March 23, 2004

 

 

Citigroup's Holding of Convertible Debentures of China's Fengyuan Biochemical Increases Its Exposure to the Lucrative Lysine Market

 

An eFeedLink Exclusive Report
 

In a public announcement published on the January 7, 2004 issue of China Equity, Fengyuan Biochemical Private Limited Company, located in China's Anhui province, said that Yinhe- Standard Chartered-Citigroup Global Markets Limited, holders of the company's convertible debentures (No.125930), has a controlling stake on over 20% of the total issue. Specifically, as of January 7, 2004, 21.36% of Fengyuan's convertible debentures issue (No.125930), or 1,067,868 shares, is being held by Citigroup Global Markets Limited

 

In 2003, Citigroup Global Markets invested a RMB600, 000 on purchasing Fengyuan Biochemical's convertible debentures, when it was offered to the public. After the listing, Citigroup continued to increase their holding by buying the convertible debentures in the open market. In Fengyuan's third quarter report last year, it was reported that Citigroup has acquired 810,000 shares of the company's convertible debentures from the secondary markets.

                      

Citigroup's large acquisition of Fengyuan's convertible debentures is noteworthy. Fengyuan's convertible debenture issue is not a hot favorite amongst investors. According to industry observers, Fengyuan's convertible debenture does not stand out in terms of interest returns, as it only offers a mediocre rate of return, compared with convertible debenture issued by other companies. Additionally, the share price of the Fengyuan Group is highly volatile and at one point, it even took a dip of 15%.

 

The listing price of Fengyuan's convertible debenture has fluctuated widely and slumped in tandem with the movement of the company's share prices. However, with Citigroup's entry into the market, share prices of Fengyuan Biochemical and its company's convertible debentures have surged simultaneously and it has rekindled hopes for making further gains amongst investors.

 

The transaction history showed that, since the listing of Fengyuan's convertible debentures, its total transacted volume has not been large. Industry observers believed that if it is true that the Citigroup has only begun to acquire Fengyuan's convertible debentures after the fourth quarter of 2003, the group's purchasing volume would account for 50% of Fengyuan's total transacted volume during that period.

 

One experienced investor revealed that under normal circumstances, the convertible debentures bought in by an investor would not exceed 20% of the total transacted volume. To reach 50% of the total transacted volume would definitely require sizable offloading by a selling party. Otherwise, this is not easy to be realized, even if price quotes were being raised to a high level. It should also be noted that during that period, the market price of Fengyuan's convertible debenture has been rather stable.

 

If the aforementioned supposition is justifiable, industry observers will have to rethink that whether the Citigroup has sniffed out a golden investment opportunity that other investors had given a miss? Is the group trying to gain exposure to China's lysine industry?

 

It is well known that Fengyuan Biochemical is one of China's largest corn processing industrial enterprise. It is also the world's largest producer of citric acid. Recently, Fengyuan has actively engaged in lysine production. In order to fund its investments, Fengyuan has reached out to the capital markets by issuing convertible debentures and offering them to the public. 

 

In recent years, Fengyuan raised fund through issuing convertible debentures for its development plans, such as a 1.8 million tons/year corn processing line; a 300,000 tons/year ethanol production line; a 300,000 tons/year starch sugar production line and a 30,000 tons/year lactic acid production line. Besides, the company has invested to establish a new 30,000 tons/year lysine production line.

 

Lysine is an essential feed additive in feed production. With rapid development in China's livestock industry, China is now the world's second largest consumer of lysine. With the shutdown of Japan's Kyowa Hakko's lysine plants in the USA and Mexico, there would reportedly be a temporary shortage in the global supply of lysine. Undoubtedly, this is a golden business opportunity for China's lysine producers to expand their market shares.

 

With the completion of Fengyuan's 30,000 tons/year lysine production line, the company's lysine production capacity will be raised to 50,000 tons per year. This will place Fengyuan among the tops in China's lysine production industry.

 

China is the world's second largest producer of corn and the country is also well endowed with other natural resources. As such, China's lysine production enterprises will enjoy cost efficiencies and have a competitive edge over lysine producers in other countries. In recent years, investing in lysine production projects has become an investment focus amongst China's businesses.      

 

Some analysts forecast that after its achievement as the world's largest vitamin C and antibiotics raw material producers, China will become the world's largest lysine producer in future.