine and dye) and phosgenation series of intermediates (for pesticide, medicine and dye), etc. After the acquisition completes successfully, Lier Chemical could improve the product mix, enhance the ability to resist risks and expand its sales network and business scale. That Noposion shares the equity of Jiangsu Changlong Farm Chemicals Co., Ltd. (Changlong Farm Chemical) is an important step for Noposion to extend the upstream industry chain, to enhance its long-term competitive advantages in pesticide field. Changlong Farm Chemical is one of the advanced companies in pesticide technical field, and it is also a medium-sized technical company with mature technology in China. It has perfect product mix and beneficial phosgene resources. Through this acquisition, on one hand, Noposion can gain a reliable source of pesticide technical and accelerate the industrial speed of pesticide formulations; on the other hand, this case has played a positive role in ensuring the
Such as Shenzhen Noposion Pesticide Co., Ltd. (Noposion), Lier Chemical Co., Ltd.(Lier Chemical) and other listed companies, their acquisition strategy generally is, looking for companies with complementary strengths, diversifing products and expanding business to increase profits. To analyze the case that Lier Chemical acquired Jiangsu Kuaida Agrochemical Co., Ltd. (Kuaida Agrochemical), Lier Chemicals main products are chloropyridines serial and its product mix is single. At present, Kuaida
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pesticide technical supply and reducing the risk in raw material procurement. The pesticide product registration and product patents owned by Fujian Sino-dashing Bio-engineering Co., Ltd. Sino-dashing have great potential profitability. The purpose of Noposion's acquisition of Sino-dashing is to further improve its national distribution base, to form a multi-brand company and to accelerate development. And the purpose of Noposion's acquisition of Jinan Leeder Chemical Co., Ltd. Jinan Leeder Chemical is to further improve its product mix and accelerate the R&D, production and sale of herbicide products . Three distinct common features can be found from these M&A cases: first, both sides have strong complementarity in product species to meet each other's demand from the upstream or downstream industry chains. Second, the target enterprise has some advantages in R&D; Third, listed companies can expand the market through off-site acquisition. However, some of the companies M&A aim at obtaining a new profit source or backdoor listing, such as the M&A between Zibo Hongda Mining Co., Ltd. (Zibo Hongda) and Shandong Huayang Science and Technology Co., Ltd. (Huayang Technology), Shandong Hualian Mining Co., Ltd. (Shandong Hualian) and Shandong Dacheng Pesticide Co., Ltd. (Shandong Dacheng). The M&A purpose of Zibo Hongda and Shandong Hualian is backdoor listing to gain access to the capital market financing platform while Huayang Technology and Shandong Dachang are to obtain a new profit source. No matter what purposes they have on earth, they are practicers of the M&A which is greatly encouraged by the authority. TABLE 2: Major Domestic M&A in Pesticide Industry, 2009-2011
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Company dynamic
Shandong Kingenda seeks M&A
n April 26, 2011, Shandong Kingenta Ecological Engineering Co., Ltd. (Shandong Kingenta) released its operation performance in Q1 2011, showing a 28.5% growth in net income year-on-year. At present, Shandong Kingenta is the largest controlled release fertilizers (CRFs) producer in China, with the production capacity of 600,000t/a. By 2010, China has been the largest production and consumption country of CRFs in the world, with the production capacity of about 2.5 million tonnes per year, composing nearly one third of the world's total. However, CRFs' output of 700,000 tonnes only takes up 0.7% of the national total fertilizer output in 2010. Being gradually accepted by the government and farmers, development of CRFs is to witness a faster growth in the coming years. In the Guiding Catalog of Industrial Structure Adjustment (2011 edition), development of CRFs is classified as one of the encouraged items for the first time, which indicates that the development of CRFs will speed up during the 12th Five-Year Plan (2011-2015). To capture larger market share, Shandong Kingenta is to add investment to enlarge its production capacity, including expansion and merger & acquisition. In September 2010, Shandong Kingenta got listed on Shenzhen Stock Exchange to raise USD105.92 million (USD1=RMB6.74) for a new CRFs production line with capacity of 600,000t/a. When the new production line launches in Sep. 2012, Shandong Kingenta's CRFs production capacity will be doubled.
