Origin Agritech Ltd (SEED)

[BlockTrade]

ORIGIN AGRITECH: A CALL OPTION ON CHINA GOING GMO POSITIVE?

We think so!

Upgrading Shares from Buy to Strong Buy

PRICE TARGET $10
Symbol: SEED
Price: $2.47
Shares Outstanding: 22.8 million
Float: 17.55 million
Cash: ~$35 million
Debt: ~$14 million

TRUMP SELECTS IOWA-R GOVERNOR TO BE US AMBASSADOR TO CHINA

Last week, President-Elect Trump selected Terry Branstad the Governor of Iowa-R to be the US Ambassador to China. This is a tremendous asset to not only agriculture stocks, but to our bullish thesis on Origin. In fact, The Washington Post reports Branstad was just in China last month visiting with China’s Ministry of Agriculture (MOA) and other officials. We believe, Origin heads could have been involved in some of those gatherings as the company officials said they spent 2 weeks in China in early November. Coincidence we think not. In concert, Bill Niebur, the CEO of Origin continues to devote his time to bring China – US relations closer through agriculture. Remember, in 2015, he was awarded One of 50 People Shaping the Future of the U.S.-China Relationship. As a result, at this valuation we see this announcement as big as any future deals Origin may forge in the weeks to months to come.

On the heels of the optimal selection of Branstad, we’re upgrading the shares concluding the first introduction of Origin’s new senior management team to Wall Street. This new team consists of CEO Dr. William Niebur, an ex-Dupont only executive of 33 years, CFO Sharshank Aurora, an ex-Dupont executive of 25 years and CTO Dr. Jihong Liang, an ex-Syngenta & ex-Monsanto head of R&D. Combined, the team possesses the cultivation and harvesting of the next breeding grounds in Big Ag growth. During the visit, Origin presented its 3 Pillars of Growth: China Biotech, Global Biotech Traits and Non-GMO/Organic (E-Commerce Platform) which we see being 3 pillars with high barriers to entry. This distinguished team brings a lengthy olive branch within the top global agriculture companies making Origin a call option on igniting China’s effort in becoming GMO positive and an equal in the global agriculture world.

In our view, the master plan at Origin is to clean house reinforcing and bringing to market its biotech arsenal (12 years of government GMO trait trials) and its unique broad germ plasm bank via an ultra attractive subscription fee royalty model with both Chinese national companies and Multi-national seed companies. This past September, the new Origin team (150 days on the job), announced that it would sell its commoditized seed business for what amounts to be well over $60 million over the life of the deal. This maneuver, unquestionably makes Origin an attractive biotech company in agriculture. They’re about to provide the wow factor to investors and traders alike whenever it executes on its planned roadmap.

We maintain our bullish stance and believe the market has yet to fully value the company’s tangible and intangible assets. Furthermore, in our opinion, the market is oblivious to the importance of China wanting to become an agriculture equal in the global marketplace. In total, the company is addressing a $4.7 billion total available market with most of that revenue being derived from fees which carry very high gross margins. The shares are one or two events away from uncovering the tremendous upside that resides inside of China and outside of China over the next 1-3 years in this under appreciative company.

We, continue to rate shares a buy with a price target of $10 or ~$230 million market capitalization in the next 12 months and a price target of $15 or ~$370 million market capitalization on China lifting its GMO ban. By looking at the charts, the team, the total available market, the attractive subscription based business model, Branstad selection and the ambitions of China it’s only a matter of time before the market starts to recognize the value never mind appreciate it. Our price target reflects that process.

OUT WITH THE OLD IN WITH THE NEW

Late September, the company unexpectedly announced it sold its seed business for $60 million in cash and royalties on current and future portfolio products. In addition, the acquiring company will pay for subscriptions on Origin’s pipeline of new products. We calculate the deal being worth $70 million dollars over a 3-4 year period. The deal allows the company to fully maintain all its IP and government trials on GMO traits and to remove itself from the fluctuations of the commoditized seed business, a time consuming fight for scraps. Conversely, it extends its financial runway to an international runway and it opens the door for the company to be fully focused on being a pure play agriculture biotech to not only China, but the rest of the world. It also gives a seasoned and diversified agriculture team the room to run with the ball and utilize both its biotech & business creativity, contacts and vision it accumulated during the combined 83 years at top executive positions in the three biggest Ag companies of the world. Who better to make this happen? As Neibur explained to Benzinga. “What we have done is that we’ve tried to position ourselves in a way to develop novel routes to market in some of these novel, emerging, fast-growth markets, albeit from a small base, but fast growth nonetheless”. We applaud this move with great fanfare and see this move as transparent and transcendent in its effort to be the first Chinese micro-cap to outlandishly pilot itself to multi-national status. A massive task, but it already has multinational backing in its executive team, its IP, its strategic partner Dupont and the relationship Branstad has with China to catapult off of.

