The seed industry market is expected to bottom out and rebound in the third quarter
Editor's note
In recent years, some seed inventories have been severe, with corn and rice seed supply exceeding demand, the number of seed companies and seed production areas shrinking, and production capacity declining. According to general patterns, after two or three years of wandering in the trough, the seed market will enter an upward cycle. Last year, the seed production, supply and demand analysis meeting of the National Agricultural Technology Center also predicted that the seed supply and demand relationship would improve this year. Some analysts in the agricultural materials industry, based on the bottoming-out situation of the industry's economic operation and various favorable conditions, predict that the seed industry will bottom out and rebound in the third quarter, but some people in seed companies believe that the risks in the seed industry market have not yet been fully released, and the destocking and capacity reduction of the two hybrid crops have not yet been completed. Which view is more well-founded? Where does the seed market's wind vane point? Readers are invited to pay attention and think.
1.
The recovery in prosperity benefits from the combined effects of reduced areas, lower production and favorable policies
Including the 2015 planting cycle, the industry's seed production area and seed production volume have decreased significantly for three consecutive years. In 2014, the national hybrid corn seed production area was 2.95 million mu, a year-on-year decrease of 22.77%, and the seed production volume was 1.36 billion kg, a year-on-year decrease of 13.38%. The national hybrid rice seed production area was 1.4 million mu, a year-on-year decrease of 14%, and the seed production volume was 240 million kg, both hitting new lows since 2010. The decline in seed production in the seed industry is obvious. We believe the main reasons are that leading enterprises took the initiative to shrink seed production areas, and that in 2014, adverse effects from severe weather led to a decline in per-unit yield. In addition, the revision of the Seed Law enhanced the industry's development expectations. We believe that the revision of the Seed Law breaks the bottleneck constraining the development of modern agriculture and provides new driving force for the reform of China's seed industry. The new Seed Law will, in accordance with the requirements of modern seed industry development, improve the current operating environment of the seed industry, focus on enhancing China's independent innovation capacity and market competitiveness in the seed industry, build a scientific and reasonable legal system for seeds, promote the sustainable and healthy development of the seed industry, and gradually promote the alignment of the seed industry with international standards. It is expected to improve and standardize 8 aspects, including germplasm resource protection, the breeding research system and mechanisms, variety management, plant variety protection, seed production and operation, supervision and management, support measures for seed enterprises, and legal liability.
From the perspective of industry supply and demand, both the inventory volume and seed production area of corn and rice seeds have shown a downward inflection point. The seed production areas of hybrid corn and hybrid rice have fallen to reasonable levels. In 2015, the overall situation of oversupply in the industry will be effectively alleviated, and the number of enterprises will also decline significantly.
2.
The economic operation of the seed industry has bottomed out, and a recovery in prosperity is expected in the third quarter
From the main indicators of the industry's operation, all indicators are tending to improve. Judging from indicators such as the year-on-year growth rate of China's seed industry operating revenue, the growth rate of net profit attributable to the parent, gross profit margin, net sales margin, and total market value, in the first quarter of 2015 the decline in seed industry operating revenue slowed significantly, the growth rate of net profit attributable to the parent turned positive, gross profit margin reached a recent high, net sales margin continued to improve, and the industry's market value hit a new high. It can be judged that the economic operation of the seed industry has bottomed out, and a recovery in prosperity is expected in the third quarter. (See the table in the text for data)
From the year-on-year growth rate of operating revenue in the first quarter of 2015 for listed companies, Longping High-Tech increased by 9.78% year on year, Denghai Seeds decreased by 29.46% year on year, Nongfa Seeds increased by 50.21% year on year, Quanyin High-Tech increased by 8.96% year on year, Shennong Dafeng decreased by 24.80% year on year, Dunhuang Seeds decreased by 11.97% year on year, Wanxiang Denong decreased by 8.44% year on year, and Fengle Seeds decreased by 24.57% year on year. From the year-on-year growth rate of net profit attributable to the parent, Longping High-Tech increased by 6.28% year on year, Denghai Seeds decreased by 16.74% year on year, Nongfa Seeds decreased by 376% year on year, Quanyin High-Tech decreased by 21.11% year on year, Shennong Dafeng decreased by 157.63% year on year, and Wanxiang Denong increased by 169.97% year on year. Overall, the seed industry sector was still in a bottoming-out stage in the first quarter of 2015. With the supply side declining for three consecutive years, we expect that in the third quarter of 2015 the seed industry is expected to bottom out and rebound, gradually entering a 2-3 year upward cycle. Among them, the inventory-to-sales ratio of the corn seed industry is expected to gradually decline from 100% to 60%, with the greatest room for improvement on the supply side, and corresponding corn seed enterprises may usher in investment opportunities from increases in both volume and price.
From market feedback, the launch of China's spring sowing seed market in 2015 was slightly later than in previous years, mainly due to the influence of holiday factors. Overall, the seed market operated steadily in 2015, and the characteristics of high quality at a high price were still relatively obvious. Considering that market supply is relatively sufficient, it is expected that the market will continue to show the characteristics of “ordinary varieties sold at parity and high-quality products sold at higher prices” in the later period. Therefore, we maintain that the performance of high-quality seed companies in 2015 will still grow steadily.
3.
Policy dividends continue to be released, and corporate profitability improves in the era of mergers and acquisitions
General Secretary Xi Jinping emphasized that we must resolve to develop the national seed industry and promptly cultivate superior varieties with independent intellectual property rights, so as to safeguard national food security from the source. It can be seen that the seed industry has risen to the height of a national strategy and is expected to continue to enjoy policy dividends in the future. The Opinions on Deepening the Reform of the Seed Industry System and Improving Innovation Capacity and the Central No. 1 Document have repeatedly focused on the seed industry, clarified policy measures for deepening the reform of the seed industry system, and put forward the goals of advancing modern seed industry development and building a strong seed industry nation. Mergers and acquisitions will be the main means for future seed industry leaders to expand, and also the direction encouraged by policy. At the current stage, the industry is in a downturn, which is even more a favorable window period for mergers and acquisitions. At the level of listed companies, Longping High-Tech, Dunhuang Seeds, Quanyin High-Tech, Nongfa Seeds, Shennong Dafeng, and Fengle Seeds have all announced related matters such as additional issuance or mergers and acquisitions. The industry has entered the era of mergers and acquisitions, and improved profitability after industry reshuffling is generally favored. At present, mergers and acquisitions in China's seed industry mostly take consolidating and strengthening the main business as an important focus. It can be seen that some large seed enterprises are, on the one hand, divesting industries weakly related to the main business, and on the other hand, seeking suitable merger and acquisition opportunities. In general, the approach of the seed industry is to gradually focus on the main business. We believe that future mergers and acquisitions in the seed industry will focus on two areas: on the one hand, mergers and acquisitions of small and medium-sized seed enterprises with superior varieties; on the other hand, supplementing research and development capabilities by acquiring research institutes or research-oriented companies.