1. China Agriculture Investment ExpressVol.1 Issue 01 2011Copyright CCM International Limited

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China Agriculture Investment ExpressVol.1 Issue 01.11 ContentsEditors NoteIHeadlines of China Agriculture Investment Express 1101IIPolicy & Legislation18 measures promoting China agricultural products logistics1Policies on foreign investment in China stricter1Laws and regulations on food safety accelerate M&A in food industry 2Industry dynamic3Phosphorus ore resource draws wide attention3M&A to continue in feed industry4M&A in global agricultural industry increasing5Two listed pesticide companies transformed into mining corp.5Major domestic M&A in pesticide industry6Company dynamic 8Shandong Kingenda seeks M&A 8COFCO further strengthens and expands wine market 9Bright Food shows ambition in domestic and overseas M&A10Longping High-Tech: road to industry consolidation 11China BlueChemical to strengthen profitability through acquisition 12Price update13Agricultural products13Agrochemical 14Food 15Editors NoteWelcome to the first issue of China Agriculture Investment Express.Agriculture is important for China, which draws Chinese Central Governments close attention.With the industrial modernization, Chinese agricultural industry is to develop to be moreenvironmentally friendly, hi-tech-oriented and less resource-dependent.However, agrichemical industries, such as fertilizer and pesticide industries, are facingovercapacity; feed industry requires upgrading and food industry witnesses security crisis. Hence,the government has restricted the chaotic expansion by implementing stricter requirements, suchas industrial entry criteria. To maintain long-term development and to develop with strongercompetitiveness, companies have to expand their capacities, enrich product portfolios and extendvalue chain through mergers and acquisitions (M&A) in the coming years.www.cnchemicals.com CCM I econtact@cnchemicals.com 3. China Agriculture Investment ExpressVol.1 Issue 01.11Headlines 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 theindustry. 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 Chinas 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 havingdifferent 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 grapewine sector and develop new fields to improve industrial chain. Bright Foods serial M&A launched from 2010 show its ambition to expand business, thoughthe results are not satisfactory. Longping High-Tech is on the road to achieve industry consolidation. China BlueChemical is to strengthen profitability through acquisition.www.cnchemicals.com CCM IIecontact@cnchemicals.com 4. China Agriculture Investment ExpressVol.1 Issue 01.11Policy & LegislationPolicies on foreign investment in China stricter I 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 Chinas 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 Chinas 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 countrys total.In recent years, deal in foreign M&A has increased with the growing laws and regulations of M&A Chinaissued. The Notice of the General Office of the State Council on the Establishment of the Security ReviewSystem for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the Notice) was releasedby the State Council of China on February 3, 2011, and the Notice covers agricultural products.The main purpose of the Notice is toFIGURE 1: Chinas foreign direct investment, 2006-2010improve Chinas foreign policies andregulations system, enhance transparencyand promote development of M&Aenterprises. Implementing safety reviewhas some effects on Chinas agriculturalproducts. First, it is effective to preventthe foreign enterprises monopolisticconduct in agricultural products andprocessing industry of agriculturalproducts. Second, it is helpful to stabilizeprices of agricultural products. Third,it is effective to promote independentinnovation capability of China agriculturalenterprises. Then, it is beneficial forresonable utilization of foreign capitalconcerning agriculture. Fourth, it willbetter ensure the development of domestic Source: CCM Internationalagricultural enterprises.At present, foreign enterprises continue to control the Chinese key agricultural enterprises, trade andprocessing enterprises in China agricultural products industry. China agricultural products and market havebeen brought into global markets by foreign enterprises, then these foreign enterprises form absolute controland 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 Chineseagricultural industry or establish monopoly, small and medium-sized enterprises in China will be likely to bewashed out from the market, and it even threats the supply of agricultural products. And whats worse, it will8 measures promoting China agricultural products logistics O 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 betweenagriculture schools and agricultural enterprises; strictly implement the policies related to fresh agriculturalproducts distribution channels; to speed up development of modern logistics concerning food and cotton. Atpresent, the underdeveloped of agricultural products logistics has blocked the development of agriculture inChina.The measures have a great influence on logistics industry of agricultural products and that is good for Chinaswww.cnchemicals.comCCM 1econtact@cnchemicals.com 5. China Agriculture Investment ExpressVol.1 Issue 01.11seriously impact the national economic foundation.resource integration in logistics industry of agricultural products, encourage small and medium-sized agriculturalenterprises 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 forsolving the problems of packing difficulty, storage and transport difficulty in agricultural products logistics industryat present. Secondly, they are expected to help reduce the cost of manufacturers of agricultural products logisticsand improve the profitability of enterprises. Then, the measures will promote the reduction in prices of agriculturalproducts, stablize the prices of agricultural commodities and guarantee security of food. Moreover, they are helpfulto reduce tax of agricultural products enterprises.At present, if the difficulties of agricultual products logistics transport are settled, it will enhance enthusiasm offarmers to plant and increase the income of farmers, promoting the development of Chinas agriculture. Data showthat fruits and vegetable lose 25% to 30% during picking, transportation and storage in China. Based on this, thereare 100 million tonnes of fruits