Origin Agritech (NASDAQ:SEED)

Third Quarter Results

• During the third quarter of fiscal 2011, the Company generated revenues of RMB244.7 million (US$37.4 million), compared with RMB462.2 million (US$68.1 million) generated in the three months ended June 30, 2010.
• Income from operations for the third quarter of 2011 amounted to RMB34.0 million (US$5.2 million) compared with an operating income of RMB153.4 million (US$22.6 million) for the same period in 2010.
• Net income attributable to Origin for the third quarter of 2011 was RMB13.9 million (US$2.1 million), or RMB 0.60 (US$0.09) per share - both basic and diluted, as compared to a net income of RMB105.2 million (US$15.5 million), or RMB 4.57 (US$0.67) per share - both basic and diluted in the same period one year ago.

FISCAL 2011 GUIDANCE

Based on its current outlook, and existing and anticipated business conditions, Origin lowers the revenue guidance for FY 2011 in the range of RMB 530 million to RMB 550 million.

Rodman and Renshaw on  SEED                               5/20/2011

F2Q11 Earnings Update

F2Q11 Results

Origin Agritech Limited (“Origin,” Ticker: SEED, Market Outperform) announced its fiscal 2Q11 financial results that were below our expectations as well as Street consensus. For this seasonally light quarter, the company reported revenue of $0.2 million, slightly below our Street-low expectation of $0.3 million as well as Street consensus of $0.9 million. Gross loss came in at $1.1 million, more than our estimate of a loss of $0.8 million. The company incurred $4.9 million operating expenses in the quarter, slightly less than our estimate of $5.1 million. As a result, actual operating loss was $6.0 million, more or less in-line with our estimate. Net loss in the quarter was $4.8 million, or $0.21 per diluted share, slightly larger than our respective estimates of $4.0 million and a $0.17 per diluted share.

As of March 31, the company had cash and cash equivalents equating to $35.2 million, shareholders’ equity of $33.8 million, as well as short-term borrowings of $3.1 million.

All Eyes on FQ3

As the seed industry is heavily seasonal with the June quarter being the single most important quarter of the year, the March quarter is typically viewed with a passing glance, unless there is something extraordinarily wrong or unusually good. Sales in the quarter are mostly scrap seeds. We believe F2Q11 was no exception, despite the somewhat below-expectation results. We do have some preliminary indications for FQ3 performance, however, as the company’s $67.7 million deferred revenue and $45.9 million advances from customers in the F2Q11 balance sheet were either in-line or higher than their respective figures a year ago. These data points lead us to continue to believe that Origin’s F3Q11 revenue will be moderately higher than last year.

Adjusting Estimates while Maintaining Rating and Price Target

We have slightly tweaked our financial model to reflect the recent results. We now expect the company will report $76.9 million of revenue, $17.2 million of net income, or $0.74 per diluted share for F3Q11. For fiscal 2011, our respective updated estimates are $94.5 million, $8.8 million, and $0.38. We are maintaining our Market Outperform rating and $14 price target on the shares of Origin. We derive our $14 price target by discounting FCF through FY2020 by 9.7% of WACC and applying a 2% of terminal growth rate.

Major Risks

Major risks to the company and our rating include: 1) strong seasonality of the business, 2) dependence on corn seed market and licensed hybrid seed portfolio, 3) significant government influence, 4) technological changes in creating seed hybrids, 5) uncertainty of time over the government’s acceptance of genetically modified seeds into the market, 6) difficulty of building forward-looking estimates due to relatively poor reporting standards, and 7) country risks related to operating and investing in China.

Notice Regarding Privacy and Confidentiality:


This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Second Quarter Results:

• During the second quarter of fiscal 2011, the Company generated revenues of RMB1.09 million (US$0.17 million), a decrease of 32.31% from RMB 1.60 million (US$0.24 million) generated in the three months ended March 31, 2010
• Net loss for the second quarter of 2011 was RMB35.13 million (US$5.36 million), or RMB -1.36 (US$-0.21) per diluted share, as compared to a net loss of RMB30.98 million (US$4.54 million), or RMB -1.23 (US$-0.18) per diluted share in the same period one year ago.

