Beijing, China
September 5, 2007
Origin Agritech Limited
(NASDAQ: SEED) ("Origin" or "the Company"), a
vertically-integrated supplier of premium corn, rice, cotton and
canola crop seeds, today announced unaudited financial results
for the three months ended June 30, 2007. Origin prepares its
financial statements in accordance with generally accepted
accounting principles of the United States.
Dr. Gengchen Han, Chairman and Chief Executive Officer of
Origin, commented, "Origin's proven business model allowed us to
successfully weather this important transition period in China's
hybrid seed industry. Although this transition period materially
impacted our results during fiscal 2007, as we look ahead to
fiscal 2008, we see an opportunity to broaden Origin's presence
in what we expect will be an environment of decreased
competition and improved pricing. Our optimism for next year is
influenced by a number of factors. The government-sponsored
companies affected by these regulations have now ceased
operations. Orders for our hybrid canola seeds, which have begun
shipping, are already up approximately 27% over total hybrid
canola shipments for all of last year, despite only being half
way through the canola selling season. We recently signed a
letter of intent to acquire a majority stake in a leading
manufacturer of fertilizer and chemical products in southern
China, with the potential to bolster our product line, expand
our distribution, and add in excess of US$100 million in
revenues upon closing. We were issued a pre-approval to begin
selling hybrid rice into Vietnam. And, we continue to invest the
necessary capital and human resources in the future of our
industry - biotechnology and genetically modified ("GM") crop
seed."
Revenues for the fiscal 2007 third quarter were RMB447.73
million (US$58.82 million), compared to revenues of RMB522.17
million (US$65.32 million) for the same period in fiscal 2006.
As previously announced, as a result of government mandated
regulation seed companies in China that heretofore had been
under-capitalized and government subsidized were forced out of
business and liquidated their inventories at below market
prices. Origin responded by lowering its average selling prices
(ASPs), although at a lesser rate than its competitors due to
the quality of its hybrid seeds and after-market support. Unit
sales also declined. Operating income for the fiscal 2007 third
quarter was RMB51.59 million (US$6.78 million), compared to
RMB124.29 million (US$15.55 million) for the third quarter of
fiscal 2006, due to lower revenues, the resultant gross margin
compression, and one-time non-cash charges of RMB12.60 million
(US$1.66 million) (see "Financial Results Overview and
Additional Updates"). Net income for the period was RMB36.89
million (US$4.85 million), or RMB1.50 (US$0.20) per diluted
share, as compared to net income of RMB123.89 million (US$15.50
million), or RMB5.18 (US$0.65) per diluted share, for the same
period in fiscal 2006. Net income included total one-time
charges of US$2.25 million.
Hybrid Seed Portfolio
Origin's hybrid seed portfolio is comprised of approximately 100
products. The Company has 5 new corn hybrids which have been
approved by the provincial variety authorization committee, and
expects that 15 new proprietary hybrid seeds will be approved
for sale in 2007.
While Origin continues to expand the breadth of its hybrid seed
portfolio, it believes that the future of agriculture in China
and around the world lies in biotechnology and GM seed. As an
ever-evolving business, Origin is investing heavily in
initiatives aimed at developing and delivering GM hybrids in
order to prepare for what it believes will be the eventual
approval of GM food seed products in China. Origin is the only
Chinese crop seed company with an in-house biotech center,
staffed by 40 full-time employees, and also owns 34% of
Biocentury Transgene (China) Co., Ltd. Origin's research center
is working on relevant commercial applications for targeted
genetic traits, and functions as a hub for alliances with
academic institutions and state run research programs. These
relationships allow Origin to participate in government
sponsored research, extending its research capabilities beyond
its in-house budget. Origin has been encouraged by its success
to date in this area. Researchers have begun development of Bt
Maize products with a stable gene demonstrating high levels of
activity beyond currently offered commercial products. Origin
continues to feel confident that once the GM marketplace opens
in China, it will be positioned strategically as the strongest
player in the market.
Guangxi Fortuneland Acquisition
The Company recently signed a letter of intent ("LOI") to
acquire a majority stake in Guangxi Fortuneland Agricultural
Corp., Ltd. ("Guangxi Fortuneland") (www.gxfmd.com). Origin
believes this acquisition will diversify its product line with
strong fertilizer and pesticide brands. In addition, Guangxi
Fortuneland possesses 5,000 distribution outlets in Guangxi
Province in southern China. Guangxi is one of the top 5
agricultural provinces within China and possesses strong ties to
the Vietnam marketplace. Based on preliminary analysis and
historical results, Guangxi Fortuneland should contribute in
excess of US$100 million in annual revenues. Additional details
will be released following the closing of the acquisition. The
acquisition is expected to close within an agreed upon time
frame, following the successful completion of required audits
and additional due diligence.
