On September 8, 2020, GeoInvesting invited the Chairman and CEO of Origin Agritech Limited (NASDAQ:SEED), Mr. Gengchen Han, and his new IR manager, Joe Ramelli of Ramelli Asset Management to a live discussion and Q&A. We were pleased to also have a good turnout of near 40 members of our community join in on the call and give them a chance to pose their own questions to Mr. Han and Mr. Ramelli.
- Gengshen Han, Origin Agritech Limited Chairman & CEO
- Joe Ramelli, Origin Agritech New IR representative
- GeoInvesting Co-founder Maj Soueidan
- 30 to 40 GeoInvesting premium network attendees
There was no fee paid by Origin Argitech to participate in the live webcast. This was an invitation only event and one in which we have been trying to set up for a while to be able to gain a better understanding of the timeline of SEED’s initiatives, as well as other key aspects of where they are with respect to goals and achievements with respect to GMO in China.
Key Questions and Answer Summaries
What follows are the key questions posed to Origin Agritech Chairman & CEO Gengchen Han during the September 8, 2020 meeting.
Since the recorded audio was a bit muffled and hard to understand at times, we are offering the key takeaways from the conversation. Please pay close attention to this section of the summary where SEED’s new IR rep talks about the company being Jon Carnes’ largest position. This position resides in Carnes’ fund. For those of you who do not know who Carnes is, he was one of the top short sellers who outed several high profile U.S. Listed China based frauds. Jon was featured alongside Muddy Waters and GeoInvesting in the 2018 documentary, The China Hustle, chronicling various short selling activism in the China fraud space, particularly as perpetrated on U.S. investors.
Also, please note that we included part of the transcript and selected audio files in areas of the summary.
Can you talk about the history of the company and your role at the company? How has the company and your role changed over time?
Chairman Han Summary
- Origin Agritech was founded in 1997.
- Chairman Han was born in China and after he graduated from university,he worked for the [International Research Institute] in China, founding Origin Agritech. SEED Has spent the past 20 years focusing on corn seed biotechnology research and has developed a nice biotech pipeline, mainly in corn.
- SEED’s research culminated in 2009 when it was the first company to receive a GMO biosafety certificate (for a corn gene trait).
- But for the last 10 years the domestic commercialization of GMO initiatives were not moving forward in China due to public opposition to GMO, preventing Origin Agritech from “monetizing” its corn biosafety certificate.
- However, China is at a turning point with respect to GMO.
- China imports 90% of soybeans from the U.S., Brazil and Argentina and also imports corn from the U.S.
- That’s why it is important for China to promote technology for domestic production of corn and soybean.
- Finally, over the last year, the Chinese government has been moving forward with laying the groundwork for the domestic commercialization of GMO, starting with corn and soybean.
Thank you chairman. Obviously there is some tension between the US and China right now. I understand that in 2009 when you received the biosafety certificate, China did not go through with GMO at that time because of certain information disseminated by the media, and people were not ready for it. Right now, the environment is a little different, so do you see more support and less obstacles for the case for China to go GMO positive? 4:00
Chairman Han Summary
- The food crisis environment has changed since 2009
- In 2009 there was no meaningful food crisis in China and thus no immediate reason for China to go GMO positive. And for the past 20 years, GMO positive progress in China has been non-existent. However, things have changed today. For example, due to the trade war crisis. Also, the opposition in 2009 to GMO due to safety and public concerns is not as big of an issue today because China has been importing corn and soybean products derived from GMO for 20 years. In general, Chairman Han feels that consumers and farmers are willing to accept GMO products today more than they were in 2009.
The past year, the country has taken major strides in corn and soybean GMO. Starting in December 2019 and June of 2020, the government has started moving forward in the approval process of GMO corn and soybean by issuing safety certificates to a handful of companies for both corn and soybean, putting them in a position to start production once China goes GMO positive. And it seems over the last few years, there have been some illegal GMO activities going on. So that’s a concern also.
- Chairman Han confirms this
Before we get further into GMO, I’d like to understand more about how you intend to generate revenue from this opportunity. There currently isn’t a great understanding of this within the investment community. Are there certain ways in which you can do this? Manufacturing, licensing?
