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Origin Agritech Limited Reports Unaudited Financial Results for the Year Ended September 30, 2010

BEIJING--(BUSINESS WIRE)--January 18, 2011--Origin Agritech Limited (NASDAQ: SEED) (“Origin” or the “Company”), a vertically–integrated supplier of hybrid and genetically modified crop seeds in China, today announced unaudited financial results for the year ended September 30, 2010. Origin plans to file its audited financial statements in conjunction with the annual report next week on Form 20-F with the SEC on January 27, 2011. These unaudited year end results reflect the Company’s financial statements during the period from October 1, 2009 to September 30, 2010. Origin prepares its financial statements in accordance with generally accepted accounting principles (GAAP) of the United States.

China’s Seed Industry: Growth and Prosperity for 2011

Fiscal year 2010 showed significant progress again toward improved industry conditions. The seed industry is beginning to enter the early phases of a consolidation period, in which we believe the next 3 to 5 years will have increased opportunity. These upcoming years should make the period of change and development in the industry. The fiscal year end September 30, 2010 marks the third consecutive year of improvement in our earnings as a result of these improving industry conditions.

With the rapid growth in China prompting greater demands on domestic food production, and China rapidly becoming a net corn importer, as a result of the rising consumer desire for higher quality food products, the Chinese central government has taken several measures to deal with these core issues. Seed is the fundamental input in the corn industry, and the input which possesses the greatest future upside in gains from biotechnological improvements. According to research, corn seed plays the most active factor in the increase of yield gains, accounting for over 35.5% of the total contribution.

 
 

 

During the past years, the Chinese central government initiated a comprehensive US billion plan for the implementation of genetically modified food products throughout China. In 2010, they furthered this plan through further implementation, including the approval of the first genetically modified main crop seed in rice and corn. Compared with conventional varieties, the obvious advantages of transgenic varieties are high yield, high quality, disease-resistance, and herbicide resistance. Farmers plant transgenic varieties to both save time and cost, while also reducing the amount of fieldwork. Given our unique position with our late stage product pipeline, we believe we are the beneficiary of such emerging trends affecting our industry for the next decade.

UPDATE OF ORIGIN GM PROGRAM

China’s First GMO Maize: Phytase Corn Approved

We have pursued genetically modified research, and in November 2009, we received the Bio-Safety Certificate from the Ministry of Agriculture as a final approval for commercial use of the world’s first genetically modified phytase corn. This is the first genetically modified corn seed product in China. We are also actively pursuing the approval of other GM seed products including glyphosate resistant corn and Bt Corn. Our focus remains in the production of higher quality seed products, whether proprietary or licensed.

Glyphosate Tolerance and Bt in Later Stages

Glyphosate tolerance has passed the intermediate testing phase (Phase 2) and entered the environmental release testing phase (Phase 3). The company expects this product to be this to be the following product commercialized after Phytase, and expect potential news of entrance into Phase 4 during 2011. Tests of our hybrid have performed exceedingly well as the plant has been able to effectively breakdown over 6x concentration of standard doses of glyphosate applied directly to hybrid. This glyphosate tolerance gene is able be stacked with the Bt gene. Introduced in the US in 1998, the use of glyphosate resistant corn grew from 950,000 acres in 1998 to 2.3 million acres in 1999 to 41 million acres by 2007, or at a compounded annual growth rate of 51.9%, according to the US Department of Agriculture. The rapid historical adoption rate indicates farmers find this trait to extremely valuable. The high level of adoption of these crops by farmers has also caused the reduction in value of the remaining herbicide market.

Since their introduction in 1996, over 75 million acres of genetically engineered glyphosate-resistant crops have been planted, making up 46% of the corn, 80% of soybean acres, and 70% of cotton acres in the US. These genetically engineered crops have been adopted by farmers because they are perceived to offer significant economic benefits over conventional crop and herbicide programs. The adoption of glyphosate-resistant crops has reduced costs for US farmers an estimated .2 billion. On the basis of recent adoption rates by growers around the world, it appears that glyphosate-resistant crops will continue to grow in number and in hectares planted.

 
 

 

Pest Resistance (Bt Corn)

Pest resistance (Bt Corn) has passed the intermediate testing phase (Phase 2)and entering the environmental release phase (Phase 3). In these phase 1 and 2 trials, these traits continue to perform as the best performing traits for pest resistance throughout China.