and vegetable rotting in China each year, while the loss rate of fruits and vegetableis controlled under 5% by developed countries, especially for the US whose rate maintains 1% to 2%. What worthmentioning 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 agriculturalindustry. In the long run, this measures promulgated by Chinese government are beneficial to strengthen theinternational competitiveness of domestic agricultural enterprises, improve the products and services of agriculturalproducts in China, increase the investment in logistics industry related to agricultural products and improve thelogistics network of agricultural products.Laws and regulations on food safety accelerate M&A in food industryAseries of laws and regulations on food safety have been released in recent years, which maywith small production scale, chaotic managementand dispersed distribution difficult for supervision. Inaccelerate the M&A process in Chinas food industry.order to strengthen the supervision of food industry,They are Food Safety Law of the Peoples Republic ofthe government raises the market access threshold byChina released in 2009, Notice of the General Officeimplementing the license system. Its reported thatof the State Council on Rigorously Cracking Downthere are only more than 100 thousand food enterpriseson Illegal Adding of Food Additives on 21 April 2011having the ability to get the license, which means a largeand the latest Standards for Uses of Food Additives part of enterprises have to withdraw from the market.(GB2760-2011) coming into force on 20 June 2011 This is a great time for large food enterprises to expandand so on. The promulgation of them is triggered by bushiness through M&A. Take the dairy industry forsuccessive food safety incidents, such as the 2008example, General Administration of Quality Supervision,melamine scandal, milk tainted by leather protein,Inspection and Quarantine issued an announcement inclenbuterol-tainted pork and steamed buns containingDecember 2010, requesting all of the dairy enterprises toillegal yellow coloring. These laws and regulations not reapply for the production license. As of 31 March 2011,only restrain food producers from illegally using foodonly 643 among 1,176 dairy enterprises have passed theadditives to ensure civilians health, but also createreexamination, with a passing rate of no more than 55%.the best time for M&A in food industry.And some provisions indirectly increase the production Food Safety Law of of the Peoples Republic of China cost of food enterprises, making those small players and Standards for Uses of Food Additives (GB2760-2011) operation hard to continue and thus providing a great stipulate the process of food production and operation chance for large players to carry out M&A. The Food and the application of food additives, helping eliminate Safety Law stipulates that food producers and operators the hidden danger of food safety in the aspects of man-must possess production equipment in accordance with made pollution and overuse of food additive. Somethe food variety and production volume; it also requires of the provisions will accelerate the M&A directly orfood producers to check the license and certification of indirectly.suppliers of food raw materials, food additives and otherfood-related products. Meanwhile, Standards for Uses In the Food Safety Law, the government requiresof Food Additives (GB2760-2011) clearly formulates food producers to implement the license system ofthe application range and application amount of production and operation. At present, there are more food additive. According to the data from National than 400 thousand food enterprises in China, almostBureau of Statistics of China, there are more thanwww.cnchemicals.com CCM 2econtact@cnchemicals.com 6. China Agriculture Investment ExpressVol.1 Issue 01.11 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 cant 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 Chinas 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. Its estimated that the number of future M&A will increase rapidly, promoted by the laws and regulations on food industry. Industry dynamicPhosphorus ore resource draws wide attentionW ith the exhausting phosphorus ore resource,phosphate fertilizer producers are to acquire phosphorus ore resource is essential for factory removal and new entrants.phosphorus ore resource to sustain long-termdevelopment, driven by the strict entry criteria for On March 25, 2011, Ministry of Industry andphosphate and ammonium production. Information Technology (MIIT) promulgated the exposure draft of the Entry Criteria for Phosphate and China is the second largest phosphorus ore reserves Ammonium Production (the Entry Criteria) which country in the world, only next to Morocco. Among the requires that the factories to remove and new entrants proven phosphorus ore reserves of 16.786 billion tonnes,should have their own phosphorus ore and sulfur ore only about 4.1 billion tonnes with actual economic valueresources. can be exploited technically in China, capturing 24% of the total reserves. In addition, only 52% of Chinas According to the Entry Criteria, in principle, the factories phosphorus ore reserves with actual economic value canto remove and new entrants are not allowed to build new be exploited under current technology.wet process phosphoric acid (WPA), monoammonium phosphate (MAP) and diammonium phosphate (DAP) China exploited 68.07 FIGURE 2: Price of phosphorus ore, 2008-2010 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. Driven by the soaring demand and exhausting resource, phosphorus ore price has seen an uptrend with fluctuation during 2008 to 2010, which brought many risksSource: 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 thethe existing compound fertilizer production plants are risk of phosphorus ore price fluctuation.located in county-level ecological protection areas, scenicareas, nature reserves, cultural heritage protection areas, Besides being beneficial for long-term development,etc., they have to relocate.www.cnchemicals.com CCM 3 econtact@cnchemicals.com 7. China Agriculture Investment ExpressVol.1 Issue 01.11By the end of 2010, there were 466 phosphate fertilizer producers in China, with the total production capacity ofover 21.00 million tonnes per year and the output of 17.01 million tonnes (100%P2O5) in 2010; while the apparentconsumption volume was only 14.75 million tonnes (100%P2O5). That is to say, Chinas phosphate fertilizerindustry is facing overcapacity.The most