[JD Says] Dow Marries DuPont and Bayer Fancies Monsanto -- How JD Capital Seizes Opportunities Amids

2016-06-28

[JD Says] JD Capital dissects investments in different sectors, bearing witness to the development of enterprises. It shares what it has felt and learned from the process of its growth. P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

[Sharer] JD Capital’s food & agriculture investment team: the team specializes in China’s agriculture and modern food industry with members from leading players in the sector. Their rich experience enables them to look at the industrial cycle from a broader perspective so as to make cross-cycle investment. Currently the team focuses on the upcoming M&A era of China’s agriculture and food industry, the intensive farming propelled by technological advance, as well as investment opportunities brought by the cyclicality of staple commodities.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

In this May, Bayer announced an all-cash offer to purchase Monsanto, an American agricultural group, with $62bn. Only half a year ago, Dow Chemical and DuPont, two of America’s largest chemical companies, announced their merger. The merged firm DowDuPont will be the world’s biggest agrochemical company with a market value of US$120+ bn.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

Over the past six months, agrochemical giants such as Dow Chemical, DuPont, Bayer and Syngenta have not been the only players on the global M&A stage. Chinese enterprises like China National Chemical Corporation (ChemChina) also made their move.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

Despite the recent downturn of the global agricultural market, M&A has not been muted among agrochemical enterprises. Especially, the wave of merger in agricultural seeds and chemicals industry has been hard to ignore. Chinese enterprises are no exception. By integrating global resources, they are fueling the modernization of Chinese agriculture.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

[Keywords] Agricultural capital: also known as agricultural inputs, including seeds, pesticide and chemical fertilizer in its narrow sense, and extends to agricultural machinery and film in its broad sense.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业


P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

Global agricultural capital market: industry-wide reshuffle driven by M&AP29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

In recent years, sluggish economic recovery, low prices of agricultural products, and high inventory level -- a series of negatives have damped global demand for agricultural capital. Relevant enterprises have seen their sales go down under grim market conditions. According to Phillips McDougall statistics, global sales of crop pesticides was $51.84bn in 2015, a sharp decrease of 8.5% YoY, the biggest drop in a decade.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业


P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

Yet with this trough comes opportunities for M&A.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

At end-2015, DuPont and Dow Chemical announced their merger proposal worth a total size of $130bn. This has been the biggest merger case in seed and pesticide industries in a decade. The merged firm, DowDuPont, will be the world’s biggest seed and pesticide company.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

Not long after, ChemChina announced to purchase Syngenta in cash, with a valuation of US$43+ bn, higher than any other overseas M&A by Chinese enterprises. Less than half a year later, Monsanto received a purchase offer from Bayer at $62bn in May this year. If the deal goes well, the enlarged company would surpass DowDuPont to become a new global bellwether in the industry.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

The big wave of M&A started by industrial giants from 2015 to 2016 has reshaped the global agricultural capital market, which is expected to see a recovering growth by 2017, as forecasted by JD Capital. Therefore, the timing is perfect for domestic enterprises to merge and acquire quality overseas targets at low cost over next two years.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业


P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

M&A opportunities for Chinese agricultural capital enterprisesP29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

The agricultural capital industry in China has evolved from wild growth to steady development as the country shifts from planned to market-oriented economy. Compared with other countries, however, the market can be described as “big industry, small enterprises”.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

China has a highly fragmented agricultural capital industry. Among the over 5200/2100/2400 seed/pesticide/fertilizer companies, the top 10/5/5 together only take 13%/~11%/~10% of the market.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

In contrast, the world’s 5 biggest seed companies take up 62% of global market, and the figure is 67% for top 5 pesticide companies and 40% for chemical fertilizer.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

Besides, the securitization level is still low for China’s agricultural companies -- 10% in the seed sector, 40% in pesticide, and 20% in chemical fertilizer.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

Under such circumstances, JD Capital believes that the industry is looking at huge potential for M&A in the future. Quality listed companies will continue M&A and subsequently push up market concentration rate and securitization ratio.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

Industry trends and investment opportunities:P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

1. Industrial consolidation and the rise of leading enterprisesP29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

Currently, China’s agricultural capital sector is still small, fragmented and disordered. However, intensification of agricultural production and increasingly fierce market competition are bound to bring in-depth changes. Market share will go to leading enterprises with advantages in R&D, cost, and quality products and services. These market players will help consolidate the sector through output of technologies, resources and management, thus achieving leapfrog development and becoming winners in this era of change.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

Investment opportunity: Allying with these leading enterprises, JD Capital will accelerate industrial consolidation through M&A, so as to build world-class agricultural enterprises and drive the modernization in China’s agriculture.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

2. Transformation of distribution channelsP29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

The small-scale peasant economy in China usually comes along with small yet disordered circulation channel for agricultural funds, small-size distributors, poor technical service, multiple channel levels and low efficiency.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

As agricultural production scales up and farming turns professional, consolidation of distribution channels will also pick up speed. Most distributors will be crowed out and those with quality product resources and advanced technologies will stand out. The shift from product providers to comprehensive service providers will become obvious.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

Investment opportunity: quality distributors will become scarce resources of the industry and thus invite competition among upstream manufacturers. JD Capital will work with the industry’s bellwethers in consolidating distribution channels through M&A and help them grow into comprehensive service providers.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

3. Overseas M&A and integration of global resourcesP29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

Currently, there is still a big gap in terms of the technological level of agricultural capital enterprises between China and developed economies. In the next few years, asset price in the industry will remain at a low level. By dint of its high valuations in the capital market, China will be able to provide sufficient financial support to agricultural capital enterprises that went public in the domestic market. As a result, these enterprises will accelerate their overseas M&A and obtain advanced technologies and channel resources from the rest of the world.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

Investment opportunity: JD Capital will work with domestic bellwethers in the agricultural capital industry, consolidate quality global resources, and fuel the transformation and upgrading of China’s agricultural capital enterprises.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

To conclude, R&D, resources, and the capability to provide terminal services are key competitive advantages in the agricultural capital industry. JD Capital will focus on industrial bellwethers, and help them consolidate resources from home and abroad, so as to achieve leapfrog development.P29威尼斯欢乐娱人成app(600053.SH)_上交所私募股权投资领域上市企业

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