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Summary of Bullish View on Origin Agritech, Based on GMO Commercialization in China

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Origin Agritech Limited (NASDAQ:SEED) is a China based company that trades on the NASDAQ under the ticker symbol SEED.

“Origin Agritech Limited, founded in 1997 and headquartered in Zhong-Guan-Cun (ZGC) Life Science Park in Beijing, is China's leading agricultural technology and a rural social e-commerce company, expanding in mid-2018 from crop seed breeding and genetic improvement business to be a leading technology developer in new rural e-commerce platform and Blockchain technologies. In crop seed biotechnologies, Origin Agritech's phytase corn was the first transgenic corn to receive the Bio-Safety Certificate from China's Ministry of Agriculture. Over the years, Origin has established a robust biotechnology seed pipeline including products with glyphosate tolerance and pest resistance (Bt) traits.”

We know what you're saying, please not a China based stock! Trust me, I feel the same way. Leading the research team at GeoInvesting, I saw firsthand how most of the U.S. listed China stocks I was investing in, from 2005 to 2009, ended up being frauds. We busted 12 high profile China frauds and even Int on a mission to expose 22 U.S. pump and dumps. If you are interested, here is an article that discusses Geoinvesting beginning involvement in the China stock universe. 

SEED is one of the remnants left over from the failed China reverse merger days. When bad luck prevented the company from monetizing its large GMO patent portfolio, it had to rely on growing other parts of business and entered business ventures that failed to gain traction. It eventually sold these businesses to survive and take one more stab at monetizing its large GMO patent portfolio. 

While there are no guarantees when investing, particularly involving China based companies, our research indicates that SEED has a good chance of being of the few U.S. listed China stocks worth taking a bet in.  

Geoinvesting has been monitoring SEED for some time, but began to turn bullish on the company in February 2019 when the stock was ~$6.50, due to our belief that the company is a great candidate to be one of the few companies in line to be awarded a license to sell GMO products in China. Currently, China only imports GMO products, but does not allow for the domestic production of GMO products. Although the stock briefly rose to $10.70 in January, shares pulled back to the $3.00 area during the COVID-19 crisis and have risen aggressively back to over $8.00 during the last few trading sessions.  Quite frankly, I had thought that SEED would have been awarded all the necessary GMO licenses several months ago, but it appears that COVID-19 has delayed the process. For full disclosure I have purchased shares between $3.00 and $10.00.

What follows is a summary of our bullish view on seed. 

Still, please be aware that this is a very very speculative play.

Elevator Pitch

We believe SEED’s current stock price of $3.40, or a market cap of $16 million, significantly undervalues the company’s potential to capitalize on China’s goals to commercialize GMO in China, a several billion dollar market opportunity.

Our research indicates that SEED is one of the few China based companies (less than 5)  that will be permitted to receive a GMO commercialization license in China.  If SEED is awarded a coveted GMO license, we believe shares would immediately be worth multiples of where it trades today. 

GMO Woes 

In October 2009, investors had high hopes that China would commercialize GMO. During that time, SEED received a biosafety certificate as the first, but most important step, to receive a license to license its GMO technologies to third parties and/or produce GMO products. 

The stock rose from ~$50 to $105 the day after it made the announcement that it received a GMO biosafety certificate. However, GMO was met with significant public unrest. This resulted in the government temporarily shelving its GMO initiatives to issue certificates to allow for the production of GMO products.  

The GMO initiative came back into focus when, in  2016, the Chinese government set an official plan to commercialize GMO by the end of 2020. That brings us to where we are today.

GMO Today

In December 2019, two China based companies were issued GMO biosafety certificates. 

Now, investors are waiting for the Chinese government to officially issue the remaining certificates, so that they can produce GMO products.  However, COVID-19 had delayed this process.

Why The Disconnect

The disconnect between SEED’s current price and where we believe the stock should be trading is based on few things:

  • Lack of awareness of public information in China that supports management’s comments made in press releases and SEC filings pertaining to having a biosafety certificate and  optimism about the company receiving the remaining necessary GMO certifications.
     

  • Although the company has been periodically discussing it’s belief that it will receive the required GMO certificates, investors' overall distrust of U.S.listed China based companies and China’s  government’s previous failure to move forward with GMO initiatives are depressing the stock. However, our review of public sources in China confirms what management has been talking about in the U.S., including the receipt of significant capital from a State Owned Enterprise JV partner to help fund the company’s GMO operations once it receives all the necessary certificates.
     

  • One very important information disconnect that we find very attractive is that investors assume SEED no longer has its biosafety certificate that was issued to them in 2009 because they were not mentioned alongside the two companies that received these certificates in December 2019. However, our research of public sources, including a media outlet that lists SEED as having the certificate,  indicates that SEED has not lost the certificate because it can be renewed every five years.

  • In preparation for what we believe is laying the groundwork for GMO commercialization, China just announced that it’s cracking down on illegal GMO activities. 

  • A few weeks ago, a China media report discussed SEED’s role in the commercialization of GMO.

  • Unlike 2009, the degree of negativity by the Chinese media and public is not as fierce as it was then. In fact, the media is essentially concluding that the commercialization of GMO is going to happen.

  • U.S. investor are unaware that GMO related stocks in China have risen sharply

  • Seed used to be the leading GMO company in China and it has been maintaining a close relationship with China Agriculture Institute in Beijing and several U.S. giant GMO companies,e.g. Monsanto and DuPont. Seed has its own GMO research results, which were recognized by the U.S. government. If Seed receives the license from Chinese government, these U.S. companies can put Seed’s GMO IP into their own products in China. Our research indicates that the two Chinese companies who received the safety certificate in 2019 do not have a high chance to work with U.S. companies because these two Chinese companies do not own GMO tech that they possess. Furthermore, one of these two companies, Dabeinong, has a terrible reputation for stealing GMO seeds in Iowa several years ago and the brother-in-law of the founder is still in jail, in Iowa. 

China Has No Choice

We see very little chance that China will not commercialize GMO by the end of 2020 for the following reasons:

  • COVID-19 has escalated an already severe food shortage crisis in China due to disruptions in the food supply chain and a significant increase in prices of imported crops/seeds, such as corn and soybeans.

  • An unprecedented insect infiltration problem has been reducing food supply in China. 

  • The company already imports GMO products from the U.S. Given trade wars between the U.S. and China, along with COVID-19, we think it's inevitable that China is going to take more control of their own food supply.

Valuation  

SEED’s Market-cap after it received its biosafety certificate in 2009 rose to around $300 million. Applying the same market-cap today would equate to a price target of around $60.00, compared to its current price of around $3.50. Once it becomes evident, as we believe will be the case, that SEED receives ALL of its GMO certificates, we believe shares could meaningfully exceed $60.0.

Equity Disclosure: long SEED, at time of article
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