Besides expansion, Shandong Kingenta is seeking for merger & acquisition targets, expecting to enlarge its production capacity within a short time. As for the merger & acquisition targets, Shandong Kingenta prefers nitrogenous or phosphate fertilizer producers and compound fertilizer producers, according to Shandong Kingenta. That's primarily because nitrogenous or phosphate fertilizer is the main raw material of CRFs. Cooperating with nitrogenous or phosphate fertilizer producers will help Shandong Kingenta to extend to the upstream to save production cost. And cooperating with compound fertilizer producers will help Shandong Kingenta to strengthen the compound fertilizer production. Meanwhile, Shandong Kingenta prefers to cooperate with companies in Shandong, Guangxi, Guangdong, Hunan, Hubei and Northeast China, which indicates that Shandong Kingenta aims to capture a larger market share in these regions. About Shandong Kingenta Founded in 1998 and specialized in the R&D, manufacturing and marketing of compound fertilizers, controlled release fertilizers (CRFs) and new types of fertilizers, now Shandong Kingenta is the largest CRFs producer in China and the National Key High-tech Enterprise. In 2011, Shandong Kingenta has assets of USD674 million, nearly 3000 employees and holds 3.0 million t/ a fertilizer production capacity.
TABLE 3: Shandong Kingenta's performance, 2009-Q1 2011, USD
Note: USD1=RMB6.47 Source: CCM International
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OFCO Wine & Spirits Co., Ltd. (COFCO W&S), a subsidiary of China Oil & Foodstuffs Corporation (COFCO), respectively acquired Chateau de Viaud in Feb. 2011 and four of the six fields and a winery of Bisquertt Vineyard in Sept. 2010. Chateau de Viaud is a French wine producer in the Bordeaux Region, while Bisquertt Vineyard is one of the top ten winemakers in Chile. From the two M&A activities, it can be found that COFCO mainly focuses on productive assets like vineyards and wineries. It shows the company's determination to strengthen its ability to control the upstream of grape wine industry and the distribution of grape resource worldwide. Meanwhile, it's beneficial for COFCO W&S to form a broad product mix under the tight supply of every quality grape in domestic market. Besides, COFCO W&S will utilize foreign grape resources of high quality to launch a new brand of high-end grape wine in order to consolidate its leading position in domestic grape wine industry. And this will be helpful for its entering the international market. In recent three years, the consumption market of high-end grape wine has witnessed booming development with an annual average growth rate of around 50%. Just depending on the mid-end and low-end products is unfavorable to COFCO W&S while competing with other leading grape wine enterprises in domestic market. Therefore, getting high profit ratio and improving competitiveness are the key purposes for COFCO's active launches of M&A in grape wine industry. Moreover, taking over the two foreign vineyards favours COFCO to learn the advanced experience in order to further promote the development of domestic grape wine business and enhance its international influence.
COFCO further strengthens and expands wine market

Grape wine sector is just a part of the wine industry chain to COFCO W&S. In order to further expand its business, COFCO W&S plans to enter the liquor sector. During 2009-2010, a succession of "rumors" have come out that COFCO W&S has negotiated the cooperation matters with several national well-known liquor enterprises such as Guizhou Chun Liquor Factory (Guizhou Chun), Shaanxi Bai Shui Du Kang Liquor Co., Ltd. (Bai Shui Du Kang) and Shaanxi Xifeng Alcohol Co., Ltd. (Xifeng Alcohol). Though some confirmed negotiations (with Guizhou Chun and Xifeng Alcohol) were unsuccessful, it indicates the strong decision of COFCO W&S to enter the liquor sector. Though it's not difficult for COFCO W&S to build a new liquor factory to achieve its goals, the cost of production and management will be much more expensive than directly acquiring well-known liquor enterprises. Thus, COFCO W&S took a series of actions in liquor industry. However, there's something beyond the obvious. Actually, COFCO W&S hopes to not only perfect its wine industry chain but also enter the high-end market of liquor industry via the M&A of well-known liquor enterprises. This is all propelled by the high profit in high-end liquor industry. It's reported that the gross profit margin of many high-end liquor products exceeds 70%. The margin of Kweichow Moutai Co., Ltd. (Moutai) even comes up to 90%; leading liquor enterprises' gross profit margins in domestic market have always kept an average growth rate of around 30% in recent years. Owing to the above reasons, COFCO W&S won't give up seeking for reasonable liquor wine partners to achieve its goals. As to the grape wine sector, COFCO W&S declared in April 2011 that it will finish two M&A of large vineyards in the US and Australia this year to strengthen its leading position in the first group in the world and further realize its strategic development.
