Guangdong VTR Bio-Tech Company
A company with a bright future –and quite a few challenges, too.
by David LIN and YANG Yang
China's first and largest feed enzyme manufacturer, Guangdong VTR Bio-Tech Company (VTR) was founded in 1991 in the southern Chinese province of Guangdong, Zhuhai City. The company is dedicated to the research, development and manufacture of enzyme preparations and feed additives, and sells its products to 20 countries in Asia-Pacific, Europe, Africa and Americas.
VTR's products include premix compound feed enzymes, anti-coccidial powders, ß-Mannanase preparations and compound enzymes for concentrated feed. Among these compound enzymes, phytase and xylanase are the company's core products, accounting for 92% of total revenue.
Financial status
From 2010 to 2012, VTR's gross profit margin stayed at about 52% and it achieved a compound annual growth rate (CAGR) of 39% during the same period. Net profit totalled RMB28.19 million (US$4.61 million) in 2010, RMB43.19 million (US$7.06 million) in 2011 and RMB54.72 million (US$8.94 million) in 2012, respectively.
Alongside volume driven revenue increases, prices of the company's core products were also on the rise during those years. The average price of VTR's enzyme products was at RMB17,700/tonne (US$2,893.59/tonne) in 2010, RMB18,300/tonne (US$2,991.41/tonne) in 2011 and RMB19,700/tonne (US$3,220.26/tonne) in 2012, respectively.
Recent development
On January 28, 2014, VTR was listed on Shenzhen Stock Exchange with 13 million shares in an IPO that raised RMB166 million (US$26.99 million), most of which will be used to invest in the second phase of a 20,000-tonne enzyme manufacturing plant in Inner Mongolia province.
This expansion is VTR's latest move to increase its capacity. When plant's expansion is completed and fully operational, VTR will increase its feed enzyme making capacity by 86% or 12,000 tonnes to 26,000 tonnes.
Up until 2012, China's feed industry had been growing steadily. Driven by the swine sector's ongoing scale consolidation and the increase in prices of minerals that are used as feed additives, demand for enzyme products has been expanding rapidly.
VTR benefited greatly from this trend and gradually built up its customer base over the years. However, the limits of its production capacity were also laid bare as the company found it increasingly difficult to keep pace with rising demand.
In July 2009, VTR set up a subsidiary in Inner Mongolia and started the plant's operation. In the same year, the company's sales jumped 54% on-year, while its share of China's livestock supplement market reached 18%.
However, as the Chinese feed enzyme market continued to grow, the company found itself stuck in yet another capacity bottleneck in 2010. Unable to satisfy rising demand for the company's products, VTR's market share dropped to 14% in the same year, four percentage points lower than 2009, and slipped one percentage point compared to 2008's 15%.
Currently, VTR has a collective production capacity of 14,000 tonnes per year, with 6,000 tonnes produced at the Zhuhai headquarter's facility and 8,000 tonnes at its subsidiary in Inner Mongolia. In 2012, the company produced 16,000 tonnes of enzyme products, overstretching its capacity by 2,000 tonnes.
VTR soon rolled out plans to expand its Inner Mongolia subsidiary's operations and began the plant's second construction phase. In a bid to get the operation up as soon as possible, the company pinned its hopes on gathering funds though an IPO.
A promising future
According to VTR's IPO prospectus, the strong growth of China's feed sector and progress made by Chinese feed manufactures will continue to boost demand for its enzymes.
On one hand, rising feed production volumes demands the reliance on non-traditional raw materials. By adding feed enzymes, unconventional raw materials including straw and wheat bran, can be used for animal feed. Together with China's ongoing livestock sector's consolidation, this will push up sales of feed enzymes as demand increases.
On the other hand, as feed manufacturing technology advances, manufacturers have pushed down costs while enhancing enzyme product efficiency, with their effects on animals more clearly demonstrated. This has in turn brought up the use of enzymes by feed millers and livestock farmers, as they realise the benefits.
At the same time, with consumers' growing consciousness about the connection between animal health and food safety, enzymes and other natural alternatives are increasingly used in feed, thus providing great opportunities for VTR and feed additive manufacturers in general.
It is estimated that feed mixed with enzymes will account for 60% of compound feed by 2014 in China, compared to 32.4% in 2010. Based on forecasts in VTR's prospectus, the Chinese market for feed enzyme preparations will reach 141,800 tonnes in 2013 and 167,200 tonnes in 2014.
The larger share of this market will be grabbed by global enzyme producers, including Danisco, Genencor, AB Enzymes, Adisseo, DSM, Alltech, BASF, and Kemin. Domestic companies, including VTR, Hubei-based SunHY, Beijing Challenge Bio-Technology Co., Ltd., Beijing Smistyle Science and Technology Development Co., Ltd., Beijing Sunson Industry Group and Hunan-based Youtell will compete for the remaining share.
Challenges lie ahead
Despite the optimistic outlook, some industry analysts also believe that given decelerating feed demand growth and increased competition from new players, the heyday for enzyme manufacturers is coming to an end. Many expect enzyme prices to decline as more and more products enter the marketplace. Medium-term fluctuations in feed demand caused by factors such as China's many animal disease outbreaks, will also inevitably impact feed enzyme sales.
According to eFeedLink's data, China will produce 190 million tonnes of feed in 2014, one million tonnes less than in 2013 and four million tonnes less than in 2012. This is the very first time that China's feed demand has fallen for two consecutive years since the economy was liberalised in the early 1980s. Even though the proportion of feed that incorporates enzymes continues to rise, this makes it a far more competitive, challenging marketplace.
However, performances vary for different types of feed. One on hand, despite a slump in the overall feed sector, sales of pig feed rose by 3% to 5% for 2013, primarily due to rising pork production and the greater use of supplemented feed by swine farms.
One the other hand, twice hit by H7N9 bird flu in one year and undergoing a 25% three-month drop in broiler inventories, poultry feed saw sales volume falling sharply.
The resulting livestock market turbulence undoubtedly impacted VTR's performance. In the first three quarters of 2013, VTR generated operating income of RMB255 million (US$41.53 million) and net profit of RMB46.94 million (US$7.64 million). Though the figures represent an increase of 2.4% and 5.4% respectively, they are a far cry from the average growth rate of 39% in the previous three years.
Stock information
Since the company's share began trading on Shenzhen Stock Exchange on January 28, VTR's stock price skyrocketed to RMB58.88/share (US$9.59/share) at one time. It has since stayed in the range of RMB50/share to RMB55/share (US$8.95/share).
VTR's price-to-earnings ratio (P/E ratio) for the stock is 39. That is lower than the average of 51 for China's overall feed industry but above the average of 22 achieved by leading Chinese feed manufacturers, including New Hope Group, Tongwei Group and Haid Group.
Though VTR enjoys an above-average P/E ratio relative to competitors of similar size and scale, the company will be subject to the volatility of China's unpredictable feed and livestock sectors.