PROOF IT’S CLEAN AND TRANSPARENT

Prior to selling the seed business Origin’s Chairman and founder Doctor Han, set out to pass his 18 years of building a solid agriculture biotech platform to a more acclimated group of confident, trusted executives to grow the value of these unrecognized assets. He also recently decided to take permanent residence in the US by buying a home in the past year. We view his residency as a big showing of credibility and transparency in the integrity of Origin’s corporate structure. For us, this is one Chinese company we feel that what you see is what you get. A hard statement to say never mind put in print. When you place an executive such as Niebur in the CEO cockpit after spending his entire career at one blue chip company, you know the due diligence has been thoroughly done. Add the current CFO, Sharshank Aurora, having spent 25 years at Dupont and most likely being a conservative, reserved risk controlled person by nature of his occupation, we see even further proof Origin is one micro-cap company with all the transparency of a US company with all the upside to China’s demographics. Last but not least, the Chinese American CTO Jihong Liang’s having been head of R&D at Monsanto and Syngenta makes his acceptance of the position as CTO further proof Origin has technical merit. We see this as four of a kind.

BREEDING BEST OF BREED MANAGEMENT

We believe the company will have the opportunity to hand pick the best of breed scientists inside and outside of China, as well as legal counsel, business development and marketing heads as the recent wave of consolidation in the agriculture industry will attract talent that see the inherent financial leverage in this team, demographics and technology. We believe that the CEO said it best in a recent interview with Benzinga. “We feel like we’ve assembled diversity in the sense of where we’ve come from and where we’ve developed, but also who we’ve worked with, but we have a common understanding of what it’s like to operate at the highest levels of science and the highest levels of business and transparency and ethical behavior within the company,”

CHINA IS READY TO ROCK AND ROLL ON GMO

In August and September, China’s government made two historic announcements that have gone unnoticed by most investors, but noticed by many different media outlets. First, the Chinese government announced in its 13th “Five Year Plan” that it will be lifting its GMO ban in the next 2-3 years. This is an absolute first! We already know China backed ChemChina’s $43 billion dollar bid for Syngenta (SYT) earlier this year. A first by China in the agriculture industry. However, if you talk to people familiar with China then you know that when the Chinese decide to do something they do it fast. It’s taken a long time for the government to publicly act on lifting the GMO ban, but now we get the chance to witness just how fast it’ll catch up to global levels. In Chinese fashion, it showed its hand just a few weeks post announcing its intentions to lift the ban. It allocated $450 billion towards agriculture spending over the next four years. We believe Origin could be behind some of these assets when its turn comes. In fact, the Chinese government could be providing the financing for the acquiring company of Origin’s seed business which if true is a clear sign how important it sees Origin’s biotech arm being as they attempt to become the first Chinese multinational from micro-cap scale. The Chinese government is not done making noise in its effort to feed its country independently and also be known as a global participant in the field of agriculture science.

3 PILLARS OF GROWTH

CHINA BIOTECH

Origin now has ample funds to accelerate its biotech arm of GMO traits and germ plasm library. In addition, it will position itself as a “no brainer” ally to both local seed companies and more importantly, multinational seed companies (MNCs) that need competent, trustworthy Ag personnel and technology coverage in China. That personnel, will be handpicked, best of breed affording MNCs parallel caliber R&D at good value and a local respected arm for navigation through China’s rigid regulatory system for foreign entities that have to participate in China’s Ag business to grow. For example, Dupont, a 12-15% market share leader in China, licensed Origin’s IP in early 2016 exclusively for China only which we believe could be extended to other countries in the near future. This relationship is certain to open dialogue with the other MNCs and in fact we heard management is in discussions with 2 other parties that are unknown.

We remind investors that in 2009 China granted Origin’s R&D efforts to bring Phytase corn from phase I – Phase V with China’s first GMO approval rating. The shares exploded from $4 per share to $15 per share. In that time, Fidelity initiated a 10% stake in the company. Unfortunately, China wasn’t in a GMO positive mode like it is today. A big difference for the new Origin when the company gets its next GMO trait through the approval process.

From our sources, during the NDR, Origin stated that it recently submitted its Weed Resistant GMO trait (GT) for Chinese government approval. We find this to be material and significant to the value of Origin’s share price, as it creates a more significant price move if and when it receives approval. To be clear, no one knows if and when China will approve the trait but we believe more than ever, China will be more proactive on GMO activities after proclaiming its positive stance in August.

From its presentation deck (slide 11), Origin estimates the Chinese GMO traits market to be worth an estimated $1 billion in licensing fees. We believe Origin’s 2 licensees total a minimum of 15% market share of the Chinese seed market and could represent over 20-25% over the next 1-2 years prior to China going GMO positive by 2019. To achieve 20-25% levels management would need to close more strategic partners. That could total $150,000,000 – $250,000,000 in royalties. This estimate is based on China becoming 90% GMO just like North America and it would of course take many years post being approved. We remind investors that licensing business models fetch up to 10x sales in valuation from investors. Our $15 target or $370 million valuation is less than 3x our low end revenue estimate of $150 million dollars.

