On January 14 th 2020, China Agri-Industries Holdings Ltd. (“China Agri”) released the estimated annual results for 2019, expecting the profit attributable to owners of the company to range from HK$1,200 million to HK$1,240 million, which represents a 8% to 11% decline compared to the HK$1,346 million for the year ended 31 December 2018. Regarding the reasons behind, China Agri mentions that “In 2019, changes in trade policies of certain major global economies made it more challenging for the Group to make business decisions. The breeding industry witnessed falling hog stocks mainly due to the impact of African swine fever, resulting in a weaker demand for soybean meal and other materials for animal breeding. Even though the prices of vegetable oils and oilseed meal rebounded from low points in the second half of 2019, the average profit margin for the year in terms of domestic oilseeds processing industry narrowed compared to that in 2018”. On November 28 th 2019, China Agri announced COFCO (Hong Kong) Limited proposed to privatise China Agri in light of its long-term stock underperformance, low liquidity and the associated inability to access any meaningful financing through the stock market. The declined estimated annual results for 2019 provides a new source of reference for the market as it is the company’s first performance report after the privatisation announcement.
Affected by uncertainties of the industry and shifting regulatory policy environment since its IPO, China Agri has demonstrated significant fluctuations in terms of overall performance and earnings. Disclosed financial info indicates that the profit attributable to owners of the company for the first half of 2019 was approximately HK$449 million, down 40% compared to first half of 2018 as expected by market. The newly issued estimated 2019 annual results shows the downward trend continues.
A further analysis based on public information reveals that the company acquired four oil crushing plants and the Guangdong Terminal during 2018 Q4, which were financially consolidated in November and December 2018 respectively. Meanwhile, in 2018, China Agri recorded some serious one-time asset impairment, without which the company’s actual profit attributable to owners of the company would for sure exceed HK$1.346 billion. Taking the above factors into consideration, the company’s actual performance decline during 2019 can be far worse than the 8% to 11% that the announcement suggests on paper.
Apart from the abovementioned estimated annual results for 2019, currently the market is generally of the opinion that factors such as changes to the situation of US-China Trade War and the progress of managing the African Swine fever may have significant effects on China Agri’s future business performance. On December 13th 2019, the trade negotiating teams from China and the US announced both parties had reached preliminary consensus on the text of the China-US phase I trade agreement and agreed that China would increase its purchase of agricultural products from the US. Some believe it to be a signal of improvement in China-US relations and that the prices of raw material imports such as soya beans will fall. Others, on the other hand, holds that the phase I agreement is only a framework without any specific binding obligations for the soya bean purchase. With the phase II agreement expected to be completed around the end of 2020, great amount of uncertainties still exist regarding future import of soya beans from the US. In fact, factors such as the US presidential election six months later and the US-Iran tensions will continue to complicate the further outlook of US-China trade relations.
The seemingly improving African swine fever situation is still a challenge ahead, particularly in China as the disease has affected a relatively large area and is expected to re-surface sporadically. Recently cases were found in northeast China and southwest Yunnan province. This is the first time in history China has to confront African swine fever, whose devastating effects had already led to large reduction in the hog stocks in China. It is widely believed that full recovery is beyond a mere one or two-year timeframe.
With the newly announced decline of 2019 results confirming again the challenges already exist and additional uncertainites and fluctuations due to the above factors for the both the industry as a whole and China Agri into the next two to three years, it is certainly not looking promising for the company going forward.
We have noticed that since the privatisation proposal announcement, China Agri’s stock price has been stabilized between HK$4.13 and HK$4.15 per share, which is extremely close to the cancellation price of HK$4.25 per share, representing a discount less than 3%. The market seems to be rather confident in the take-private proposal being approved.