Chairman Han Summary
- Origin Agritech can act as a licensee of technology from research firms that still need SEED’s IP and general infrastructure. Origin Agritech can also license its own IP.
- The key is that Origin Agritech already has a production, distribution and marketing network in place from its legacy (traditional seed business). This is infrastructure that research firms just don’t have, but will need access to in order to monetize their research.
- SEED’s traditional agricultural business lost market share due to illegal GMO activities.
- Things are different now, as China is cracking down on illegal agricultural businesses and has a better way of tracking illegal GMO activities.
4- So basically, you had a thriving business before, you had the infrastructure, and with the relationships you had before using past infrastructure, you can use the same partnerships with current GMO initiatives?
- Chairman Han confirms these thoughts
So, if you look at the patent and licensing business before GMO, there was a competition issue, where you were losing market share in a very commoditized industry. So, if you look now, at least we’d assume, from our research, that there is less competition in the GMO space now that would give you an advantage. Is that true? Is it possible that the same challenges you saw in your legacy business where you lost market share will persist in the GMO business?
Chairman Han Summary
- There are only 2 or 3 companies that have a presence doing GMO research. And Origin Agritech is building relationships with them so we can create products with them.
- Chairman Han once again stressed that these small research firms don’t have the infrastructure to be able to produce, market and distribute GMO seeds.
- He also stresses that SEED’s GMO IP is much easier to protect than their traditional seed IP, which should alleviate competitive pressures.
What I’d like to understand is that as part of your model now seems to revolve around building relationships and partnerships that deal with distribution, manufacturing, and developing new technology, maybe you can talk about these relationships, what they mean to you, and how you plan to benefit from them moving forward.
Chairman Han Summary
- Chairman Han continues to stress that Origin Agritech has a competitive advantage along three lines:
- Product development, which research firms need access to
- Relations with distributors (who will need GMO products).
- Strong marketing channels. Chairman Han stresses that they have important relationships with distributors who have important relationships with local farmers
And that will be able to keep your costs low and help you reach profitability faster, because I know you had some issues in the past?
Chairman Han Summary
- Chairman Han confirm this
- He stresses that the margin picture with the company’s new GMO model should be better than it was under the legacy model, on two fronts:
- The company can basically save on research and development expenses by working with research firms that have already completed research and development and need Origin Agritech to produce GMO products
- The company plans to save on marketing expenses because it will depend more on the distributors relationships as they promote GMO to local farmers. Under its previous business model, the company primarily leaned on its own resources to carry out marketing activities.
Joe, anything you’d like to Add?
One thing I wanted to clarify, which I don’t know if you or any other people picked up on, is that Chairman Han said that the hybrid business is actually thwarted by illegal GMO, so there are people that are producing, using illegal GMO seeds. So that’s what really took down the hybrid business. He had a thriving hybrid business, and once the country goes GMO positive, they’re going to make sure that only official, approved gene traits like ours that go through the official process will be allowed to be marketed and then everything else will be squashed, so we’ll be back in a leadership..be in a position again to provide the market with no competition. I wanted to highlight that, I hope it’s helpful.
Thanks, and maybe a little later we can back on the revenue. So when you have these licenses and relationships, what I want to be clear on, what does Origin Agritech own and what do you not own within these relationships? So, when you partner with a research institute, for example, what is Origin bringing to the table? And what do others bring to the table?
SEED’s IR representative Joe Ramelli addresses this question
I can take a stab at that. I think what we are bringing to the table are things like the distribution network, and also the capabilities and secret sauce on taking that gene trait and creating a trans-genetic crop from it. It’s a very complicated thing as Chairman Han said. It’s not as risky as creating it. It could take years and millions of dollars but definitely to scale the technology on. Is that a fair assessment Chairman Han?
Chairman Han continues to stress their three pronged advantages, while SEED’s new IR representative provides additional color.
Mr. Ramelli adds…
I would say, Maj, a good way to view the business model is that it’s very similar to a pharmaceutical company. Nowadays, very few of the innovations taking place within a big pharmaceutical company…they find interesting drugs that are kind of like smaller biotech companies, when they license them and then market them, bringing them through their distribution and sales force.
So, getting back to your question about whether we own, and what the structure we have with our gene traits partnerships…some of them we own outright and some of them are royalty payments. Our royalty payments are very reasonable. You can think of them as not a big burden, I don’t know if we can give formal guidance…It’s definitely an attractive situation with the ones we owe royalties on.