Realignment Completed - Stronger Internal Controls, New
Incentive Plan
Origin also recently completed the implementation of its
corporate realignment plan, under which it reorganized the
Company into four distinct business units according to product
line. In these specific business units -- Corn (Maize), Rice,
Cotton and Agrochemicals (including fertilizer and pesticides),
and Canola -- management re-evaluated existing processes,
implemented new rigid internal controls for the coming year, and
installed new incentive plans throughout the organization to
capitalize on the forthcoming opportunity in 2008. In total, and
as previously announced, this plan resulted in a headcount
reduction of approximately 150 personnel.
Vietnam Marketplace Opens
Origin signed an agreement under which it will sell its premium
rice hybrid in Vietnam. The agreement is expected to be
finalized by October 2007. Vietnam represents a 14-16 million
annual kilogram rice seed market opportunity with 75-80% of this
market comprised of international imports. While Vietnam is
primarily a rice producing nation, the demand for corn products
is rising. The climatic and agronomic conditions in southern
China are very similar to those in Vietnam, suggesting that
other hybrid seeds in Origin's current product portfolio are
well suited for the region.
Financial Results Overview and Additional Updates
Gross profit for the three months ended June 30, 2007 decreased
to RMB113.77million (US$14.95 million) from RMB160.53 million
(US$20.08 million) for the same period in 2006. The decrease in
gross margin from 30.74% to 25.41% was mainly caused by the
decrease in average sales price in the marketplace during this
transition year.
Total operating expenses for the three months ended June 30,
2007 totaled RMB62.18million (US$8.17 million), an increase of
71.59% from RMB36.24million (US$4.53 million) reported for the
same period in 2006. Specifically:
- General and administrative
expenses for the three months ended June 30, 2007 were
RMB32.52 million (US$4.27 million), an increase of 176.57%
from RMB11.76 million (US$1.47 million) for the same period
in 2006. This increase is primarily due to the inclusion of
Jilinchangrong's general and administrative expenses of
RMB5.09 million (US$0.67 million), RMB12.60 million (US$1.66
million) related to inventory write downs, and an increase
of RMB3.18 million (US$0.42 million) in employee salaries
and benefits.
- Selling and marketing
expenses for the three months ended June 30, 2007 decreased
by 13.02% to RMB18.27 million (US$2.40million) from RMB21.01
million (US$2.63 million) for the same period in 2006. This
decrease is primarily due to lower transportation fees of
RMB1.61 million (US$0.21 million) caused by the decrease in
the production of seeds, and a decline in advertising
expenses of RMB0.70 million (US$0.1 million), which was
caused by the change in marketing strategies in 2007 that
has placed an emphasis on providing services to local
farmers instead of advertising.
- Research and development
("R&D") expenses for the three months ended June 30, 2007
were RMB11.39 million (US$1.50million), as compared with
RMB3.47 million (US$0.43 million) for the same period in
2006. The increase is primarily due to the inclusion of
Jilinchangrong's research and development expenses of
RMB7.55 million (US$0.99million).
Operating income for the three months ended June 30, 2007
decreased 58.50% to RMB51.59 million (US$6.78 million) from
RMB124.29 million (US$ 15.55 million) for the same period in
2006.
Net income for the three months ended June 30, 2007 was RMB36.89
million (US$4.85 million), or RMB1.50 (US$0.20) per diluted
share, as compared to RMB123.89 million (US$15.50 million), or
RMB5.18 (US$0.65) per diluted share, for the same period in
2006.
Effective June 26, 2007, Origin's common stock qualified for
listing on the NASDAQ Global Select Market sm as a result of
meeting the most stringent listing standards worldwide.
Origin completed a Notes Purchase Agreement with entities
affiliated with Citadel Investment Group, L.L.C. ("Citadel") on
July 25, 2007, pursuant to which Citadel purchased $40 million
in principal amount of guaranteed senior secured convertible
notes issued by Origin. Origin intends to utilize net proceeds
of this financing for future acquisitions and working capital
needs.
Revenue Guidance
Origin expects that total revenues for the year ending September
30, 2007 will approximate US$60 - US$65 million, below its
previously issued guidance of US$80-US$90 million. The revised
guidance is due to: the impact of the market transition in
China's hybrid seed industry, the aftermath of which is expected
to benefit Origin in fiscal 2008 by creating an environment of
decreased competition and normalized pricing, as has been
previously disclosed. In addition, the US$80-US$90 million
revenue guidance assumed closing of certain acquisitions during
the month of August, which are now expected to close in the near
future. While significantly benefiting fiscal 2008, the impact
to fiscal 2007 financial results is expected to be minimal (see
"Guangxi Fortuneland Acquisition"). |
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