There are a lot of mouths to feed in China. I think that statement succinctly summarizes investors' appetite for Chinese seed producers, too. Alas, I'm afraid I don't particularly share that hunger.
Losing sleep over missing sheep
In mid-2008, I twice covered the trials and tribulations of Chinese corn seed, sheep, and seedling specialist Agria (NYSE:GRO). A delayed financial audit socked the shares, as did a flap with a key employee. Subsequent guidance revisions also disappointed investors.
Things remain interesting at Agria. A management overhaul in late 2008 was followed by some resignations in March, and yet another change in the top brass this past September. I've lost count of how many board members have resigned over this period.
If that weren't bad enough, the 2008 annual report has still not been filed, because of multiple audit committee investigations into things like uncertain land titles and questionable sheep purchases. Who knew counting sheep could keep you on the edge of your seat?
The new management team consists of two gentlemen from Big Four auditor PricewaterhouseCoopers. I suppose they've got a shot at running a tighter ship, but at this point, the stock is really only appropriate for those with a strong stomach for stormy waters. Agria makes LDK Solar (NYSE:LDK) look like a sea of tranquility.
An overnight seed sensation
As for Origin Agritech (NASDAQ:SEED), I wiped this seed shop off my writerly watch list earlier in 2009. The company had dropped to such a low market capitalization that I figured I'd never be able to write about the firm's adventures in genetically modified (GM) seeds.
In a September 2008 article on Chinese agricultural matters, Tim Hanson pointed out Origin, rather than foreign hulks like Monsanto (NYSE:MON), DuPont, and Dow Chemical (NYSE:DOW), would benefit most from China's embrace of GM seeds. This stems from a government-mandated 49% foreign ownership limit on seed producers. I wonder whether this point planted a seed in any Foolish investor minds? I certainly overlooked Tim's important column at the time.
My colleague Rich Duprey also set up investors for potential success here. After presenting the short case back in 2008, Rich warmed up to the bull case this past May. That gave investors six months to get on board before last week's fireworks.
On Nov. 23, Origin shares doubled in a single day. The shares have traded staggering volumes ever since. In fact, trading volumes have been as high as four times the firm's "free float."
So what caused the spike? Origin got final approval to sell its GM corn in China.
Really? That's it?
Did people have serious doubts that China would keep this productivity-juicing product off the market? Such a possibility didn't even enter into Rich's short case last year. The country takes food security matters very seriously, and GM seeds, plus the increased application of fertilizer sold by the likes of China Green Agriculture (AMEX:CGA) and PotashCorp (NYSE:POT), are key means of assuring better grain yields.
Maybe I'm missing something, but this seems like a patently obvious outcome for the company. Whether it makes Origin a buy at current levels is far from clear.
Consider the genetic modification involved here. This corn seed, developed by and licensed from the Chinese Academy of Agricultural Sciences, has been engineered to produce phytase. Phytase is added to animal feed in order to increase absorption of the nutrient phosphorus. So this seed, in the words of the company, "will allow animal feed producers the ability to eliminate purchasing phytase and corn separately. It will eliminate the need for mixing the two ingredients together, saving time, machinery, and labor."
A Rodman & Renshaw analyst dubbed this approval a "potentially game-changing event." Really? Like how J.M. Smucker's Goober Grape product changed the game for PB&J sandwiches by combining peanut butter and jelly in a single jar?
Sorry, but as with Goober Grape, I'm not buying it. Now seems like a particularly bad time for new investors to hop on board this stock, since the company has a big pile of convertible notes to repurchase from hedge fund Citadel by year's end. Don't be surprised to see an equity offering announced in the next week or so, with Rodman possibly acting as placement agent. Now how corny would that be?
