Tuesday, September 29, 2015

China Corn Processing Giant Out of Dough

In northeast China's Changchun City, farmers, suppliers and construction companies gather at the gates of Dacheng Biotech Group to collect on unpaid bills. Most go away empty-handed from the mostly-deserted headquarters of Asia's largest corn-processor which has been idle most of this year.

The company is listed on the Hong Kong stock exchange and is Asia's largest "deep-processor" of corn, yet it has accumulated 80 million yuan in unpaid IOUs to farmers who sold corn to the company.

The money owed to farmers is a miniscule part of Dacheng's arrears. Voice of China reports that a company official says Dacheng is behind on RMB 9.8 billion in bank loans and owes RMB 1.2 billion to suppliers. They claim to have struck a deal to pay off debts to farmers by the end of the year.

After a string of bad business decisions and with demand for its main product shrinking along with the Chinese hog herd, Dacheng Group's cash flow has dried up. China's big four state-owned banks have stopped feeding loans to the company, and it is near insolvency. It has essentially been shuttered for six months. In March 2015, the company sent a report to the Changchun government and to its main lender informing them that it was idling its production operations.

A report from China Business Journal explains how the company got into its predicament. Dacheng Group was founded in 1996 as a starch factory. Its main products are lysine, an amino acid used in animal feed, and liquid glucose. Both products are made from corn, northeastern China's leading agricultural product. The company normally would use up to 8 million metric tons of corn annually.

The company listed on the Hong Kong stock exchange in 2001. It hit the big time when Jilin Provincial leaders chose corn-based biochemicals as one of two pillar industries to develop the regional economy (vehicles for special uses were the other one). After that, free land, loans, and preferential tax rates came the company's way.

An unnamed industry participant told China Business Journal, "The government ordered banks to give Dacheng money, and a considerable part of the loans had no collateral."

In 2006, Jilin authorities issued a document conferring special status on two projects: the airport for Changchun (Jilin's provincial capital), and a giant corn industrial park near Changchun. The park's plan was to make chemical fibers and plastics out of corn. In 2009 they ordered Dacheng to relocate to the industry park with free land and other inducements. When the park was still unfinished and underutilized in 2012, another of its subsidiaries was ordered to move there too.

In 2010, another of Dacheng's subsidiaries was awarded "high-tech company" status, bringing another tax break.

The company's business reportedly began going downhill after its chairman died three years ago. Since then, the company has had three CEOs, none of whom could turn the company around. Observers say the company expanded too rapidly and was too eager to diversify into ventures at the request of the government. It failed to upgrade the quality of its products, neglecting to transition into higher-margin crystallized sugar. Dacheng admitted to having serious excess capacity for lysine production, and it expanded production of starch that was earning minimal profits.

According to China Business Journal, aggressive expansion ate up the company's cash, and it built up short-term liabilities to finance investments with long-term payoffs.

The way forward for Dacheng is unclear. It's rumored that the local government wants COFCO--the state-owned agribusiness conglomerate--to acquire Dacheng but banks reportedly oppose the move. The Changchun government has reportedly given the company some subsidies to keep it going.

CJ Group, an offshoot of the Korean Samsung conglomerate, is reportedly interested in acquiring Dacheng. CJ Group would become the world's leading lysine producer if it acquired Dacheng. The companies have had a partnership since 2006 and the CJ Group president reportedly traveled to Changchun to meet with the governor of Jilin. (CJ Group has its own problems--its CEO was arrested in Korea last year and his sister has taken over.) An unnamed industry person warned China Business Journal that a Korean takeover would mean that Chinese people lose pricing power for a critical feed additive, and "when we eat pork or chicken, it would not be at the same price as now."

A provincial investment group acquired a 49% interest in Dacheng during August and China Business Journal says it is reportedly negotiating with other Chinese companies to make a further move.

Dacheng's plight comes at a bad time for China's corn industry which is already suffering from a severe corn glut.

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