So when you do enter into a type of situation where you are actually paying for certain rights to how long do those relationships last? Five years? Ten years? Twenty years? Thirty years? Are there long-term commitments?
- Basically, until IP protection lasts. Chairman Han confirms that to be around 20 years
That’s great, I think it’s important because I think there is a little bit of a black hole where investors don’t understand how long these relationships last…so these are very strong relationships that last a long time.
- Chairman Han agrees
So, when we see, for example, in 2009 when you had received the corn certificate, your name was on the certificate, and now what we are seeing is that some of your partners are getting their names on the certificate, so there is some confusion, what does that mean for Origin? Should we be concerned that your name is not on some of these certificates? 22:00
- Chairman Han starts, then Maj clarifies his question…
To clarify, in 2009, Origin Agritech received the certificate, the bio-safety certificate. That particular certificate got renewed in 2015, and now we’re waiting for it to get renewed again, but in the meantime some of your research partners are getting certificates. Their names are on them, not yours. How should we view this situation?
Chairman Han pointed out that there is confusion regarding their receipt of their biosafety certificate in 2009. He pointed out that the situation is no different than it is in 2020, pertaining to the biosafety certificates that it’s research partners have received in 2020.
Just like 2009, the research partners are giving Origin Agritech the right to produce, market and distribute GMO products based on the technology developed by these partners.
At the LD microcap conference, last week, I think, Joe, you had talked about two catalysts, one was to maybe reestablish the corn certificate if I understand that correctly, and then number two, the JV partner, I think it was BTC something, they are going to help you with the whole GMO relationship, and with the JV partnership being inked, the debt being turned into equity. Is that correct and I was hoping that maybe you could give us some timeline on this? 2020? 2021?
Chairman Han is hopeful that both of these events will happen sooner rather than later.
Mr. Ramelli Interjects…
I was going to say that the biggest catalyst is obviously going GMO positive and I know we’re kind of seeing kind of a ramp up in activity in the seed approval process, things going through, as well as different statements from the government that indicate that it is coming quite soon. So I just wanted to mention that.
And I assume that once that happens there would be a pretty big interest from a lot of agriculture companies that operate in China too. We’ve actually seen other stocks go up, Joe?
Mr. Ramelli continues…
Those two that I mentioned are multi-billion dollar companies, both have gone up 100% this year. Multi-billion dollar U.S. market cap. So, it’s definitely a good indication, and people are excited about it, and as I mentioned, this is the only play on GMO positive traits in the United States. So, if you want to play a trend of this big…I would call it kind of a generational investing trend, with countries modernizing and going GMO positive.
So now you have this JV partner that’s going to help you commercialize GMO. You have JV partners that are going to help you with manufacturing, you have partners that will help you with research and development. What do you see as some of the most challenging parts of growing this business Chairman Han, moving forward- what could go wrong?
- Chairman Han is confident that GMO is coming, but the issue is timing.
And there’s been some US companies that you’ve been cultivating relationships with for some time – can you talk about that and how real that opportunity becomes once China goes GMO positive?
Our key takeaways from Chairman Han’s answer to this are:
- U.S. Companies can’t set up GMO operations and monetize their own IP in China without a conduit like Origin Agritech.
- And because Origin Agritech has a presence in the U.S. through its NASDAQ listing, it has a good opportunity to partner with multinational companies.
- These firms can also partner to use SEED’s IP.
So if a foreign or US company wants to sell GMO seeds eventually in China, they have to go through you, they have to go through you to do that, establish a Chinese partner to do that?
- Chairman Han answers Yes
Mr. Soueidan asks if there are any questions from attendees..
Questions from Ed Gilmore of Little Grapevine
How much of what you do is research and how much commercialization and development?
SEED’s main focus is on product development. Even if a gene is discovered by another entity Origin Agritech can take it further to by applying it to product and gene trait development.
Grain prices are rising..if this continues will it make opening of GMO in China faster?
- Chairman Han answers Yes
Is the African market important to you? Do you have any entities in Africa that are licensing commercializing your products, or do you intend to? 38:00
- China is where SEED’s focus currently lies and that South America and Mexico would be target geographies before South Africa.