important is that many phosphate fertilizer producers that have to relocate their plants have nophosphorus ore resource of their own. To sustain long-term development, phosphate fertilizer producers will paymore attention to phosphorus ore resource.M&A to continue in feed industry In February 2011, the leading feed enterprise inthe world Nutreco Group purchased 100% shares funds, so they were squeezed out of the market. As predicted, the number of feed enterprises in China will of Zhuhai Shihai Feed Co., Ltd. (Zhuhai Shihai)decline continuously in the future. And it will reduce the a leading aquaculture feed company in Chinacost of M&A for large feed enterprises. Thus, its a great at a fancy price, attracting much attention in feed time for the expansion of large enterprises and the industry. Some other M&A cases also happenedintegration in feed industry. during 2010-2011. Its estimated that this M&A trend will continue in Chinas feed industry. Besides the current situation of feed industry in China, some of government regulations are favorable toCurrently, China is the second largest feed production large feed enterprises expansion. Measures for thecountry in the world. And feed industry plays an Examination of Feed Production Enterprises, issued onimportant role in the development of national economy. 1 May 2007 by the Ministry of Agriculture, emphasizesHowever, the degree of feed enterprises scale is much and standardizes the feed production to protect thelower than the US, the largest feed production country product quality. The regulation puts some pressurearound the world. As of 2006, there have been more on feed enterprises; unqualified enterprises have tothan 10,000 small-scale feed enterprises in China, but withdraw from the market. Small feed enterprises are ononly five have an annual output exceeding one milliona sticky wicket due to lack of sufficient funds to meet thetonnes. The total output of top ten feed enterprises justrequirements, while the raised threshold is beneficial foraccounts for 22% of the nations total.large feed enterprises.Through the M&A wave during 2005-2007, the numberMoreover, feed industrys development depends on theof small feed enterprises declined apparently. In 2007,development of breeding industry. In breeding industry,there were 15,400 feed enterprises in the whole nation,small-scale enterprises and farmers are graduallybut the figure reduced to 13,600 in 2008almost 2,000quitting due to the high production cost, while large-feed enterprises disappeared.scale breeding enterprises are forming, which will further intensify in the coming few years. At the sameSince 2008, the cost of raw materials and labor hastime, the strong demand for meat, eggs, and dairyrisen dramatically. The high production cost and products will drive the expansion of breeding industry.economic crisis in 2008 exerted great pressure on theAll these are beneficial for large feed enterprises todevelopment of feed industry, especially those small develop and enlarge scale.enterprises who couldnt afford the high cost and lacked TABLE 1: M&A cases in Chinas feed industry, 2005-2011Source: CCM Internationalwww.cnchemicals.com CCM 4econtact@cnchemicals.com 8. China Agriculture Investment ExpressVol.1 Issue 01.11Because the feed industry is easily impacted by market fluctuation and meager profit, feed enterprises haveto extend industrial chain to reduce the risk. Thus, feed enterprises would choose to acquire some breedingenterprises.However, there is a strange situation in Chinas feed industry. Its reported that some foreign-owned enterprisesattempted to enter the breeding industry through investing in feed industry, because its difficult for them to passthe certification auditing in breeding industry under the protection of Chinese government.Amidst M&A cases in Chinas feed industry, its not difficult to see that foreign-owned enterprises directacquisition of domestic enterprises is rare: only three cases during 2005-2011. High acquisition costs but low profitare the reasons. Its estimated that foreign-owned enterprises will take over some large feed enterprises whenChinas feed industry develops to a better stage. But joint investment together with domestic feed enterprises infeed industry is a common cooperation method.Therefore, M&A will still happen among domestic feed enterprises. And the M&A will continue in domestic feedindustry in the future to further promote the industrial integration.M&A in global agriculturalAccording to CCM Internationals survey, theenterprises involved in the M&A share some common industry increasingcharacteristics. First, some of them are shortage of rawmaterials. Second, they have solid financial strength In recent years, merger and acquisition (M&A)activities among global agricultural enterprisesand own rich experiences in the industry. Third, theyconduct M&A with the purpose of expanding industrial have increased year by year. In 2008, the worldschain. largest oil producer Bunge acquired the worlds largest corn processor, namely America CornFor the target company in the M&A, advanced Products International, Inc., which was driven by theproduction technologies, rich administrative experience increasing global grain demand and the rising food and capital will be introduced, helping boost technology price. Moreover, less profit has been gained fromlevel and R&D capability of the target company. the industry and M&A will absolutely help Bunge to expand its business. However, in the long run, it will to some extent threatengrain security of the target country. Take China which Many reasons are accountable for the increasing M&Ahas vast land and huge pupulation for example, its activities in global agricultural enterprises. Nowadays, complex situation makes the Chinese Goverment has the competition in global agricultural industry becomesto be greatly aware of the grain security and know the more intense, leading to the reduction of profit and the market well. increase of risk. M&A will facilitate the enterprises to expand their market share and enhance their status But on the whole, M&A is of great significance, making in the global stage. For example, Sinochem corpresource allocation more efficient, optimizing industry purchased Makhteshim Agan Group with a bid tostructrue, and promoting development of global increase market share in May 2011. agricultural industry. Two listed pesticide companies transformed into mining corp.Shandong 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 Technologys 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 