Pine Agritech doing superbly

Oct 18, 2005
The Business Times

PINE Agritech is one of this year's best performing China IPOs. But the maker of soybean-based products wants to persuade investors that its stockmarket success is not a flash in the pan. Pine is raising production capacity to meet healthy Chinese demand and is looking to sustain the robust growth achieved in the first half of this year.

Mr Li: Zhuping: The margin from exports of SPI is 8% higher than from domestic sales

Speaking to BT recently while in Singapore to attend the SIAS Investors' Choice Awards, Pine's financial controller, Raymond Ho, said the company is expanding capacity in two major products - soy protein isolate (SPI) and soy oligosaccharide syrup (SOS).

'From the capacity expansion plans and the continued growth of the PRC economy, we are quite confident we can sustain the growth and the profits in the first half,' he said.

For the first six months of 2005, Pine's revenue grew 81 per cent to 369.3 million yuan (S$76.9 million) while net profit rose 107 per cent to 107.9 million yuan. While SPI accounted for the bulk of its sales, SOS generated a higher margin.

Demand is expected to be strong as consumers become more aware of the health qualities of soybeans, analysts said.

'With rising consumer affluence, demand for soybean-based products is expected to strengthen. Pine stands to benefit from this trend,' CIMB-GK Research analyst Gary Ng said. The research house initiated coverage on Sept 30 with a target price of $1 a share.

The stock has been trading around 70 cents recently, compared to its initial public offer at 57.5 cents - making it one of the best performing China IPOs here. Pine, which is 36 per cent owned by People's Food Holdings, has three production plants, located in Linyi (Shandong Province), Fujin and Daqing (both in Heilongjiang Province). It is raising its production capacity for SPI by 20,000 tonnes per year at the Linyi plant and aims to increase its SOS capacity by 2,000 tonnes per year each at its Linyi and Daqing plants.

The company hopes to double its SOS capacity to 8,000 tonnes by the first quarter of next year. Production capacity for defatted soy flakes is set to increase by 75,000 tonnes per year to about 165,000 tonnes.

The company sells its SPI mainly to makers of processed meat products. People's Food is its largest SPI customer. Soybean oil is sold mainly to customers who process the oil into higher-grade oil while SOS is sold to distributors for retail sale as well as to beverage makers.

Its order book is split between 45 per cent retail sales and 55 per cent industrial sales.

Since June, the group has started to export SPI to Europe, South Korea and various markets in South-east Asia. These exports make up less than 3 per cent of sales, but chief executive officer Li Zhuping expects exports to grow gradually.

'The margin from exports is 8 per cent higher than domestic sales because domestic price is 14 yuan per kilogramme while export price is 15-16 yuan per kilogramme,' Mr Li told BT.

He said that when the opportunity arises, Pine will also look to export its syrup, which is still in its nascent stage in China, contributing about 10 per cent to group sales.

Pine is about to start research to gauge the market acceptance of peptides, which could yield margins equivalent to or better than the margins of SOS.

Prices of soybean, which accounts for 80 per cent of Pines' sales costs, are cheaper by 40 yuan per tonne this year, Mr Li said.

'Next year, prices are expected to be stable,' he said, stressing Pine's good relationship with farmers, built up over the years.

Management is planning to declare a dividend policy of at least 20 per cent of net profit for 2005 and 2006.

'With earnings projected to improve by 43 per cent year-on-year in 2006, the improvement will translate into a higher dividend per share. The implied dividend yields based on our earnings forecasts are 2.2 per cent for 2005, 3.1 per cent for 2006 and 3.4 per cent for 2007,' Mr Ng said.

'Our dividend policy is subject to directors' approval. But as long as we meet the growth target and profit estimates, we will keep our dividend policy,' Mr Ho assured investors.