Mr. Ramelli follows up…
- I think it’s safe to say we are still a small company and know there are huge opportunities, but don’t want to spread our resources too thin. That’s also a big factor in that.
Can your gene traits be licensed to companies that want to do GMO in pork. Can you talk more about the animal opportunity?
- Chairman Han and Mr. Ramelli both answer, generally yes, they do that.
A question from Mike Woloski from GeoInvesting
Currently, what are the consequences for farmers using illegal GMO strands? What control will you have on your seeds once they are introduced to the market? How will you prevent the reuse of crop for Origin.
- Chairman Han stresses the advantages that GMO seeds have over being able to track the seeds and that China will be more proactive at taking legal action against illegal GMO activity.
Mr. Ramelli follows up with additional commentary…
And I think Chairman Han brought up earlier that with the hybrid seed it’s very difficult to prove that somebody’s stealing your seeds or technology, but obviously with GMO there is a fingerprint almost on the seed where you can prove that it’s being stolen. Also, I think there’s some anticipation that once they go GMO positive there will be much more effort placed on enforcing the rules and getting rid of people that aren’t following the rules or don’t have safety approval. I think there will be many protections afforded to us.
Joe, can you define hybrid seed? Since we are using this terminology here?
Ya, so basically if you were raising peaches, take 2 different varieties of trees and cross-breed them, you get a certain trait. So in the old days, before GMO, it would take generations to develop different traits, but gene editing has really sped up that process and continues with companies like CRISPR, different technologies.
Mr. Ramelli digresses about two personal stories with respect to how he came to be involved.
…about chatting with a large shareholder who worked in sales at Monsanto and is very excited about Origin Agritech prospects and thing highly of HAB.
On that note, talk more about his personal story which leads into a great discussion highlighting how one of the most infamous short sellers in the China space, Jon Carnes, is bullish on Origin Agritech.
Carnes is one of the smartest if not the smartest investors I know with regards to due diligence. We don’t think investors realize that Carnes is involved in this story….
- Maj interjects about GeoInvesting’s role and history in vetting US Listed China-based companies
- Talks about how Geo was uncovering fraud at about the same time as Jon Carnes, Muddy Waters, and others, where a lot of the work was done by looking at SAIC filings at the provincial level, documents where we could find financial and corporate structure information, subsidiaries. The Due Diligence validated many of the suspicions we had.
- We have leaned on SAIC filings to help us confirm aspects of SEED’s disclosures in U.S. filings and press releases.
Chairman Han, there was a point in time when you were approached to be acquired by another company back in the day.
- When the time is right we can revisit this, but we are currently focused on growing shareholder value.
Interjecting..I believe the split adjusted price was about 30 bucks?
Yes, 5 years ago
And it now looks like you are in a better position now than you were 5 years ago…
And I think your company got to a $300M market cap back in 2009 when you received approval…What kind of revenue potential for the company?
Chairman Han Summarizes
- With our conventional seed business we reached revenue of 600RMB
- GMO should be much much more than that because of the potential for higher price and less competition.
- Once China goes GMO positive and Origin Agritech gets approvals, revenue could begin to occur in a few months since Origin Agritech already has the infrastructure in place.
When is China’s growing season?
- Starts in April
So, if China was to be ready for the 2021 growing season they need to go GMO positive soon?
- Answers Yes
Question from attendee
Are your seeds similar to those used in the U.S. that were planted and harvested only once? There have been problems with farmers planting seed instead of selling through the market.
Our GMO seeds can only be used once
Question from attendee
How is the company marketing GMO products, and specifically Asia and the rest of the world?
Origin Agritech plans to use its infrastructure that it has cultivated during its legacy years
In this chapter of Origin, do you believe margins will lead to better profitability? In other words, are the margins generally better?
Han , yes, because of better pricing and less competition (only 3 comps in China)
There’s definitely some tensions between the U.S. and China, especially with investor sentiment with investing in US Listed China Based companies right now, even some higher profile companies. Obviously you will continue to run the company as you normally would, build trust…are you trying to develop relationships with Wall Street and analysts to reach a broader audience?
Yes, Origin Agritech participated in the September 2020 LD Micro Virtual Conference, now GEO and will continue to communicate more openly with investors
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