Bt crops produce a protein toxic to specific insects used in areas with high levels of infestations of targeted pests. Bt cotton, which controls varieties of the budworm and bollworm, was planted on 59 percent of U.S. cotton acreage and over 75 percent of the Chinese cotton acreage in 2010. Introduced in 1996 in the US, acreage of Bt corn has grown from 3.6 million acres in 1999 to 44 million acres by 2007, or at a compounded annual growth rate of 36.7%, according to the US Department of Agriculture. This Bt corn variety was planted on 49 percent of U.S. corn acreage in 2007.

ORIGIN’S GM PIPELINE

     

CURRENT STATUS

   

2011 Potential

   

Commercialization

                   

PHYTASE

    Market and Product     Minor Market      

 

   

Development

   

Penetration*

   

 

 

                 

GLYPHOSATE TOLERANCE

    Phase 3 Approval     Phase 4     2013-2015

LICENSE RIGHTS

    Worldwide Rights           2011+
                   

BT

    Phase 2 Approval     Phase 3     2015-2016

LICENSE RIGHTS

    Worldwide Rights           2011+
                   

NITROGEN EFFICIENCY

    Phase 1     Phase 2     2016+

DROUGHT TOLERANCE

    Phase 1     Phase 2     2016+

*through limited potential end product sales

Long Term GMO Catalysts

Glyphosate resistance and Bt corn, as highly successful products elsewhere in the world, remain “industry changers” in China. Origin Agritech retains the exclusive license rights to these specific traits, and expects to be the first company to commercialize these crops in China.

 
 

 

Worldwide, the largest segment of the transgenic crop market has been herbicide resistant crops. Specifically, glyphosate resistant crops have been widely accepted in cotton, corn, and canola in North America. Introduced in the US in 1998, the use of glyphosate resistant corn grew at a compounded annual growth rate of 51.9%, according to the US Department of Agriculture. The rapid historical adoption rate indicates farmers find this trait to extremely valuable. The high level of adoption of these crops by farmers has also caused the reduction in value of the remaining herbicide market. Bt crops produce a protein toxic to specific insects used in areas with high levels of infestations of targeted pests. Introduced in 1996 in the US, acreage of Bt corn has grown at a compounded annual growth rate of 36.7%, according to the US Department of Agriculture.

FY 2010 Accomplishments

  • Acquisition of Shandong Kunfeng Biochemical Limited, a company specializes in production of agricultural chemicals, and possesses an integrated chemical production facilities in China, and owns 38 product certifications.
  • Divestment of our minority stake in Shenzhen Biocentury Transgene (China) Limited (“Biocentury Transgene”) for RMB 60M
  • Increase in the majority interest in our subsidiary, Jilin Changrong Hi-Tech Seed Company Limited.
  • Reach Worldwide Agreement for Licensing Right to Novel Bt Gene
  • Received Prestigious National Agricultural Industrialization - ‘Leading Enterprise’ Status
  • Continued Market Development of World’s First Phytase Maize.

FY 2011 Expectation

  • FY 2011 Revenue Guidance: RMB 600 million to RMB 650 million
  • Further growth of the pesticide product line, increase of gross margins over 20%
  • Further development in our GM product pipeline
  • Further development of our worldwide licensing rights for Bt Gene
  • Further development of our worldwide licensing rights Glyphosate Tolerance Gene
  • Development of complementary product lines

Liang Yuan, President and Chief Executive Officer of Origin Agritech, commented, “We remain excited of the positive growth trends illustrated by results for the fiscal 2010 year period ended September 30, 2010. While most other industries remain uncertain, we show positive signs of significant improvement in both our top-line and bottom-line numbers. As expected, our financials for the fiscal 2010 period ended September 30, 2010 showed significant margin, net income, and operating cash flow improvements from the fiscal year ended September 30, 2009 in light of our aggressive product management. As the market trends more towards technology based products, we have managed our R&D and operations in anticipation of bringing higher quality products to the market.”

 
 

 

UNAUDITED FINANCIAL RESULTS OVERVIEW

Revenues & Gross Margin

Our revenues for the year ended September 30, 2010 were RMB584.86 million (US.28 million), a slight decrease of 1.29% from September 30, 2009 with RMB592.49 million (US.76 million). Inclusive of any currency changes, based on US $, the year over year increase in revenues to US .28 million from US .76 was 0.60%.