TABLE 4: M&A activities of COFCO W&S in grape wine industry, 2010-2011
TABLE 5: Some of rumors about COFCO W&S intending to acquire liquor eterprises, 2009-2010
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Bright Food shows ambition in domestic and overseas M&A

s a large conglomerate in China's food industry, Bright Food (Group) Co., Ltd. (Bright Food) has been carrying out M&A since 2010 after integrating its inner assets in 2009. It indicates the company's ambition of business expansion even thought the results are barely satisfactoryonly one of the five overseas M&A gets successful, while the rest ends in failure. Bright Food's launching large-scale M&A in 2010 is not a whim but an overall consideration to extend its food industrial chain from planting to sales of end products as well as ensure its leading position in food industry. Through M&A in different industries, it hopes to achieve full food industrial chain, make full use of the high-quality resources of companies it merges, establish extensive sales networks in the world and enter the high-end market to get high profit in food industry. It can be found that Bright Food's six M&A from 2010 to now are all related to its core business and target resource-intensive enterprises. In 2009, Bright Food purchased 60% shares of Yunnan Yinmore Sugar Co., Ltd. (Yunnan Yinmore). This deal promoted Bright Food's sales volume of sugar to reach 2.1 million tonnes and sales revenue beyond USD1.5 billion (RMB10 billion) that year. Also, it helps the company extend sales networks of sugar to Northeast China and Northwest China and obtain a market share up to 18% in domestic market. The successful in this M&A further strengthens Bright Food's leading position in China and makes it the largest sugar producer and marketer. It's reported that Bright Food has early began to prepare for the acquisition of sugar enterprises in other countries worldwide, which indicates its interest in food's upstream industry. Given the success in its acquisition of CSR Limited (CSR) in 2010, Bright Food would have got 45% of CSR's capacity of raw sugar in Australia and become one of the top three players in sugar industry in the world, but it failed. The same situation also happened in wine industry and rice industry. Bright Food enters liquor industry after merging Sichuan Quanxing Distillery Co., Ltd. (Sichuan Quanxing). It's reported that Bright Food is also seeking for wine resource in Australia. As to rice industry, Bright Rice Co., Ltd. (Bright Rice), a subsidiary of Bright Food, is ready to change its current self-sufficient production mode to a market-oriented one after largescale restructuring in 2010, and M&A will be the main channel to achieve its goal. At present, Bright Rice has been looking for partners in Anhui Province and northern Jiangsu Province to negotiate its purchase of their rice assets, laying the foundation for its future full food industrial chain.
To lay a global resource network and get high-quality resources, Bright Dairy & Food Co., Ltd. (Bright Dairy), a subsidiary of Bright Food, is actively finding suitable overseas investees. It invests in overseas companies because there are few excellent dairy companies left after several integration in the dairy industry after the 2008 melamine scandal, and high-quality raw milk is limited in China, while the price of imported premium milk powder is relatively low. In Oct. 2010, Bright Dairy successfully bought the 51% shares of Synlait Milk Limited (Synlait Milk), recording a big step for its internationalization. Now it can provide high-end infant formula for domestic customers with the help of foreign bases of high-quality raw milk. Synlait Milk is one of the suppliers of high value-added milk power worldwide, through the share purchase Bright Food sets foot in high-end products and upstream resource industry. Though its attempt to acquire the French company Yoplait in March 2011 failed, it should not prevent Bright Food's strategy of getting resources by capital methods. Besides, Bright