Based on its current outlook, and existing and anticipated business conditions, Origin reiterates the revenue guidance for FY 2011 in the range of RMB 600 million to RMB 650 million.

Rodman and Renshaw on SEED                          5/05/2011

New Licensing Agreement a Step in Right Direction

Origin Agritech (“Origin”, Ticker: SEED, Market Outperform) today announced that it has reached a licensing agreement with a multinational corporation to develop high-yielding corn varieties incorporating Origin’s glyphosate-resistant and Bt- traits. These traits are novel to the Chinese market and are protected by separate patents both in China and the U.S. Origin will license the traits to this unnamed multinational partner while taking the lead in the development and testing activities. Please note that Origin possesses comprehensive worldwide rights to the Chinese Academy of Agricultural Sciences (CAAS) developed glyphosate- resistant and Bt- genes.

We certainly view this as a positive step for Origin’s effort to commercialize its GM technology and capability. While no details of this licensing agreement are available at this time, we believe the unnamed partner is a Europe-based multinational company with markets covering almost 100 different countries. And based on our communication with management, we expect the agreement will involve an upfront payment to Origin as well as a percentage of profit after the commercialization. Origin will have a leading role during the development process. In our opinion, while the eventual commercial launch of these traits might not happen until several years down the road, the development is certainly a step in the right direction. Perhaps most significantly, we believe this announced collaboration with a world class multinational corporation further validates Origin’s technology and capability, and suggests its GM products do possess significant commercial merit.

We are maintaining our Market Outperform rating on the shares of Origin and $14 price target. Our $14 price target is based on a DCF model discounting FCF through FY2020 by 9.8% of WACC and applying a 2% terminal growth rate. We expect the company will announce its F2Q11 results in mid-May, and we estimate Origin will report $0.3 million of revenue, $4.0 million of net loss, and a loss of $0.17 per diluted share for this seasonally light quarter.

Major risks to the company and our rating include: 1) strong seasonality of the business, 2) dependence on corn seed market and licensed hybrid seed portfolio, 3) significant government influence, 4) technological changes in creating seed hybrids, 5) uncertainty of time over the government’s acceptance of genetically modified seeds into the market, 6) difficulty of building forward-looking estimates due to relatively poor reporting standards, and 7) country risks related to operating in China.


Notice Regarding Privacy and Confidentiality:


This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Due to the cyclical nature of the cash flow inherent in our business, the majority of cash flow from operations is received during the second half of the calendar year, which corresponds to the fourth quarter and the subsequent first quarter of our fiscal year. We use bridge loan financings and bank credit facilities to cover operating expenses during low-revenue portions of the year, which generally include July through December. We believe we can generate sufficient cash flows from operating activities and can access sufficient borrowing capacity from local banks to satisfy our seasonal liquidity needs.

The nature of our business involves cycles in expenses and revenues that are not always in phase. Most often in the third calendar quarter of each year, we may face costs that are in excess of our cash flow sources during that period. Whether that occurs, and to what extent it occurs, depends on the amount of deposits received from customers compared with the advanced payments made by us to our seed producing farmers and the final payment for seed procurement. The exact timing of these payments is determined by the Chinese lunar calendar, which varies from one calendar year to the next. As a result, in some years our working capital needs are greater than in others. This aspect of the business is the reason we have customarily relied upon short term bridge loans to cover our expenses pending receipt of cash payment from farmers at the time of seed purchases. We, on a consolidated basis, have had access to sufficient financing in the past to manage these cash flow cycles.

