Origin Agritech Ltd. Q2 FY2022 earnings call

• Sales growth: Impressive 300% increase from RMB11.6M to RMB46.4M.
• Gross margin: Grew from RMB4.3M to RMB12.9M.
• Operating expenses: Grew 14% despite rapid growth.
• Loss from operations: Decreased from RMB7.8M to RMB1.3M.
• Sub-lending: Contributed RMB5.5M, pushing to earnings of RMB1.3M.
• Disease-tolerant corn variety: Launched, performed well in stressful conditions like drought and flooding.
• NEC corn: Nutritionally enhanced, tested in 2021 with feed industry partners excited, sales to hit in second half.
• GMO and gene editing: Integrated GMO traits into hybrid corn, completed drought-tolerant GMO corn trials, filed for biosafety licenses, leading in CRISPR for corn breeding with over a dozen new traits.

Sales grew impressively from RMB11.6 million to RMB46.4 million (USD7.3 million), a 300% increase. Gross margin grew from RMB4.3 million to RMB12.9 million. Operating expenses grew by a muted 14%. Loss from operations decreased from RMB7.8 million to RMB1.3 million (USD200,000). Sub-lending of a portion of corporate headquarters in Beijing generated RMB5.5 million, leading to earnings of RMB1.3 million (USD0.03 a share). The main driver of rapid growth was the launch of a disease-tolerant corn variety. The nutritionally enhanced corn (NEC) sales, which will impact the second half of the year, are expected to contribute significantly. The NEC market in China is over 1.9 million metric tons with an approximate market value of RMB500 billion (USD75 billion).

• Anticipates exceeding full-year sales guidance of 300% for fiscal 2022 as NEC sales hit in second half.
• Ramping up seed production for the coming season to meet anticipated demand.

• Geopolitical events, rising interest rates, and inflation affecting the market.
• Uncertainties related to approval and commercialization of GMO and gene-edited crops.

Q: Are you and if so, would the patents be for China, for the United States for worldwide maybe you could elaborate on that?

A: Yes - best of the regards and we have basically for the gene editing at this moment, what I said - for our patents, you know in worldwide not only for China. Since we think, you know, we have some kind of technology break us through in the gene editing, especially for corn. We're much more efficient than other people doing the same things - as we're confident.

Q: One is, is DuPont still a licensee of Origin and also do we expect. Do you expect to have more contracts to land with your, I guess the NEC - the new corn versus GMO since it isn't approved yet. And also maybe you can just comment, I'm sorry, comment on how strong today is Origin versus any other time in history?

A: Okay, that's the - first actually we still look you know, all kinds of possible collaboration with multinational. But I think we also more focused since multinational has some kind of, you know restrictions - limit operation in China. So we more you know in China we have the dependence on more and sell our collaborating with the local seed company. As in another one area as you mentioned what's the difference no, from last Origin 10 years ago. As you know last 10 or 20 years Origin is building the focus on the technology on the seed business that we are really put a lot of effort on GMO corn, which is you know, recent get just most profit and but we didn't touch other things. But at this moment, I think we have much more advanced the technology number one. Number two is, we have a breeding process in the last 20 years when we build out excellent GMO product pool which was as a result as showing bitter like noise. Like largely as Joe mentioned we had - China had very bad weather for the corn growing. But you know it's a good year hybrid growing good. But actually of good hybrid is really showing good it's in better years that's all hybrids - should have. So in terms of product competition in terms of GMO product development in Origin for us at this moment we are much stronger than before product of new technology. I think we are moving we - will help you - that we still have a very strong technology basis that's one. Number two is, you can see through the last few years we said we have one option as you mentioned we are seem like nutrition enhanced corn. This one was launched last year was just tight we saw farmer - with you know see the partners see the amount of people. It has the corn we feel that's very too emphatic since this was not [indiscernible] you know, supply issue this would also save there. You can see that in that 60% of the cost base corn that cost. So with all nutrition enhanced corn, actually you can save a lot of money they have [indiscernible] before that RMB200 million money can be saved from the, our corn. So they are so excited they have actually formed the partner with us tried for the growing contract growing with farmers to supply their seed - their demands. So this was really a new growing area for us as you know, as you mentioned you know corn seed market in China right now is around at RMB300 million and if you cover for the GMO maybe double like RMB600 million to RMB1 billion that's the total world of corn seed. But for the seed corn crop that's the annual very support here RMB500 billion. People like - we talk like just one person [indiscernible] I think very exciting very and our side there is no much competition. We're the only one hedge products. We are the only one decide to growing with the seed. So we have lots of contracts, you know, to request some kind of collaboration with us I think is much - very exciting I think for this area that - we can see next I mean, not only see them in next coming few years, we'll be you know, we just can't meet the demand for the request for these kind of products. As I think it will be very exciting for Origin definitely for investors.