Food expects to acquire global leading enterprises to smoothly enter overseas high-end food market. It hoped to enter overseas high-end food market by acquiring the world-largest producer of vitamins and health products in the USGeneral Nutrition Centres, Inc. who owns around 7,100 stores worldwide, and made full use of the latter's global sales network, but finally gave it up. Bright Food gets some advantages to successfully launch M&A. Firstly, as the largest food group in China at present and a state-owned enterprise, Bright Food is easy to get financial and policy support from government and strive for external financial support. Secondly, Bright Food's food industrial chain is relatively complete, which is helpful for it to utilize and integrate external resources to optimize own resource advantages. Also, Bright Food's advanced management and organization level is beneficial for it to merge domestic enterprises. However, the failure in some M&A also expose its disadvantages. First of all, lacking experiences in M&A makes it stand in a weak position while competing with leading investors around the world. Secondly, lower management and technology level compared with global leading enterprises is another reason for its failure. Thirdly, owing to language barrier, background and cultural difference, it's rare for East Asia countries to succeed in merging Euro-American enterprises; even Bright Food can't be exempted. Though most of its M&A carried out from 2010 are declared to be a failure, Bright Food won't stop its M&A
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steps. Bright Food expresses its development directions on 19th January, 2011 that it will continuously take M&A as an important measure to realize the growth targets. It's said that a series of M&A are being actively promoted in wine, dairy product, sugar and health product industry. TABLE 6: M&A cases of Bright Food, 2009-2011
Longping High-Tech: road to industry consolidation

firm determination of the administrators to develop Longping High-Tech. On 18 April 2011, the State Council Meeting discussed and approved the Suggestions for Accelerating Development of Modern Crop Seed Industry (the Suggestions). It emphasized that China must: adhere to the integration of crop seed industry resources; improve the support of policy and investment; rapidly enhance the technological innovation capability in crop seed industry, the competitiveness of enterprises, the seed supply capability and the supervision of the market; construct an integrated morden crop seed industry system. Longping High-Tech's superiority, on one hand is to set a high technical barrier, on the other hand is expected to become the focus of national policy support. In 2011, it has frequently taken some actions in rationalizing the equity relationship and the industry. In Feb. 2011, Longping High-Tech revealed that the equities of Changsha Xindaxin Weimai Agriculture Co., Ltd. (Xindaxin Weimai), the largest shareholder of Longping Hing-Tech, would be transferred. Vilmorin Hong Kong Limited (VHK), the second largest shareholder of Xindaxin Weimai and a subsidiary of Vilmorin & Cie, would sell its shares of Xindaxin Weimai to Hunan Xindaxin Co., Ltd. (Xindaxin), and after this is finished, the share structure of these companies would be greatly changed. Xindaxin has become the sole shareholder of Xindaxin Weimai. And then, Xindaxin Weimai has been transformed from a Sino-foreign joint venture into a domestic company. Prior to that, because of VHK's foreign background, Longping High-Tech is a Sino-foreign joint venture, which makes it hard to enjoy the policy support. After the transfer of its shareholder equities, Longping High-Tech has been changed into a domestic company, which qualifies the company to fully enjoy the state's policy support. Meanwhile, Longping CCM 11
n April 2011, Longping High-Tech has purchased 28% shares of Sichuan Longping, starting to solve the problem of minority shareholders on the road to achieve industry consolidation.