Hongdas purpose of bidding for Huayangwww.cnchemicals.com CCM 5 econtact@cnchemicals.com 9. China Agriculture Investment ExpressVol.1 Issue 01.11Technologys equities clearly aims at the access to capitalShandong Dachengs main business will be changedmarket financing platform and backdoor listing.to iron mining, production and sale of iron powder. Shandong Hualian will get backdoor listing after theThe same restructuring has also happened in Shandong reorganization is completed successfully, making accessDacheng Pesticide Co., Ltd. (Shandong Dacheng).to capital market financing platform.On 18 Jan. 2011, Shandong Dacheng Pesticide Co., In these two cases, the restructuring companies areLtd. (Shandong Dacheng), a listed pesticide company, listed pesticide companies. Because of the significantsaid it will launch major assets reorganization. It is decline in pesticides overall profitability, listed pesticidenot until 25 March 2011 that China National Chemical companies are becoming the objects of some largeCorporation (ChemChina), the biggest shareholder ofenterprises backdoor listing, for accessing the financingShandong Dacheng, selected a united transferee body to platform of the capital market. This happens underpurchase Shandong Dachengs state-owned shares. Thecertain policy backgrounds.united transferee body consists of Shandong YinshanInvestment Co., Ltd. (Yinshan Investment), Dongli Town In recent years, the listed companies have been facingCollective Assets Management Center (Managementmany difficulties impacted by the international financialCenter) and Beijing Huiquan International Investment crisis, the cyclical adjustment of pesticide and chemicalCo., Ltd. (Huiquan International). On 31 March industry, the rising raw material price and the weak2011, Shandong Dacheng announced a major assetsprofitability. In August 2010, the State Council issued therestructuring plan, and the counterpart is ShandongOpinions of the State Council on Promoting EnterpriseHualian Mining Co., Ltd. (Shandong Hualian), whose Merger and Restructuring and proposed to supportcontrolling shareholder is the joint transferee. Thisthe corporate M&A through taking advantage of theplan shows that Shandong Dacheng will gain Shandongcapital market. The State Council also supports eligibleHualians 100% shares. And then, Shandong Dachengenterprises financing of M&A though issuing stocks,will be turned into a mining company whose mainbonds, convertible bonds, etc. The listed companiesbusiness is iron ore mining & dressing.are encouraged to use equity, cash and other financial innovations as payment means of M&A to broadenThe core business of Shandong Dacheng is chemicalfinancing channels and improve the efficiency of M&Apesticides, production and sale of basic chemicalin capital market. The State Council also encouragesraw materials before the assets reorganization. Afterand supports private enterprises to participate in thethe completion of assets reorganization, Shandongcompetitive fields of state-owned enterprises reform,Dacheng will sell out all its original assets and liabilities, restructuring and reorganization, which promotes theand Shandong Hualian will become a wholly-owneddevelopment of non-public economy and SMEs.subsidiary of Shandong Dacheng. From then on, Major domestic M&A in pesticide Agrochemical mainly produce more than fifty kinds of products, including three serials of pesticide (herbicides,industry insecticides and bactericide), acyl chloride series of intermediates (for pesticide, medicine and dye) and I n recent 2-3 years, domestic pesticide companies are restructuring frequently, and many companies phosgenation series of intermediates (for pesticide, medicine and dye), etc. After the acquisition completes have implemented the M&A. It has become a successfully, Lier Chemical could improve the product consensus in the industry that M&A can improvemix, enhance the ability to resist risks and expand its the industrial concentration and enhance thesales network and business scale. competitiveness of the enterprises. However, M&A between different enterprises have different purposes.That Noposion shares the equity of Jiangsu Changlong Farm Chemicals Co., Ltd. (Changlong Farm Chemical) isSuch as Shenzhen Noposion Pesticide Co., Ltd.an important step for Noposion to extend the upstream(Noposion), Lier Chemical Co., Ltd.(Lier Chemical) industry chain, to enhance its long-term competitiveand other listed companies, their acquisition strategy advantages in pesticide field. Changlong Farm Chemicalgenerally is, looking for companies with complementary is one of the advanced companies in pesticide technicalstrengths, diversifing products and expanding business field, and it is also a medium-sized technical companyto increase profits. with mature technology in China. It has perfect product mix and beneficial phosgene resources. Through thisTo analyze the case that Lier Chemical acquired Jiangsuacquisition, on one hand, Noposion can gain a reliableKuaida Agrochemical Co., Ltd. (Kuaida Agrochemical), source of pesticide technical and accelerate the industrialLier Chemicals main products are chloropyridinesspeed of pesticide formulations; on the other hand,serial and its product mix is single. At present, Kuaida this case has played a positive role in ensuring thewww.cnchemicals.comCCM 6econtact@cnchemicals.com 10. China Agriculture Investment ExpressVol.1 Issue 01.11 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 Noposions acquisition of Sino-dashing is to furtherimprove its national distribution base, to form a multi-brand company and to accelerate development. And thepurpose of Noposions acquisition of Jinan Leeder Chemical Co., Ltd. Jinan Leeder Chemical is to further improveits 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 complementarityin product species to meet each others demand from the upstream or downstream industry chains. Second, thetarget enterprise has some advantages in R&D; Third, listed companies can expand the market through off-siteacquisition.However, some of the companies M&A aim at obtaining a new profit source or backdoor listing, such as the M&Abetween 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 PesticideCo., Ltd. (Shandong Dacheng). The M&A purpose of Zibo Hongda and Shandong Hualian is backdoor listing togain access to the capital market financing platform while Huayang Technology and Shandong Dachang are toobtain 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, 2009-2011Source: CCM