BBCA Biochemical: Uncertain Prospects        

Anhui BBCA Biochemical Co., Ltd. (BBCA Biochemical, SZ: 000930) is one of the leading agricultural products processing enterprises in China. It is based in Bengbu, Anhui province.
   BBCA Biochemical's sale from its main business was RMB4.8 billion in 2008, an increase of 14.93% from 2007, and net profit was RMB54.27 million, up 110.68%. Although it gained a dramatic performance increase in 2008, such an outstanding achievement was due to the relatively lower base in business in 2007. In the first three quarters of 2008, BBCA Biochemical made profits, but the deficit in the fourth quarter reached RMB26.41 million, mainly caused by its subsidiaries, Dangshan Pear Industry Co., Ltd. (BBCA Biochemical holds a share of 95%), with a deficit of RMB48.69 million, and Anhui BBCA Edible Oil Co., Ltd. (BBCA Biochemical holds a share of 99.3%), with a deficit of RMB25.26 million.
   BBCA Biochemical's claims that in 2008, it achieved an annual decrease of 48.5% in water consumption, with an annual decrease of over 6 million tons of waste water discharged; the energy saved from prime products totaled about 35 300 tons of standard coal, which more than fulfilled the mission assigned by the government; by undertaking this comprehensive environmental impact reform, the firm has substantially reduced its discharge volume of wastewater, COD and ammonia nitrogen.
   The company reckons that in 2009, its business in citric acid and lysine will probably be influenced by the international financial crisis, but meanwhile, the company will also benefit from a series of economic stimulus programs of the Chinese government, including a national flexible subsidy policy for fuel ethanol.
    BBCA Biochemical also claims that in 2009, the company will implement the strategies of cutting costs and making technological advances by reinforcing technical updating efforts and improving the research and development level. Moreover the company plans to produce competitive principal products including citric acid, fuel ethanol, lysine and ethylene oxide, etc. At the same time, it will also make new efforts for rational use and disposal of unused and low-efficiency assets.
    Though BBCA Biochemical holds high aspirations, some industry insiders think that the company does not have a really powerful and decisive competitive edge. Moreover, almost all its products use grains as raw materials, which is a great risk.

Ethanol Business Relies on Subsidies     

BBCA Biochemical boasts a throughput of 440 000 tons of fuel ethanol, which ranks first in China. However, its production line used for fuel ethanol mainly uses corn as raw material. At present, its profitability in the business of fuel ethanol relies completely on an annual state subsidy. In 2008, this subsidy was RMB900 million.
   The company's annual report for 2008 shows that BBCA Biochemical's sale in fuel ethanol and its byproducts was RMB2.348 billion (48.90% of its main business), a 21.92% increase from 2007; while the gross profit margin was negative 16.05%.

Citric Acid Faces a Daunting Prospect    

BBCA Biochemical professes that the major achievements in 2008 came from its internal initiatives, with an investment of nearly RMB100 million in the technical reform and process optimization of production lines used in citric acid, lysine and fuel ethanol, etc, which resulted in an annual decrease of 5.6% in grain consumption for citric acid, and a decrease of 11.2% in grain consumption for lysine. Meanwhile, the company also professes that it is actively dealing with a citric acid antidumping investigation from the European Union and U.S.A. In addition, it is increasing its sales intensity, and its sales-output ratio has basically reached 100%, with a year-on-year increase of 25.14% in sales revenue (to RMB 1.14 billion) of organic acid (such as citric acid) and byproducts, and the gross profit margin was promoted to 13.21% from a rate of less than 1% in 2007.
   In recent years, the gross profit margin has fluctuated drastically. It was 22.59% in 2005 and down to 14.34% in 2006, and then in 2007 it dropped to 0.97%, the lowest level in history, after which it rose to 13.21% in 2008.
   In recent years, BBCA Biochemical has frequently been confronted with antidumping investigations, and at the end of 2008, according to the final verdict of the European Union (EU), BBCA Biochemical can export citric acid to EU only by paying punitive anti-dumping duties or accepting price adjustments. BBCA Biochemical has chosen to accept the price adjustments. China is rapidly increasing its citric acid capacity, which is presently one million t/a, 70% of the world's total, yet domestic demand is very small. About 70% of the citric acid produced by the company is exported, so the EU price adjustments result in uncertainty for the company's future distribution.

Main Business Is Unclear   

In 2008, BBCA Biochemical's sales volume in amino acid (such as lysine) increased by 35.41%, totaling RMB525 million, with a gross profit margin of 10.85%, a significant increase compared with 2007. And the sales volume of ethylene oxide reached RMB328 million, a decrease of 2.32%. The business of lactic acid also experienced a slight fall of 1.68%, totaling RMB191 million. In 2008, exports made up 17.8% of its total sales revenue, and the main product exported was citric acid (about 80 000 tons), ranking third nationwide. In addition, 10 000 tons of citrate was exported.
   Some analysts have pointed out that the current structure of the company's main business is unclear. Aside from the business in ethanol, citric acid and its citrate as well as byproducts, the other business is also enormous: amino acid and its byproducts and ethylene oxide and its byproducts. But it is expected that the management of the company will turn part of its focus on the business of citric acid, fuel ethanol and lysine toward enhancing the management of its subsidiary Dangshan Pear Industry, so as to make up its deficits gradually.