On 15 April 2011, Yuan Longping High-Tech Agriculture Co., Ltd. (Longping High-Tech) said it will purchase 28% equities of Sichuan Longping High-Tech Seeds Co., Ltd. (Sichuan Longping) with USD8.27 million. After the transaction was completed successfully, Longping High-Tech became the largest shareholder of Sichuan Longping, holding 80% of its total equities. Longping High-Tech expresses that the purpose of this purchase is to gradually increase its holding proportion of subsidiaries and to achieve industry consolidation progressively. Shareholders of Sichuan Longping before the purchase: Longping High-Tech held 52% shares, individual shareholder Liao Peizhong held 30% shares and individual shareholder Huang Weicui held 18% shares. Shareholders of Sichuan Longping after the purchase: Longping High-Tech holds 80% shares and individual shareholder Liao Peizhong holds 20% shares. All along, Longping High-Tech holds low-percentage equity in its five subsidiaries which earn more profits. In these five subsidiaries, a minority of shareholders hold a large proportion of shares and the profits are concentrated in the hands of the subsidiaries' supervisors. It resulted in the net profit outflow of Longping High-Tech, what's worse, many operations couldnt meet the requirements of the head office, and thus the company failed to form a scale economy. It is widely believed that, Longping High-Tech's expansion of its equity in Sichuan Longping this time means great significance for Longping High-Tech to build a bigger seed group; it is just the beginning of Longping HighTech's internal assets reorganization. It also shows the
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High-Tech released a report on 10 Feb. 2011 saying that it had signed an agreement with VHK on 27 Jan. to set up a joint venture for the development of corn seed, wheat seed and its other seed business. FIGURE 4: Shareholders of Sichuan Longping after the FIGURE 3: Shareholders of Sichuan Longping before the purchase, 2011 purchase, 2011
China BlueChemical to strengthen profitability through acquisition

hina BlueChemical Ltd. (CBC) benefits from its acquisitions within value chain. Now, China BlueChemical Ltd. (CBC) has become one of the largest fertilizer producers in China, mainly by mergers and acquisitions to expand its production capacity and enrich its product mix. Before 2006, CBC only operated urea capacity of 1.32 million tonnes per year, while it expanded its urea capacity to 1.84 million tonnes per year after acquiring Inner MongoliaTianye Chemical (Group) Co., Ltd. in March 2006. And CBC has been successfully engaged in phosphate fertilizer production by acquiring Hubei Dayukou Chemical Co., Ltd. (DYK Chemical) in Feb. 2009. In more detail, CBC has achieved not only capacity expansion but also expansion within value chain to consolidate its competitiveness. Leveraging on the acquired phosphorus ore (ZHJ Mining) and Note: * means acquired by China National Offshore Oil Corporation (CNOOC), the parent coal (Huahe Chemical) resources for company of CBC. Source: CCM International constructing vertically integrated phosphorus fertilizer and coal-based Primarily thanks to a series of acquisitions, CBC has urea production bases, CBC will be able to keep its gained high profits for six years. competitiveness in low cost. And the acquisition of Guangxi Fudao AMP helps CBC to cut distribution cost In 2011, CBC is to seek merger and acquisition and capture larger market share. opportunities that match its development strategies both in China and overseas.
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TABLE 7: China BlueChemical's acquisitions, 2006-2010
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CBC aims to become the largest chemical fertilizer manufacturer and the most effective resources-processing enterprise in domestic chemical industry, and it has also geared up for competing in the international market. TABLE 8: China BlueChemical's performance, 2005-2010, million USD
Note: On 28 Feb. 2009, CBC acquired 83.17% and 100% equity interest of DYK Chemical and ZHJ Mining respectively. As the three parities are all ultimately controlled by CNOOC before and after the acquisition, CBC chose to refer to the principles set out in Accounting Guideline when preparing the consolidated financial statements as if the acquisition had occurred from the date when the combining entities first came under the control of CNOOC, and the consideration was regarded as the deemed distribution to CNOOC, thus restarted the 2008 consolidated financial statements. USD1=RMB6.47 Source: China BlueChemical's Report
Price update
Agricultural products
The prices of five agricultural products and analysis in June, 2011, including wheat, corn, soybean, rapeseed, peanut. -- Wheat During the period from May 2010 to June 2010, price of wheat kept stable. And it is expected to steadily rise in the next half of this year and the increase rate will not surpass 5%. The purchase process of winter wheat has been simplified this year and the market prospect is good. -- Corn At present, domestic price of corn kept stable. The price in both northeast China and North China was at a high level, and it slightly increased in southern China owing to the intense market demand. In the near future, the market price of corn will keep stable then experience an uptrend. -- Soybean During the first five months of 2011, the total import of Chinese corn fell 1% to 1,941 million tonnes compared with August to Dec. of 2010. On one hand, the dealers are now spending the inventory; on the other hand, driven by the influence of pig disease and the weather, the filling of pigs has been put off so that the consumption of soybean did not see increase. In the near future, the price of soybean is anticipated to see little change. -- Rapeseed The planting area of rapeseed has been reduced this year compared with last year and the growth period of rapeseed was also affected by cold weather and spring drought, leading to a decline in total output of rapeseed. Therefore, since the rapeseed has been on the market,
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the price of rapeseed has been generally high with the growing planting cost. In the near future, the price of rapeseed will still maintain high level. -- Peanut In 2011, the planting situation of peanut is not optimistic, leading the price to easily rise. In May 2011, the price of peanut is rising sharply. In the near future, the price of peanut will rise due to the tight market supply.