Rodman and Renshaw on  SEED                                                2/23/2011

F1Q11: Below Expectation Results from a Seasonally Light Quarter

A month after announcing its F2010 results, Origin Agritech Limited (“Origin,” Ticker: SEED, Market Outperform) reported its fiscal 1Q11 results that largely missed our and Street’s expectations. Revenue slid 54.1% YoY to $2.6 million, noticeably below our estimate of $5.9 million and Street consensus of $6.4 million. Gross margin came in at 50.1%, below the 53.3% in the same period of last year and our estimate of 51.0%. Net income was a loss of $3.3 million, or $0.14 per diluted share, below our respective estimates of a loss of $2.0 million and a loss of $0.08 per diluted share, as well as Street consensus of a loss of $2.8 million and a loss of $0.12 per diluted share. 

F1Q11 Highlights and Discussions 

Revenue decrease due to changing planting schedules of farmers: Sales of canola seeds contributed 97.9% of total sales in the quarter. However the volume sold was much lower than last year due to changing planting schedules of farmers. On the pricing side, prices of canola seeds were higher than last year, which contributed to more than 540bps of gross margin expansion for the canola seed products. 

Higher operating expenses owing to increased R&D expenditure: Total operating expenses rose 15.6% YoY to $6.6 million. The hike was primarily attributed to increased R&D expenses which reached $1.9 million in the quarter vs. $1.2 million in F1Q10, translating to 56.6% YoY increase. SG&A, on the other hand, were $4.7 million, representing only a small increase from $4.5 million last year. The higher R&D expenses reflected the company’s stepped up R&D investments, which we believe are essential for sustaining the company’s competitive position and maximizing long term shareholder value. 

Balance sheet condition continued to improve: Origin had cash and cash equivalents of $28.8 million as of the end of F1Q11. Short-term loan decreased to $3.0 million from $12.8 million in F4Q10 and $30.6 million in F1Q10. Deferred revenue was $31.9 million, roughly flat with $32.3 million in the same period of last year, while advanced payment from customers increased considerably to $58.2 million from $43.3 million last year, suggesting stronger demand for Origin’s products for the upcoming selling season. 

F2011 guidance reiterated: The company reaffirmed its revenue guidance for FY2011 to be between RMB600 million and RMB650 million.

Notice Regarding Privacy and Confidentiality: 

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

During the first quarter of fiscal 2011, the Company reported:

• Revenues of RMB 17.19 million (US$2.60 million), a decrease of 55.47% from RMB 38.60 million (US$5.65 million) generated in the three months ended December 31, 2009.

RMB 16.83 million of the revenues this quarter were a result of the sales of canola seed products, 241,309 kg, for the three months ended December 31, 2010. The small remainder was a result of scrap sales. Across the industry, canola seeds, amongst other seed groups, sold lower volumes as a result of the changing planting schedules of farmers. The majority of Origin’s revenues are recorded in the fiscal third quarter as a result of our revenue recognition policy. The goods already sold and shipped to customers can be seen as Deferred Revenue line on the balance sheet and the Advances from Customers records the advance cash receipts from customers this selling season.

• Gross profit for the three-months ended December 31, 2010 was RMB 8.61 million (US$1.3 million) compared to RMB 20.58 million (US$3.01 million) in the same period of the prior year. Gross margins for canola seeds for this quarter (exclusive of scrap sales) were 58.67% versus 53.3% for the canola seed sales for the same quarter in last year. This is a result of the higher pricing structure of our canola seed products this year.

• Total operating expenses for the three-months ended December 31, 2010 were RMB 39.02 million (US$5.89 million) compared with RMB 38.96 million (US$5.71 million) reported for the same period in 2009.

• Operating loss for the first quarter of fiscal 2011 year amounted to RMB 30.41 million (US$4.59 million) compared with an operating loss of RMB 18.38 million (US$2.69 million) for the same period in fiscal 2010 year.