Q: Can you comment on any new developments or any new contracts throughout the rest of this year. You think that we can maybe see some insider buying and things of that nature to show the conviction from the company itself into the company. But again, I really wanted to know if you could comment on any new developments or any future contracts if you can or where we are for - the rest of this year?

A: Yes, I'll make a real quick comment and then turn it over to Chairman Han. And I think that obviously if you can double the profit margins for an industry, someone would have to be pretty I don't want to say stupid, but does not really make the right economic decision to pass on that. So as you can imagine, that's a hugely impactful thing to do. And it's a huge, huge - low and low margin business to. So we do have a lot more people coming to us, but and then also - and you mentioned insider buying. I'm not an officer in the company so I don't file, but when you know several months back I was able to buy stock and actually I've had my friends and family buying stock. And so - I'm kind of all in on this if not all in, but you know very excited - about the future here. So I'll turn it over to Chairman Han.

Q: Hey guys, hey Joe, hey, Dr. Han. So Joe, I wanted to just ask a couple of questions, you sort of alluded to it when you were closing out on the last question before. But can you comment on any new developments or any new contracts throughout the rest of this year. You think that we can maybe see some insider buying and things of that nature to show the conviction from the company itself into the company. But again, I really wanted to know if you could comment on any new developments or any future contracts if you can or where we are for - the rest of this year?

A: Hello yes - as you raised two questions one is the counter corn something like that its right. Now we have actually this for our field - like nutrition enhanced corn as you know NEC corn. Our strategy is not to sell the seeds to the farmers let them produce corn. What our strategy we're not selling seeds we are trying to produce the corn for the seed mills. So that's why we have set up the JV with the seed - new plant company. So right this year from it has we had of - let see have made 50,000 more contract already, we got also lot orders, but we can't make the supply yet. So but this year for us is the main challenge is how to increase the seed to meet next year's growing need that's a big thing. I think next year, we'll have lot of seed to grow a lot of the corn to grow no we are not. So we are selling the seeds for the corn hybrid seeds. Our GMO seeds are the one note sell seed who the farmers for the NEC corn, because we want to sell nutrition enhanced corn value and different products rather than the seed. The reason is if I sell seed for more details is stake on this GMO probably reach probably one RMB100 million or more this means, you know, for this will produce the NEC corn for the season, but we targeted the product better will be at least a RMB3,000 per mu. So if we can put you know I mean next year, we just brought 100. As you know we can produce 100,000 mu as you can imagine, easier can calculate or we can have much, much bigger revenue numbers and what we can sell for seeds. I'm not sure that - I answered your question.

Q: I guess some of the frustration from my investors and Joe, you know, I've been in this thing for close to six to eight years has been and I'm very happy with the way everything's going. So I guess one of the other frustrations is everyone seeing the price of corn going through the roof every day? And the stock has been performing is, you would think that the stock would be higher based on what the price of corn is. And then one other quick question or after that if you could ask - now that you guys are really starting to ramp up with revenue, hopefully we see more contracts and things like that. Do you expect to see some coverage from some of these major banks or some banks or where do you think we are with that. Those are my last two questions?

A: I can handle those Howard. We are talking to some banks about getting coverage. And so you know, it's a process and I don't think it's imminent, but we are working on that. So I look forward to something developing there. And then on the other side, you know, it's a little bit of a head scratcher I mean, if you look at our share price where it is now. It's - obviously as an insider in the company. You don't want to comment about the valuation of the stock, but we - suffice to say we think it's dramatically undervalued if you just look at not only like. I think investors can do the math on what Chairman Han said ramping up to 100,000 mu, which is the Chinese equivalent of an acre it's smaller than acre, but if you if you look at 100,000 mu that we're going to be able to grow next year. And just reiterating what Chairman Han said earlier that basically, we get a huge multiple of the market opportunity by not just sowing the seeds to the farmers and letting them kind of make all the profit margin. We saw this market as such a hugely impactful market doubling the profit margins for these feedstock companies, that we wanted to take a piece of that actual final corn product market. And policies in China right now are very accommodating to being able to do that in contract growing. And with our JV with BaoDao, feedstock company for instance, the first one we've talked about, they're actually supplying all the capital to grow the corn. So we're able to be a 51% owner in the JV and not have to put up capital at risk, really, what we supply is the corn seed, and the technical expertise to help them out in the process. So you know, if investors can do that math, where they look at 100,000 mu and we're kind of going to be half owners in that product and look at what the revenue potential is. And it's pretty staggering. If you start modeling that out where we could be a year - where we think we will be a year from now. And as Chairman Han said, we have zero competition for that there's nobody else that can do that.