Internationalwww.cnchemicals.com CCM 7econtact@cnchemicals.com 11. China Agriculture Investment ExpressVol.1 Issue 01.11 Company dynamic Shandong Kingenda seeks M&A On April 26, 2011, Shandong Kingenta EcologicalEngineering Co., Ltd. (Shandong Kingenta)Besides expansion, Shandong Kingenta is seeking formerger & acquisition targets, expecting to enlarge its released its operation performance in Q1 2011, production capacity within a short time. showing a 28.5% growth in net income year-on-year.As for the merger & acquisition targets, ShandongAt present, Shandong Kingenta is the largest controlled Kingenta prefers nitrogenous or phosphate fertilizerrelease fertilizers (CRFs) producer in China, with theproducers and compound fertilizer producers, accordingproduction capacity of 600,000t/a.to Shandong Kingenta.By 2010, China has been the largest production andThats primarily because nitrogenous or phosphateconsumption country of CRFs in the world, with thefertilizer is the main raw material of CRFs. Cooperatingproduction capacity of about 2.5 million tonnes per with nitrogenous or phosphate fertilizer producers willyear, composing nearly one third of the worlds total.help Shandong Kingenta to extend to the upstream tosave production cost. And cooperating with compoundHowever, CRFs output of 700,000 tonnes only takes up fertilizer producers will help Shandong Kingenta to0.7% of the national total fertilizer output in 2010. Being strengthen the compound fertilizer production.gradually accepted by the government and farmers,development of CRFs is to witness a faster growth in theMeanwhile, Shandong Kingenta prefers to cooperatecoming years. with companies in Shandong, Guangxi, Guangdong,Hunan, Hubei and Northeast China, which indicatesIn the Guiding Catalog of Industrial Structurethat Shandong Kingenta aims to capture a larger marketAdjustment (2011 edition), development of CRFs is share in these regions.classified as one of the encouraged items for the firsttime, which indicates that the development of CRFs will About Shandong Kingentaspeed up during the 12th Five-Year Plan (2011-2015).Founded in 1998 and specialized in the R&D,To capture larger market share, Shandong Kingenta ismanufacturing and marketing of compound fertilizers,to add investment to enlarge its production capacity, controlled release fertilizers (CRFs) and new types ofincluding expansion and merger & acquisition. fertilizers, now Shandong Kingenta is the largest CRFsproducer in China and the National Key High-techIn September 2010, Shandong Kingenta got listed onEnterprise.Shenzhen Stock Exchange to raise USD105.92 million(USD1=RMB6.74) for a new CRFs production line withIn 2011, Shandong Kingenta has assets of USD674capacity of 600,000t/a. When the new production million, nearly 3000 employees and holds 3.0 million t/line launches in Sep. 2012, Shandong Kingentas CRFsa fertilizer production capacity.production capacity will be doubled. TABLE 3: Shandong Kingentas performance, 2009-Q1 2011, USDNote: USD1=RMB6.47Source: CCM Internationalwww.cnchemicals.com CCM 8econtact@cnchemicals.com 12. China Agriculture Investment ExpressVol.1 Issue 01.11 COFCO further strengthens and expands wine market C OFCO Wine & Spirits Co., Ltd. (COFCO W&S), a subsidiary of China Oil & Foodstuffs Corporation Grape wine sector is just a part of the wine industry chain to COFCO W&S. In order to further expand (COFCO), respectively acquired Chateau de Viaud its business, COFCO W&S plans to enter the liquor in Feb. 2011 and four of the six fields and a winerysector. During 2009-2010, a succession of "rumors" of Bisquertt Vineyard in Sept. 2010. Chateau de have come out that COFCO W&S has negotiated the Viaud is a French wine producer in the Bordeaux cooperation matters with several national well-known Region, while Bisquertt Vineyard is one of the top tenliquor enterprises such as Guizhou Chun Liquor Factory winemakers in Chile.(Guizhou Chun), Shaanxi Bai Shui Du Kang Liquor Co., Ltd. (Bai Shui Du Kang) and Shaanxi Xifeng AlcoholFrom the two M&A activities, it can be found thatCo., Ltd. (Xifeng Alcohol). Though some confirmedCOFCO mainly focuses on productive assets like negotiations (with Guizhou Chun and Xifeng Alcohol)vineyards and wineries. It shows the companys were unsuccessful, it indicates the strong decision ofdetermination to strengthen its ability to control the COFCO W&S to enter the liquor sector.upstream of grape wine industry and the distributionof grape resource worldwide. Meanwhile, its beneficialThough its not difficult for COFCO W&S to build a newfor COFCO W&S to form a broad product mix under theliquor factory to achieve its goals, the cost of productiontight supply of every quality grape in domestic market.and management will be much more expensive than directly acquiring well-known liquor enterprises. Thus,Besides, COFCO W&S will utilize foreign grape resourcesCOFCO W&S took a series of actions in liquor industry.of high quality to launch a new brand of high-end grapeHowever, theres something beyond the obvious.wine in order to consolidate its leading position in Actually, COFCO W&S hopes to not only perfect itsdomestic grape wine industry. And this will be helpful wine industry chain but also enter the high-end marketfor its entering the international market. In recent three of liquor industry via the M&A of well-known liquoryears, the consumption market of high-end grape wine enterprises. This is all propelled by the high profit inhas witnessed booming development with an annual high-end liquor industry. Its reported that the grossaverage growth rate of around 50%. Just depending on profit margin of many high-end liquor products exceedsthe mid-end and low-end products is unfavorable to 70%. The margin of Kweichow Moutai Co., Ltd. (Moutai)COFCO W&S while competing with other leading grape even comes up to 90%; leading liquor enterprises grosswine enterprises in domestic market. Therefore, gettingprofit margins in domestic market have always kept anhigh profit ratio and improving competitiveness are theaverage growth rate of around 30% in recent years.key purposes for COFCOs active launches of M&A ingrape wine industry. Owing to the above reasons, COFCO W&S wont give up seeking for reasonable liquor wine partners toMoreover, taking over the two foreign vineyards favoursachieve its goals. As to the grape wine sector, COFCOCOFCO to learn the advanced experience in order to W&S declared in April 2011 that it will finish two M&Afurther promote the development of domestic grapeof large vineyards in the US and Australia this year towine business and enhance its international influence. 