Thursday, May 17, 2012

2011: Another Tough Year for Domestic Pesticide Elites

China released a policy to consolidate domestic pesticide industry in 2009, which was expected to benefit listed pesticide companies in China. However, things haven't proceeded as smoothly as expected. Most of the listed pesticide companies had a tough year in 2010, and their performance was even worse in 2011, according to CCM’s April issue of AgriChina Investor.
In Sept. 2009, China’s Ministry of Industry and Information Technology (MIIT) released the Draft for Pesticide Industry Policy, in order to consolidate the chaotic domestic pesticide industry. According to the policy, the number of China’s pesticide companies would be cut down by 30% by 2015. Some other ambitious targets were also set like top 20 pesticide companies would take over 50% market share by 2015, and over 70% by 2020.
The policy was cheered by leading pesticide companies in China. After the release of the policy, mergers and acquisitions (M&A) in China’s pesticide industry were expected, and leading pesticide companies, especially listed companies, were expected to benefit most from the policy. The stock price of domestic listed pesticide companies witnessed huge increase after the release of the policy.
However, the performance of over half of the listed pesticide companies in China showed a downtrend after the release of the policy.
In 2011, most listed pesticide companies in China have witnessed sales revenue increase, but over half of them have witnessed net profit decrease or even loss. Besides, for some companies with net profit increase, it can not be indicated that their operation was in a good condition. The net profit of Hunan Haili Chemical Industry Co., Ltd. is less than USD1 million in 2011. As for Anhui Huaxing Chemical Industry Co., Ltd., it received a subsidy of about USD11.81 million from the local government in 2011, which was counted into the company's profit in 2011. In fact, its operating profit was in a loss of USD14.15 million in 2011.

Almost all of these listed pesticide companies imputed their bad performance to the overcapacity, the increasing raw material price and labor cost, the RMB appreciation, the less occurrence of pests and diseases in China, etc.
In 2011, the production cost for most pesticides increased a lot. However, domestic companies dared not to raise their pesticide prices due to the overcapacity in the industry. As a result, gross profit margin dropped and net profit decreased.
The low price of glyphosate hugely impacted the key producers of this product, such as Zhejiang Wynca Chemical Industry Group Co., Ltd., Anhui Huaxing Chemical Industry Co., Ltd. and Nantong Jiangshan Agrochemical & Chemicals Co., Ltd. Besides, the low price of avermectin dragged down the net profit of Hebei Veyong Bio-Chemical Co., Ltd.

Overcapacity is still the major problem that hinders the development of domestic pesticide industry. The government hoped that M&A would do some help to solve this problem. However, three years after the release of the Draft for Pesticide Industry Policy, M&A cases are not as many as expected. Some listed pesticide companies even take the strategy to enter other business rather than strengthen their pesticide business by M&A. For example, Fujian Sannong Chemical & Pesticide Co., Ltd. entered the real estate business and its revenue from pesticide business accounted for less than 2% of the total sales revenue in 2011. Hebei Veyong Bio-Chemical Co., Ltd. entered energy business and its sales revenue from pesticide business accounted less than half of the total in 2011.

However, listed pesticide companies should not be too pessimistic, as things may turn better in 2012. Some small companies are withdrawing from this industry, and the overcapacity may be relieved to some degree. Besides, the occurrence of pests and diseases in 2012 is estimated to be more serious than that in 2011, which will increase demand for pesticide products.

Source: AgriChina Investor 1204

Content of AgriChina Investor 1204:
R&D reform in domestic seed industry: a tough road ahead
China reduces corn-based fuel ethanol subsidy in 2012
Vegetable oil price soaring in early April
National purchasing price increase of wheat may restrict demand for feed wheat in 2012
CAY organizing coffee enterprises to purchase unmarketable coffee beans in Yunnan
Chuying Agro-Pastoral eyes high-end pig market
Chinese tea industry facing external quality standard challenge
CGLC may taken over by COFCO or Sinograin
Sumitomo to enter rice distribution business in China
Beef cattle industry shows investment prospect
2011: Another tough year for domestic pesticide elites
Jan. – Feb. 2012 import of agricultural produces surges in China
2012 China to meet robust demand for corn import

AgriChina Investor, periodically published on 25th every month, offers timely update and close follow up of agriculture investment in China, analyzing market data and trends, as well as related policies. Major columns include investment environment, investment dynamics, market watcher, market review etc.

If you are interested in AgriChina Investor, please do not hesitate to contact us by +86-20-37616606, or email us at

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