• Net loss for the first quarter of fiscal 2011 year was RMB 25.15 million (US$3.80 million), or RMB 0.94 (US$0.14) per basic and diluted share, as compared to a net loss of RMB 16.39 million (US$2.40 million), or RMB 0.59 (US$0.09) per basic and diluted share in the same period one year ago.

2011 GUIDANCE

Based on its current outlook, and existing and anticipated business conditions, Origin reiterates the revenue guidance for FY 2011 in the range of RMB 600 million to RMB 650 million.

Rodman and Renshaw on SEED                 01/19/2011

FY2010 Review 

Origin Agritech Limited (‘Origin”, Ticker: SEED) reported mixed FY10 results today. Total revenue grew 0.6% YoY to $87.3 million, beating our estimate of $86.3 million but slightly lower than the Street consensus of $87.6 million. Gross profit increased 18.1% YoY to $34.5 million, with a gross margin of 39.5%, less than our estimate of $36.4 million and 42.2% gross margin. Net income significantly improved to $7.3 million or $0.31 per diluted share, compared to a loss of $6.0 million or a loss of $0.26 per diluted share a year ago. The EPS result was in-line with the Street consensus but below our expectation of $0.35.

FY10 Overview and Discussions 

Revenue growth dragged by rice and canola seeds: The tepid revenue growth was mainly due to diminished sales of hybrid rice seeds which plummeted 34.2% YoY, affected by weather related issues. The 10.9% YoY decline in the sales of hybrid canola seeds also contributed to the lackluster top line performance. Sales of hybrid corn seeds, the company’s biggest revenue driver, grew 2.4% YoY and partially offset the slides in revenue from rice and canola seeds. The company expects FY11 revenue will be between RMB600 million and 650 million, suggesting YoY growth between 2.6% and 11.1% (excluding changes in FX).

Gross margin expanded 580bps YoY: Gross margin improved in almost every product segment except hybrid cotton seeds. The gross margin of corn seeds expanded to 49.7% from 40.6% last year. Rice seeds gross margin improved by more than 2000bps YoY to 37.0%. Canola seeds gross margin also increased by more than 2100bps YoY to 63.1%. The remarkable gross margin improvement was primarily attributable to the company’s elimination of the bottom 15% non-performing products as well as pricing increase of corn seeds. Looking forward to 2011, the company expects the gross margin of pesticides will improve from the current 13% to more than 20%, and the overall gross margin will continue to expand from the current level.

Operating expenses on the rise: Operating expenses in FY2010 reached $25.3 million, or 28.9% of revenue, compared to $22.5 million or 26.0% of revenue in FY09. The increase was mainly due to more hiring and new stock options associated with the equity incentive plan as well as increases in R&D investment. The increase in operating expenses was tempered somewhat by the decrease in selling and marketing expenses, which recorded $7.8 million in FY10 and represented a 6.15% decline from last year. Looking ahead, we expect the increased R&D investment, which is essential for Origin’s further development of its GM product pipeline, and overall operating expenses as percentages of revenue will maintain at similar levels.


Notice Regarding Privacy and Confidentiality:


This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

During the third quarter of fiscal 2010 the Company generated:

• Revenues of RMB 462.23 million (US$68.07 million), a decrease of 3.13% from RMB 477.17 million (US$69.84 million) generated in the three months ended June 30, 2009.
  
• Operating profit for the third quarter of 2010 amounted to RMB153.36million (US$22.58 million) compared with an operating profit of RMB118.95 million (US$17.41 million) for the same period in 2009.
  
• Net income attributable to Origin Agritech Limited for the third quarter of 2010 was RMB105.16 million (US$15.49million), or RMB 4.52 (US$0.67) per diluted share, as compared to a net income attributable to Origin Agritech Limited of RMB74.97 million (US$10.98million), or RMB3.26 (US$0.48)per diluted share in the same period one year ago.

Based on its current outlook, and existing and anticipated business conditions, Origin believes the revenue guidance for FY 2010 to be in the range of RMB 580 million to RMB 600 million.