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, 2010-2011Source: CCM International TABLE 5: Some of rumors about COFCO W&S intending to acquire liquor eterprises, 2009-2010Source: CCM Internationalwww.cnchemicals.com CCM 9econtact@cnchemicals.com 13. China Agriculture Investment ExpressVol.1 Issue 01.11Bright Food shows ambition in domestic and overseas M&A As a large conglomerate in Chinas food industry,Bright Food (Group) Co., Ltd. (Bright Food) has To lay a global resource network and get high-quality been carrying out M&A since 2010 after integrating resources, Bright Dairy & Food Co., Ltd. (Bright Dairy), its inner assets in 2009. It indicates the companys a subsidiary of Bright Food, is actively finding suitable ambition of business expansion even thought theoverseas investees. It invests in overseas companies results are barely satisfactoryonly one of the five because there are few excellent dairy companies left overseas M&A gets successful, while the rest ends in after several integration in the dairy industry after the failure. 2008 melamine scandal, and high-quality raw milk islimited in China, while the price of imported premiumBright Foods launching large-scale M&A in 2010 ismilk powder is relatively low. In Oct. 2010, Brightnot a whim but an overall consideration to extend its Dairy successfully bought the 51% shares of Synlaitfood industrial chain from planting to sales of end Milk Limited (Synlait Milk), recording a big step for itsproducts as well as ensure its leading position in food internationalization. Now it can provide high-end infantindustry. Through M&A in different industries, it hopes formula for domestic customers with the help of foreignto achieve full food industrial chain, make full use of the bases of high-quality raw milk. Synlait Milk is one of thehigh-quality resources of companies it merges, establishsuppliers of high value-added milk power worldwide,extensive sales networks in the world and enter the through the share purchase Bright Food sets foot inhigh-end market to get high profit in food industry. It high-end products and upstream resource industry.can be found that Bright Foods six M&A from 2010 Though its attempt to acquire the French companyto now are all related to its core business and targetYoplait in March 2011 failed, it should not preventresource-intensive enterprises. Bright Foods strategy of getting resources by capitalmethods.In 2009, Bright Food purchased 60% shares of YunnanYinmore Sugar Co., Ltd. (Yunnan Yinmore). This deal Besides, Bright Food expects to acquire global leadingpromoted Bright Foods sales volume of sugar to reach enterprises to smoothly enter overseas high-end food2.1 million tonnes and sales revenue beyond USD1.5market. It hoped to enter overseas high-end food marketbillion (RMB10 billion) that year. Also, it helps the by acquiring the world-largest producer of vitamins andcompany extend sales networks of sugar to Northeast health products in the USGeneral Nutrition Centres,China and Northwest China and obtain a market share Inc. who owns around 7,100 stores worldwide, andup to 18% in domestic market. The successful in thismade full use of the latters global sales network, butM&A further strengthens Bright Foods leading positionfinally gave it up.in China and makes it the largest sugar producer andmarketer. Bright Food gets some advantages to successfullylaunch M&A. Firstly, as the largest food group inIts reported that Bright Food has early began to China at present and a state-owned enterprise, Brightprepare for the acquisition of sugar enterprises in Food is easy to get financial and policy support fromother countries worldwide, which indicates its interest government and strive for external financial support.in foods upstream industry. Given the success in its Secondly, Bright Foods food industrial chain isacquisition of CSR Limited (CSR) in 2010, Bright Food relatively complete, which is helpful for it to utilize andwould have got 45% of CSRs capacity of raw sugar inintegrate external resources to optimize own resourceAustralia and become one of the top three players inadvantages. Also, Bright Foods advanced managementsugar industry in the world, but it failed. and organization level is beneficial for it to mergedomestic enterprises. The same situation also happened in wine industry andrice industry. Bright Food enters liquor industry after However, the failure in some M&A also expose itsmerging Sichuan Quanxing Distillery Co., Ltd. (Sichuandisadvantages. First of all, lacking experiences in M&AQuanxing). Its reported that Bright Food is also seeking makes it stand in a weak position while competing withfor wine resource in Australia. As to rice industry,leading investors around the world. Secondly, lowerBright Rice Co., Ltd. (Bright Rice), a subsidiary ofmanagement and technology level compared with globalBright Food, is ready to change its current self-sufficient leading enterprises is another reason for its failure.production mode to a market-oriented one after large- Thirdly, owing to language barrier, background andscale restructuring in 2010, and M&A will be the main cultural difference, its rare for East Asia countries tochannel to achieve its goal. At present, Bright Ricesucceed in merging Euro-American enterprises; evenhas been looking for partners in Anhui Province and Bright Food cant be exempted.northern Jiangsu Province to negotiate its purchase oftheir rice assets, laying the foundation for its future fullThough most of its M&A carried out from 2010 arefood industrial chain.declared to be a failure, Bright Food wont stop its M&Awww.cnchemicals.comCCM 10econtact@cnchemicals.com 14. China Agriculture Investment ExpressVol.1 Issue 01.11steps. Bright Food expresses its development directions on 19th January, 2011 that it will continuously take M&Aas an important measure to realize the growth targets. Its said that a series of M&A are being actively promoted inwine, dairy product, sugar and health product industry. TABLE 6: M&A cases of Bright Food, 2009-2011Source: CCM InternationalLongping High-Tech: road to industry consolidationI n April 2011, Longping High-Tech has purchased28% shares of Sichuan Longping, starting to solvefirm determination of the administrators to developLongping High-Tech.the problem of minority shareholders on the road toachieve industry consolidation. On 18 April 2011, the State Council Meeting discussedand approved the Suggestions for Accelerating On 15 April 2011, Yuan