Diet plan

After M&A spree COFCO plans to get leaner and more profitable

COFCO Chairman Frank Ning attends the Asian Financial Forum in Hong Kong

New regime at food giant COFCO questions ex-boss Ning’s dealmaking

It is hard to escape articles about the European Union right now, so it seems fitting that WiC compares the consequences of China’s farming subsidies with those of Europe’s Common Agricultural Policy. Both had worthy objectives and both seem to have suffered similar results.

Where the EU is concerned, its founding members attempted to overcome severe food shortages in the decade following World War Two by subsidising farmers to cultivate as much produce as possible. The ensuing wine lakes and butter mountains certainly provided sustenance, but it was mainly for the comedy circuit. At one point, Britain’s Monster Raving Loony Party even suggested the butter mountain could be turned into a ski slope for the country’s loveable but hopeless Olympic ski jumper Eddie the Eagle to practice on.

As we wrote in WiC252, China’s policy of subsidising its farmers was designed with a similar ethos of ensuring food security in a country with a population four times that of the US. The government also hoped it would help to bridge the rural-and-urban income divide.

As a result, the country has ended up with huge stockpiles from time to time, particularly of corn, which reached a record 250 million tonnes at the beginning of the year. A few months ago, the government announced it would unwind the corn policy by letting the market set prices and offload the stockpile over the next three to five years.

America’s Department of Agriculture has estimated that the changes could end up costing Beijing $10 billion thanks to falling prices and deteriorating stock (two million tonnes of corn may already be so mouldy it can only be used for making ethanol, rather than feeding livestock). At the end of May, the Chinese government sold off an initial two million tonnes of corn.

Imports have also started to rise, which will be good news for US farmers who have spent years accusing the Chinese government of blocking imports on the pretext of protecting domestic crops from contamination by genetically modified variants. In May, corn imports jumped 156% month-on-month to 1.037 million tonnes.

In place of stockpiling the government has devised a new policy, which aims to make domestic agriculture more efficient and also exert greater control over the global supply chain. The company at the forefront of this policy is Sasac-owned China National Cereals, Oils and Foodstuffs Corp (COFCO).

Under prolific dealmaker Ning Gaoning, COFCO went on a global M&A spree that expanded the company’s asset base from Rmb60 billion ($9 billion) when he first became chairman in 2004 to Rmb463 billion at the end of 2015. In a recent article, 21CN Business Herald estimates COFCO spent Rmb14.6 billion on 50 M&A transactions between 2005 and 2013.

But toward the end of 2015, the government decided to change tack and as we reported in WiC311 Ning was moved to Sinochem where he also became chairman. China Economic Weekly pithily described him as being an “M&A maniac”.

COFCO’s new management has been given the task of bringing some semblance of order to Ning’s multiple acquisitions including Noble’s agricultural trading business and Dutch grain trader, Nidera.

At a recent conference, Gert-Jan van den Akker, president of Cargill’s agricultural supply chain joked that while COFCO may have ambitions to join the elite ABCD club that dominates agricultural flows, his own company has already taken the letter C.

By assets, COFCO can now claim the top spot, after overtaking Cargill in 2015. COFCO finished the year with assets of $69.7 billion, compared to the US group’s $59.2 billion, Archer Daniel Midland’s (ADM) $39.7 billion, Bunge’s $18.9 billion and Louis Dreyfus on $18.6 billion.

However, COFCO is the least efficient of the pack. The ABCD club typically generates revenues double its members’ asset base. Cargill, for example, reported revenues of $120.4 billion for the 2015 financial year, while ADM was on $64.58 billion and Bunge $41.56 billion.

COFCO, by contrast, has an asset base that is larger than its Rmb398.3 billion 2015 revenues. 21CN also notes that the company would have been lossmaking had it not been for Rmb4.7 billion in government subsidies.

Net income amounted to Rmb1.65 billion, resulting in a net income margin of just 0.4%. COFCO also carries a heavy debt load of Rmb189.7 billion, almost 50 times its Rmb3.8 billion EBITDA according to S&P Global Market Intelligence data.

As 21CN points out, COFCO also has a sprawling array of subsidiaries and listed businesses. Its acquisition of sugar and meat group Huafu in 2014 gave it a further 70 subsidiaries, while Noble Agri gave it 45 businesses across 25 countries and Nidera added 62 units in 18 countries.

COFCO has five listed companies in Hong Kong: China Food, China Agri-Industries, Mengniu Dairy, CPMC Holdings and Joy City Property. In China it has four listed entities: COFCO Tunhe, Jiugui Liquor, COFCO Properties and COFCO Biochemicals.

COFCO president Patrick Yu has said the group plans to divest some of its property and financial investments to free up capital for more agricultural investments. He has also said the company wants to become involved in the government’s supply side reforms so the company can be more “competitive in terms of the global supply chain”.

In mid-June, Sasac announced further details of the COFCO’s new three-year plan when it posted an announcement on its website. It said the company would trim its legal entities by 20% and aims to reduce losses at unprofitable companies by 50% (COFCO Biochemical and China Agri-Industries were both lossmaking during 2015).

In addition it said COFCO has identified 65 units or affiliates which need to be improved, a further 91 that need more focused management and 102 that need to be either integrated or eliminated through internal M&A.

Sasac said COFCO plans to implement a three-tier corporate structure: group level, operating level and production level. It adds that the overall aim of the “weight loss and fitness plan” will be a market-oriented structure that focuses on maintaining a “small HQ and big business”.

Noble Agri has been renamed COFCO Agri and will be merged with Nidera ahead of a planned listing in 2019. This September, COFCO’s stake in the latter will increase from 51% to 65.6% when the former management’s earn-out kicks in.

Nevertheless, while COFCO is focused on streamlining itself, it has still not shaken off the M&A bug completely. At the end of last year, for example, it tried to buy a 40% stake in Glencore’s agricultural trading business, but was pipped to the post by Canadian pension fund CPPIB. However, analysts say it is looking at more cooperation agreements rather than just buying companies outright. 21CN cites commodities specialist Peng Xinkan who flags COFCO’s discussions with France’s Roquette Group about a corn processing joint venture.

Ning Gaoning once described himself as a cowhand and said he was always keen to expand the herd. New management is under orders to aspire to a different kind of bovine: a cash cow.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.