The revenues resulting from non-scrap seed sales for the year ended September 30, 2010 as compared to that of the year ended September 30, 2009 were as follows:

  Revenues       Gross Margin
 

Year ended
September 30,
2010

 

Year ended
September 30,
2009

     

Year ended
September 30,
2010

 

Year ended
September 30,
2009

                           
    RMB’000     RMB’000                
Hybrid Corn seeds*   421,420     411,405       49.65 %   40.60 %
Hybrid Rice seeds*   82,375     125,135       36.96 %   16.5 %
Hybrid Cotton seeds*   11,883     9,917       35.76 %   49.9 %
Hybrid Canola seeds*   38,106     42,747       63.05 %   41.99 %
Pesticides*   18,958     N/A       13.01 %   N/A  
Other   1,143     68       N/A     N/A  
Total normal sales*   573,885     589,272       47.15 %   35.6 %

* exclusive of scrap sales

Cost of Revenue

Our cost of revenue for the year ended September 30, 2010 was RMB353.59 million (US.77 million), a decrease of 9.99% from September 30, 2009 which was RMB392.84 million (US.53 million), as consistent with the decrease in sales volume.

Gross Profit

Our gross profit for the year ended September 30, 2010 increased to RMB231.27 million (US.51 million), an increase of 15.81% from September 30, 2009 with RMB199.70 million (US.24 million), given the increase in corn seed prices.

 
 

 

Operating expenses

Operating expenses for the year ended September 30, 2010 were RMB169.29 million (US.26 million), representing an increase of 9.96% from September 30, 2009 with RMB153.95 million (US.55 million). The increase was due in part to increase in salary expenses and grant of stock options as related to our performance equity plans. Principal additions to our company headcount included R&D staff and IP legal protection staff.

Selling and marketing expenses for the year ended September 30, 2010 were RMB52.23 million (US.79 million), representing a decrease of 6.15% from September 30, 2009 of RMB55.65 million (US.15 million), in part due to lower amount of fertilizer subsidy expense. General and administrative expenses for the year ended September 30, 2010 were RMB78.71 million (US.75 million), representing an increase of 21.41% from September 30, 2009 of RMB64.83 million (US.50 million). As mentioned earlier, this increase was the main reason for the increase in operating expenses, and this increase in general and administrative expense was due in part to increase in salary and grant of stock options as related to our performance equity plans. Research and development expenses for the year ended September 30, 2010 were RMB38.36 million (US.72 million), representing an increase of 14.61% from September 30, 2009 with RMB33.47 million (US.90 million). Again, the increase in our research and development spending is a result of our commitment to further efforts in the research and development of self-developed seed rights and the further cooperation with universities and other research institutes.

Income from Operations

As a result of the impact of the components described above, income from operations for the year ended September 30, 2010 were RMB61.98 million (US.25 million), compared with the income from operations from September 30, 2009 of RMB45.70 million (US.69 million).

Net Income

Our net profit was RMB 49.05 million (US.32 million) for the year ended September 30, 2010 as compared to the net loss of RMB40.82 million (US.98 million) in the year ended September 30, 2009. Of note, this amount included the net gain from the sale of our minority investment of Biocentury Transgene of RMB8.88 million (US.33 million).

Cash And Cash Equivalents

As of September 30, 2009 and 2010, we had approximately RMB121.26 million (US.76 million) RMB299.67 million (US.72 million), respectively, in cash and cash equivalents. Our cash and cash equivalents primarily consisted of cash on hand and short term liquid investments with original maturities of three months or less that is deposited with banks and other financial institutions. We believe our working capital is sufficient to meet our present requirements.

 
 

 

Statement of Cash Flow

Net cash provided by operating activities was RMB298.61 million (US.56 million) in the year ended September 30, 2010 compared to net cash of RMB208.88 million (US.59 million) in the year ended September 30, 2009. This increase was primarily due to increase in the net income to RMB49.05 million (US.32 million) and the increase in the advances from customers to RMB128.83 million (US.23 million). Net cash used in investing activities was RMB9.10 million (US.36 million) in the year ended September 30, 2010. Net cash used in investing activities was RMB15.89 million (US.33 million) in the year ended September 30, 2009. This net cash used was in part due to the proceeds from equity investment disposal of RMB50.0 million (US.46 million), more specifically in regards to the divestment in the non-controlling interests of Biocentury Transgene, and the cash used in acquiring additional equity interest from non-controlling shareholders and a business acquisition, amounted to RMB24.20 million (US.61 million) and RMB10.54 million (US.57 million) respectively. Net cash used in financing activities was RMB112.16 million (US.74 million) in the year ended September 30, 2010. Net cash used in financing activities was RMB175.93 million (US.76 million) in the year ended September 30, 2009. This was mainly due to the increase in the proceeds from short term borrowings to RMB191.90 million (US.64 million) though this figure was partially offset by our repurchase of the convertible notes of RMB117.90 million (US.59 million).