Longping High-Tech AgricultureDevelopment of Modern Crop Seed Industry (the Co., Ltd. (Longping High-Tech) said it will purchase Suggestions). It emphasized that China must: adhere to 28% equities of Sichuan Longping High-Tech Seeds the integration of crop seed industry resources; improve Co., Ltd. (Sichuan Longping) with USD8.27 million. the support of policy and investment; rapidly enhance After the transaction was completed successfully,the technological innovation capability in crop seed Longping High-Tech became the largest shareholderindustry, the competitiveness of enterprises, the seed of Sichuan Longping, holding 80% of its total equities.supply capability and the supervision of the market; Longping High-Tech expresses that the purpose of thisconstruct an integrated morden crop seed industry purchase is to gradually increase its holding proportion system. of subsidiaries and to achieve industry consolidation progressively. Longping High-Techs superiority, on one hand is to seta high technical barrier, on the other hand is expected Shareholders of Sichuan Longping before the purchase:to become the focus of national policy support. In 2011, Longping High-Tech held 52% shares, individual it has frequently taken some actions in rationalizing the shareholder Liao Peizhong held 30% shares andequity relationship and the industry. individual shareholder Huang Weicui held 18% shares.In Feb. 2011, Longping High-Tech revealed that the Shareholders of Sichuan Longping after the purchase: equities of Changsha Xindaxin Weimai Agriculture Longping High-Tech holds 80% shares and individual Co., Ltd. (Xindaxin Weimai), the largest shareholder of shareholder Liao Peizhong holds 20% shares.Longping Hing-Tech, would be transferred. VilmorinHong Kong Limited (VHK), the second largest All along, Longping High-Tech holds low-percentage shareholder of Xindaxin Weimai and a subsidiary of equity in its five subsidiaries which earn more profits. Vilmorin & Cie, would sell its shares of Xindaxin Weimai In these five subsidiaries, a minority of shareholders to Hunan Xindaxin Co., Ltd. (Xindaxin), and after hold a large proportion of shares and the profitsthis is finished, the share structure of these companies are concentrated in the hands of the subsidiaries would be greatly changed. Xindaxin has become the sole supervisors. It resulted in the net profit outflow ofshareholder of Xindaxin Weimai. And then, Xindaxin Longping High-Tech, whats worse, many operationsWeimai has been transformed from a Sino-foreign joint couldnt meet the requirements of the head office, and venture into a domestic company. Prior to that, because thus the company failed to form a scale economy. It is of VHKs foreign background, Longping High-Tech is a widely believed that, Longping High-Techs expansion Sino-foreign joint venture, which makes it hard to enjoy of its equity in Sichuan Longping this time means greatthe policy support. After the transfer of its shareholder significance for Longping High-Tech to build a biggerequities, Longping High-Tech has been changed into a seed group; it is just the beginning of Longping High- domestic company, which qualifies the company to fully Techs internal assets reorganization. It also shows the enjoy the states policy support. Meanwhile, Longpingwww.cnchemicals.com CCM 11econtact@cnchemicals.com 15. China Agriculture Investment ExpressVol.1 Issue 01.11 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 3: Shareholders of Sichuan Longping before the FIGURE 4: Shareholders of Sichuan Longping after the purchase, 2011purchase, 2011 Source: CCM International Source: CCM International China BlueChemical to strengthen profitability through acquisition C hina BlueChemical Ltd. (CBC) benefits from its acquisitions TABLE 7: China BlueChemicals acquisitions, 2006-2010 within value chain.Now, China BlueChemical Ltd.(CBC) has become one of the largestfertilizer producers in China, mainlyby mergers and acquisitions to expandits production capacity and enrich itsproduct mix.Before 2006, CBC only operatedurea capacity of 1.32 million tonnesper year, while it expanded its ureacapacity to 1.84 million tonnes per yearafter acquiring Inner MongoliaTianyeChemical (Group) Co., Ltd. in March2006. And CBC has been successfullyengaged in phosphate fertilizerproduction by acquiring Hubei DayukouChemical Co., Ltd. (DYK Chemical) inFeb. 2009.In more detail, CBC has achievednot only capacity expansion butalso expansion within value chainto consolidate its competitiveness.Leveraging on the acquiredphosphorus ore (ZHJ Mining) andcoal (Huahe Chemical) resources for Note: * means acquired by China National Offshore Oil Corporation (CNOOC), the parentconstructing vertically integratedcompany of CBC. Source: CCM Internationalphosphorus fertilizer and coal-basedPrimarily thanks to a series of acquisitions, CBC hasurea production bases, CBC will be able to keep its gained high profits for six years.competitiveness in low cost. And the acquisition ofGuangxi Fudao AMP helps CBC to cut distribution costIn 2011, CBC is to seek merger and acquisitionand capture larger market share.opportunities that match its development strategies both in China and overseas.www.cnchemicals.comCCM 12 econtact@cnchemicals.com 16. China Agriculture Investment ExpressVol.1 Issue 01.11CBC aims to become the largest chemical fertilizer manufacturer and the most effective resources-processingenterprise in domestic chemical industry, and it has also geared up for competing in the international market. TABLE 8: China BlueChemicals 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 threeparities are all ultimately controlled by CNOOC before and after the acquisition, CBC chose to refer to the principles set out in AccountingGuideline when preparing the consolidated financial statements as if the acquisition had occurred from the date when the combiningentities first came under the control of CNOOC, and the consideration was regarded as the deemed distribution to CNOOC, thus restartedthe 2008 consolidated financial statements.USD1=RMB6.47Source: China BlueChemicals ReportPrice updateAgricultural products In the near future, the market price of corn will keepstable then experience an uptrend.The prices of five agricultural products and analysis inJune, 2011, including wheat, corn, soybean, rapeseed, -- Soybeanpeanut.During the first five months of 2011, the total import of-- WheatChinese corn fell 1% to 1,941 million tonnes comparedwith August to Dec. of 2010. On one hand, theDuring the period from May 2010 to June 2010, price dealers are now spending the inventory; on the otherof wheat kept stable. And it is expected to steadily rise hand, driven by the influence of pig disease and thein the next half of this year and the increase rate willweather, the filling of pigs has been put off so that thenot surpass 5%. consumption of soybean did not see increase.The purchase process of winter wheat has been In the near future, the price of soybean is anticipated tosimplified this year and the market prospect is good. see little change.