Price of agricultural products in China, 24 June, 2011
Agrochemical
Agrochemical price review and analysis in June 2011, including fungicide, insecticide, herbicide and key raw material.
Market price of main pesticides in China in June 2011
-- Fungicide market In June 2011, prices of fungicide products have kept stable generally. The current price of carbendazim and mancozeb are USD5410/t, USD3,794/t separately. Due to the shortage of raw materials, the reduction of manufacturers and the increasing foreign demand, the price of tebuconazole technical is up to USD13,377/t, while it was USD12,896/t in May 2011.
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-- Insecticide market In June 2011, prices of insecticide products have kept stable generally. The price of lambda-cyhalothrin technical has been staying at USD28,594/t. The price of abamectin technical remains at USD86,553/t while the price of chlorpyrifos keeps stable at USD5,873/t. Due to the reduction in the manufacturer number and the increase in government purchase orders. The price of Imidacloprid technical is reported to up to USD17,774/t from USD17,692/t in May 2011. -- Herbicide market In June 2011, prices of herbicide products have also kept stable generally. The price of paraquat is USD2,161/t. The price of pendimethalin has dropped to USD7,679/t, and that of the nicosulfuron remains at USD31,635/t. Due to the high production cost and depressed market, the price of glyphosate technical has declined slightly to USD3,369/ t from USD3,460/t in May 2011.
Market price of some key raw materials in China in June 2011
-- Raw material market In June 2011, the prices of raw materials have witnessed an overall increase. Attributed to the higher operating rate of yellow phosphorus and the prosperity of the downstream demand, the price of yellow phosphorus has increased to USD2,318/t in June 2011. In this period, the market price of ethylenediamine is USD7,960/t, and the price of pyridine remains at USD4,482/t.
Food
The prices of five food products and analysis in June, 2011, including sugar, peanut oil, soybean oil, rapeseed oil and raw milk. -- Sugar Because the production of sugar is limited by the seasons, and now it is the time for the growth of sugar cane and beet and every sugar enterprises have small inventory. The average price is USD10.55 higher than in 24th May and the price of sugar may increase in the next few months from this time on, which is predictedly driven by the strong consumption in summer.
Price of sugar by regions in China, 24 June 2011
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However, as the government has kept putting a considerable amount of reserve sugar into the market since early 2011, for example on 31st May, it put 250,000 tonnes on the market, the price of sugar will not increase in a large range. -- Grain oil
Mainstream price of several grain oil in China, 24 June 2011
oil. The government turns to purchase rapeseed to fullfill stock instead of selling rapeseed oil on 7th June, 2011. Therefore, the price of rapeseed oil will also post increase in the future.
-- Raw milk
In Q1 and Q2 in 2011, the price of raw milk kept relatively stable but witnessed a slight decrease in Q2. This is because usually Q2 and Q3 is the peak production season for raw milk and the supply is sufficient. Owing to the impact from reauditing the production licenses of dairy enterprises by related departments, part of small enterprises have to stop the dairy production, which leads to the decline in demand for raw milk. Therefore, the price of raw milk will drop accordingly in a short time.
Average price of raw milk in China, Jan.-May 2011
Owing to peanut oil's higher price than other grain oils and bleak market demand, the volume of market transaction was limited in the past months. It's estimated that the trend will continue in the next few months. Therefore, the price of peanut oil will stay stable because of the rigid demand. The price of soybean oil may not take an uptrend in the next few months. Because the supply of soybean is sufficient for the market demand. The government's measure on limiting price of small packing soybean oil may not end in the next few weeks, so it may prevent the price from rising to some extent. Moreover, the strong demand for soybean meal, which consumes more soybean than soybean oil, may also drive soybean oil's price to rise. Owing to the high cost of rapeseed planting and declining profit for farmers, the planting area of rapeseed is dropping. The insufficient supply for rapeseed may expectedly push up the price of rapeseed
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Journalist: Zaoqun Chen, Bang Deng, Rongli Wei Editor: Emma Chen Chief Editor: Norman Lai, Hongxiang Du Publisher: CCM International Limited
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