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China New Borun (BORN)
At the price range mid-point of $13 BORN has a market cap of $332 million |
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SUMMARY |
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BORN is a potential sleeper that could do well over time, especially if the IPO price is reduced. |
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Priced at 10x annualized earnings for the March quarter, with 46% more production capacity expected to be on-stream in December, 2010 |
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Expected to be the largest player in its defined market: ingredients for high & medium-end baijiu. Baijui is a white liquor, 18% to 68% alcohol by volume. In comparison vodka is 35% to 50% alcohol. |
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Operated its facilities at full capacity since 2007. To date has not experienced any difficulty in selling 100% of production even as production capacity expanded. |
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Baijui industry is consolidating and BORN is still able to get government permits to expand |
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Uses an in-house developed process to create a competitive advantage according to BORN |
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Overall industry supply exceeds demand, but large producers like BORN historically sell 100% of their production capacity |
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BUSINESS |
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. Focuses on ingredients for the high and medium-end baijiu market
. Based on data from the Frost & Sullivan Report and BORN’s industry knowledge, BORN believes it will be the largest producer of corn-based edible alcohol in China, in terms of current known production capacity, following complete development of the Daqing facility.
. According to the Frost & Sullivan Report, BORN is currently the largest privately-owned corn-based edible alcohol producer operating in Shandong Province and Heilongjiang Province. |
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. BORN’s edible alcohol products are primarily sold as an ingredient to producers of baijiu who further blend the products into finished products sold under various brand names throughout China. |
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MARKET FOCUS |
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. BORN’s focus is on ingredients for the high and medium-end baijiu market has had a direct impact on the demand for its product. In particular during the recent economic downturn demand for baijiu in the PRC did not experience a significant decline.
Demand for BORN’s product remained steady, when edible alcohol suppliers primarily servicing the pharmaceutical and chemical industries experienced sharp drops in demand.
. Going forward, BORN believes the projected growth in the high and medium-end baijiu market will continue to result in an uptake of 100% of annual production. |
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BORN believes that the annualized average price of edible alcohol will rise in the near term due to the growing demand for edible alcohol |
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COMETITIVE ADVANTAGE |
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. BORN believes its in-house developed manufacturing process results in a cost effective, consistent and superior product widely sought by baijiu producers.
. Has been able to sell 100% of production capacity in recent years due to its large production volume and high product quality
. A key supplier for leading baijiu producers, who are willing to maintain long term relationships with BORN in order to secure product supply of BORN’s product. |
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BAIJUI |
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. Baijiu is sold throughout China in retail stores, bars, banquet halls, restaurants and other locations where alcoholic beverages are typically consumed.
. Grain based alcoholic beverage, generally made from corn, wheat or barley, clear in color, with alcohol content ranging from 18% to 68%. |
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. Producers of baijiu often have distinctive taste and flavor profiles that are achieved through proprietary recipes and blending techniques.
. The consistency and quality of the edible alcohol BORN supplies to them is critical to achieving these taste and flavor profiles, according to BORN.. |
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LARGE PRODUCERS MAINTAIN HIGH CAPCITY UTILIZATION |
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. Large producers (like BORN) maintain high capacity utilization rates, even though overall supply exceeds demand
. Large edible alcohol producers are able to maintain a high capacity utilization rate due to their large exposure to and close relationship with baijiu producers, which historically has been BORN’s experience.
. As a result, the Frost Report expects the production capacity of edible alcohol in China to remain stable in 2010. |
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TWO PRODUCTION FACILITIES |
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Shouguang, Shandong Province |
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Annual production capacity of 160,000 tons of corn-based edible alcohol (90,000 tons of Grade B edible alcohol and 70,000 tons of Grade C edible alcohol). |
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Daqing, Heilongjiang Province |
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Currently has an annual production capacity of 100,000 tons of corn-based edible alcohol (70,000 tons of Grade B edible alcohol and 30,000 tons Grade C edible alcohol). |
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CAPACITY EXPANSION |
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. BORN believes that the completion of the Phase III Daqing facility in 2010 will have a material impact on financial performance. |
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. Constructing an additional 120,000 tons of capacity (all Grade B edible alcohol) at the Daqing facility, currently expected to commence commercial production in December 2010.
. The Daqing facility is licensed to build up to 330,000 tons of production capacity of edible alcohol. |
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. Overall production capacity of edible alcohol will be increased by 46.2% to 380,000 tons from the current 260,000 tons. |
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OVERALL SUPPLY – DEMAND IMBALANCE |
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. In 2009, total production capacity of edible alcohol was 6.5 million tons while the demand for edible alcohol was 4.6 million tons, according to the Frost & Sullivan Report. |
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. The overall supply of edible alcohol outpaced the demand for edible alcohol, and there is excess production capacity in China currently. |
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INDUSTRY CONSOLIDATION |
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. To control the over expansion of capacity in the edible alcohol industry, the PRC government has implemented a series of restrictive policies to control the industry's capacity expansion since 2006 |
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. This was done primarily through the prohibition on accepting applications for the construction of new edible alcohol facilities and closing existing edible alcohol facilities with production capacity of less than 30,000 tons per annum. |
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INTELLECTUAL PROPERTY |
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. On April 15, 2008, the State Intellectual Property Office of the PRC accepted BORN’s application for a patent of invention for the Borun Wet Process
. BORN believes that it is the only corn-based edible alcohol producer in China using the Borun Wet Process. |
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COMPETITION |
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. There is no dominant leader in the market but there are a few manufacturers whose capacities are similar to BORN.
. Only competes with domestic companies and does not compete with any international producers.
. Major competitors include the other top 10 edible alcohol producers in China such as Jilin New Tian Long, COFCO Zhaodong, Meihekou Fukang and Lianyungang Dongcheng. |
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EMPLOYEES |
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On June 1 the Shouguang facility had 474 full-time employees and the Daqing facility had 388 full-time employees for a total of 862 full time employees: 678 manufacturing staff, 159 management and administrative personnel, and the rest, 25 full-time employees in sales department. |
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USE OF IPO PROCEEDS, $65mm |
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$55 million to fund the expansion of production capacity. |
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Remaining portion as working capital to be used to support the production capacity expansion |