-- Corn -- RapeseedAt present, domestic price of corn kept stable. The price The planting area of rapeseed has been reduced thisin both northeast China and North China was at a high year compared with last year and the growth period oflevel, and it slightly increased in southern China owingrapeseed was also affected by cold weather and springto the intense market demand. drought, leading to a decline in total output of rapeseed.Therefore, since the rapeseed has been on the market,www.cnchemicals.com CCM 13 econtact@cnchemicals.com 17. China Agriculture Investment ExpressVol.1 Issue 01.11the price of rapeseed has been generally high with thePrice of agricultural products in China, 24 June, 2011growing planting cost.In the near future, the price of rapeseed will stillmaintain high level.-- PeanutIn 2011, the planting situation of peanut is notoptimistic, 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 tothe tight market supply.Source: CCM International AgrochemicalAgrochemical price review and analysis in June 2011, including fungicide, insecticide, herbicide and key rawmaterial. Market price of main pesticides in China in June 2011 Source: CCM International-- Fungicide marketIn June 2011, prices of fungicide products have kept stable generally. The current price of carbendazim andmancozeb are USD5410/t, USD3,794/t separately. Due to the shortage of raw materials, the reduction ofmanufacturers and the increasing foreign demand, the price of tebuconazole technical is up to USD13,377/t, whileit was USD12,896/t in May 2011.www.cnchemicals.comCCM 14econtact@cnchemicals.com 18. China Agriculture Investment ExpressVol.1 Issue 01.11-- Insecticide marketIn June 2011, prices of insecticide products have kept stable generally. The price of lambda-cyhalothrin technicalhas been staying at USD28,594/t. The price of abamectin technical remains at USD86,553/t while the priceof chlorpyrifos keeps stable at USD5,873/t. Due to the reduction in the manufacturer number and the increasein government purchase orders. The price of Imidacloprid technical is reported to up to USD17,774/t fromUSD17,692/t in May 2011.-- Herbicide marketIn June 2011, prices of herbicide products have also kept stable generally. The price of paraquat is USD2,161/t. Theprice of pendimethalin has dropped to USD7,679/t, and that of the nicosulfuron remains at USD31,635/t. Due tothe 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 Source: CCM International-- Raw material marketIn June 2011, the prices of raw materials have witnessed an overall increase. Attributed to the higher operating rateof yellow phosphorus and the prosperity of the downstream demand, the price of yellow phosphorus has increasedto USD2,318/t in June 2011. In this period, the market price of ethylenediamine is USD7,960/t, and the price ofpyridine remains at USD4,482/t.Food Price of sugar by regions in China, 24 June 2011The prices of five food products and analysis in June,2011, including sugar, peanut oil, soybean oil, rapeseedoil and raw milk.-- SugarBecause the production of sugar is limited by theseasons, and now it is the time for the growth of sugarcane and beet and every sugar enterprises have smallinventory. The average price is USD10.55 higher thanin 24th May and the price of sugar may increase in thenext few months from this time on, which is predictedlydriven by the strong consumption in summer. Source: CCM Internationalwww.cnchemicals.com CCM 15econtact@cnchemicals.com 19. China Agriculture Investment ExpressVol.1 Issue 01.11However, as the government has kept putting a oil. The government turns to purchase rapeseed toconsiderable amount of reserve sugar into the marketfullfill stock instead of selling rapeseed oil on 7th June,since early 2011, for example on 31st May, it put 2011.250,000 tonnes on the market, the price of sugar willnot increase in a large range.Therefore, the price of rapeseed oil will also postincrease in the future.-- Grain oilMainstream price of several grain oil in China, 24 June 2011-- Raw milkIn Q1 and Q2 in 2011, the price of raw milk keptrelatively stable but witnessed a slight decrease inQ2. This is because usually Q2 and Q3 is the peakproduction season for raw milk and the supply issufficient. Owing to the impact from reauditing theproduction licenses of dairy enterprises by relateddepartments, part of small enterprises have to stop theSource: CCM International dairy production, which leads to the decline in demandfor raw milk. Therefore, the price of raw milk will dropaccordingly in a short time.Owing to peanut oils higher price than other grainoils and bleak market demand, the volume of marketAverage price of raw milk in China, Jan.-May 2011transaction was limited in the past months. Itsestimated that the trend will continue in the next fewmonths. Therefore, the price of peanut oil will staystable because of the rigid demand.The price of soybean oil may not take an uptrend inthe next few months. Because the supply of soybean issufficient for the market demand. The governmentsmeasure on limiting price of small packing soybean oilmay not end in the next few weeks, so it may preventthe price from rising to some extent. Moreover, the Source: CCM Internationalstrong demand for soybean meal, which consumes moresoybean than soybean oil, may also drive soybean oilsprice to rise.Owing to the high cost of rapeseed planting anddeclining profit for farmers, the planting area ofrapeseed is dropping. The insufficient supply forrapeseed may expectedly push up the price of rapeseedwww.cnchemicals.comCCM 16econtact@cnchemicals.com 20. Journalist: Zaoqun Chen, Bang Deng, Rongli WeiEditor: Emma ChenChief Editor: Norman Lai, Hongxiang DuPublisher: CCM International LimitedDisclaimer:1. CCM guarantees that the information contained in the report is accurate and reliable tothe best of its knowledge and its experience. CCM defines the report as a consulting productto provide information and does not guarantee its content 100% equals the reality. 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