We don’t see another Nasdaq traded company in the agriculture space or outside it with the ability to garner strategic partnerships with Fortune 500 companies via equity upfront, licensing fees or other creative financial maneuvers in an untapped market the size of feeding China with a management team fit to run a MNC at only a $50 million market capitalization. To us, this pillar exemplifies high barriers to entry.

GLOBAL BIOTECH TRAITS

Origin has submitted documentation to Chinese officials to become the first company to ever receive approval to export GMO traits and germ plasm outside the country. Upon this approval, the company will seek out top multinational Ag companies (MNCs) to license its much more cost effective biotech traits and germ plasm. The company has submitted the proper documentation to receive governmental approval to export the traits to kick off this pillar. This approval, will give Origin great bargaining power in forming strategic partnerships for pillar #1. This announcement could be what breaks the stock out of micro cap status and we believe this approval is highly probable as the Chinese government holds Dr Han and his team in very high regard in supporting their global expansion in agriculture biotech. It could be why Branstad was visiting the MOA in Beijing last month too. This approval will make Origin the only Chinese company to have this authorization which furthers the high barriers to entry formula in pillar 2.

NORTH AMERICA NON-GMO/ORGANIC

This pillar brings two new unexpected opportunities to Origin. It also could be the first glimpse into the creativity and innovative minds at the helm. Certainly, entering the organic markets will be unique to Origin, but it also allows us to witness how the minds at work operate. In addition, the team wants to develop an E-commerce platform in the non GMO and organic space to make the process from producers of the seeds to the end users more functional and transparent which the management team believes it can do with ingenuity and foresight in what it sees as a $1.2 billion addressable market. We all know how Amazon handled the retail world and from our sources the company believes it can be the Amazon of the seed market. This is unique, exciting, unexpected and any deals that are signed or aligned in this area will unfold a potential high barriers to entry model. This has equity stake potential in an effort to raise funds and spin-off potential further down the road.

KEY CATALYSTS

These are some of the key events we place a high probability of occurring in the next 1-6 months:

China approving its new GMO trait submission to the MOA for approval. China is being pushed to get off the starter’s block. This would be game changing and its now submitted and waiting approval at anytime.

A US big Ag or a Chinese company acquires Origin for $8+ per share.

Top agriculture heads are elected to the board of directors.

Announcing E-commerce partners.

A prominent person or company takes an equity stake in the E-portal.

Receiving approval by the Chinese Government to be the first company to export GMO seed traits and/or germ plasm to the United States. A first step in the company being able to become a multinational in the seed industry. A key event.

Announcing key partnerships with one or more of the big 6 agriculture companies in its expansion into the US, Latin America and EMEA. They include but not limited to: MON SYT DD KWS RKDA

Receiving non-dilutive funding from a wealthy industry veteran, a private entity and/or big Ag in what could be a defining moment for the new Origin.

An institutional holder becomes a 5-10% holder in the shares of SEED.

China kicking off a pro GMO media campaign.

China spending some of its $450 billion earmarked for agriculture biotechnology spending that gains the attention of the global media and Wall Street.



In summary, Origin has one GMO trait approved for commercialization in China (2009 renewed 2013) that created $230 million in market value($4-$15) in a few short weeks, It has one trait for weed resistance (GT) that has been submitted for approval (2016) that under the Chinese government’s first publicly pro GMO stance should create at least ~$270 million in market value($15) and it has 2 other traits in phase II and phase III of a five phase process. Each phase is a planting season (1 year), so the first two traits approved and in submission equals 10 years of R&D by both Origin and the Chinese academy of Agriculture Science (CAAS). That has a tangible cost and an intangible value once GMO is a go in China or granted approval to export from China. Moreover, the company possesses a germ plasm library that is deep and potent for immediate licensing. These traits and germ plasm coupled with the company’s position with the ministry of agriculture (MOA) in China presents real tangible and intangible value way beyond today’s net enterprise value of ~$25 million. The management team alone could be valued at $50-100 million if focused on more intently by the buy and sell sides. That value could surface overnight if any future coverage by analysts and/or strategic deals come to fruition or investors are ready to harvest their due diligence like we have.

Origin, just buttoned up a 2 week NDR going through NYC, Boston and Chicago. It also attended the ASTA conference in Chicago where a who’s who of the seed world came together to have meetings of the minds (seeds). Furthermore, the unexpected simultaneous selection of Branstad should allow for optimism in the new Origin’s game plan. This could be the ground floor entry point for new investors with big purchasing power and for all types of other investors if this team has any of the above catalysts we highlighted or others we haven’t brain trusted on. We like it better in the $2.50 range than the $1.71 range back in June when we initiated coverage. This could be one bullish call that brings call option returns.
https://eximiuscapitalgroup.wordpress.com/2016/12/12/origin-agritech-a-call-option-on-china-going-gmo-positive/