Due to the bankruptcy risk of its shareholding company Famarco Nutrition Co., Ltd. (hereinafter referred to as "Famarco"), Capitu, the largest supplier of unsaturated fatty acid ARA in China, recently announced that it will make impairment provisions for relevant investments and debts, resulting in a 50.37% decrease in net profit attributable to the parent in 2022. This is only a dozen days after its previous performance express report was disclosed, and the rapid "face-changing" performance has attracted the attention of investors and regulators.
Investing in Famarco was regarded by Gabiyou as "the first step in the implementation of an international business strategy". In terms of ARA's international market expansion, Capiyou was once subject to the regional restrictions of global giant DSM's patents, and with the lifting of patent restrictions in 2023, Capiyou faced head-on competition with DSM.
In addition to the failure to invest in overseas subsidiaries, the dispute over bird's nest acid "infringement of trade secrets" between Kabiyou and Zhongke Hongji is still pending. Kabiyou responded to the Beijing News reporter on the evening of March 23 that the content of the subsidiary Famacco will be announced in the reply to the inquiry letter, and the lawsuit with Zhongke Hongji has not yet been tried.
Twice invested in Famarco
According to the announcement, Famarco, which is at risk of bankruptcy, was established in 2010 and is mainly engaged in the production and sales of microencapsulated and oil powdered processed products of polyunsaturated fatty acids.
Based on the globalization strategy, the demand for fish oil from domestic infant milk powder companies, and the new factories of overseas customers such as Nestle, Danone and Synlait in Southeast Asia and Australia, Kabiyou Asia Pacific, a wholly-owned subsidiary of Kabiu, made its first investment in Famacco in November 2018, investing US$3.06 million to subscribe for 14.46% of the shares. In June 2021, Gabiyou Asia Pacific increased its capital in Famarco with an investment of US$3.7 million, and after the completion of the capital increase, it held 27.2% of the shares of Famarco.
Kabiyou said that before the capital increase, the company learned that Famarco Thailand factory has made important progress in customer development, and has obtained qualified supplier certification from world-renowned customers such as DSM and Danone, and signed supply orders with some customers, but due to objective factors such as tight supply of some raw materials and long stockpiling cycle, Famac has tight cash flow problems in its operation. In order to support its long-term sustainable development, Capiyou increased its capital and completed the payment of investment funds in accordance with the agreement.
However, in July 2022, Famarco again submitted a capital increase request to Capit on the grounds of supplementary operating funds. In early March 2023, Gabiu received an email from the CEO of Famarco learning that the shortage of working capital is already very serious, and if Gabiu cannot decide to increase the capital or provide financial support by March 16, the directors of Fabico will apply for the execution of the Australian bankruptcy liquidation process, which will only take a few weeks to complete.
The management of Capit decided not to increase the capital of Famarco and not provide financial assistance, and set up a special working group to consult with Famarco and other shareholders. As Famarco's financial position is expected to be difficult to improve in the short term, Capiu is required to make impairment provisions for Famarco-related investments and bad debt provisions for Famarco's accounts receivable.
As of the end of 2022, the balance of accounts receivable of Kabiyou to Famarco was 15.1565 million yuan, mainly formed by the sale of ARA and DHA oils to Famarco, and the balance of advance payments to Famarco was 10.5112 million yuan, mainly formed by the purchase of fish oil powder from Famaco.
According to the announcement, if Famarco enters bankruptcy proceedings, it will cause investment losses of about 32.6897 million yuan and debt losses of about 14.3406 million yuan, a total of about 47.0303 million yuan, and the impact on the income statement after considering deferred tax will be about 44.8792 million yuan. Affected by this, the net profit attributable to the parent of Kabiyou in 2022 was revised to 63.8114 million yuan, down 50.37% year-on-year, from about 109 million yuan disclosed in the previous performance express report.
These issues have attracted regulatory attention. The Shanghai Stock Exchange issued an inquiry letter on March 17, requesting Gabiyou to additionally disclose the basis for making additional investments in Famarco from 2021 to 2022, the operation of Famarco since its participation in 2018, the reasonableness and necessity of the products being manufactured by Famarco, the reasonableness of Farmo's simultaneous credit sales and prepaid purchases, and whether there is any capital occupation or financial assistance.
Kabiyou replied to the inquiry letter on the evening of March 24, saying that Famarco's net profit from 2018 to 2022 was -746,200 Australian dollars, 2,302,900 Australian dollars, -3,313,200 Australian dollars, -2.144 million Australian dollars, and -5,152,500 Australian dollars, respectively. Famacco achieved profitability in the second half of 2022, and Capiyou believes that its operations can be improved, so no asset impairment provision has been made in the previous period. Before investing in Famarco for the first time, the team visited its factory in Thailand twice, and after the on-site audit in September 2021, the team had difficulty leaving the country due to objective factors. As Ma Tao, an executive of the Company, was appointed as a director of Famarco, Gabiyou constituted a related party transaction in Famarco's investment, but did not disclose it.
Shen Meng, chief strategist of Guangke Consulting, believes that due to the epidemic hindering cross-border travel, the acquisition of Gabiyou information may have high costs, which may lead to insufficient understanding of the real situation of the Australian subsidiary. Looking for dairy investment opportunities in Australia is a common phenomenon for domestic brands, and Kabiyou does not have too obvious problems from the perspective of decision-making, but in terms of specific project selection and post-management, investment failure cannot allow management to escape negligence responsibility.
Overseas business was once restricted
According to the data, Kabiyou was established in 2004, mainly producing unsaturated fatty acids ARA, algal oil DHA and SA (bird's nest acid), fermentation source β-carotene and other biosynthetic nutrients, the products are used in infant formula, dietary supplements and health food, special medical purpose formula food and other fields. In December 2019, Capiyou landed on the Science and Technology Innovation Board.
As early as in the prospectus, Capit revealed its ambition to expand overseas business, and the capital increase in Famarco was regarded as "the first step in the implementation of its international business strategy". Prior to this, due to patent disputes and agreement restrictions with international nutraceutical giant DSM, Capitu's overseas expansion was once limited.
DSM is the world's largest ARA supplier and has filed for patent protection in several countries until 2023. In 2015, Gabiyou and DSM reached a settlement and signed a series of agreements to sell a certain number of ARA products to limited customers in specific regions each year.
DSM, on the other hand, is both a competitor and a partner of Capitog. According to the previous agreement, DSM agreed to purchase a certain scale of ARA products from Capit every year until 2023, and if it did not purchase the products as agreed in the contract, it would be required to pay cash compensation to Capitu. According to the contract change announcement issued by Capit in January 2021, its procurement cooperation with DSM has been extended to 2026, and the cooperation with algal oil DHA, β-carotene and the annual purchase volume of ARA products have been adjusted.
It is worth noting that from 2019 to 2021, the non-operating income of Capityou accounted for 33.17%, 26.06% and 25.56% of the total profit of the current period, mainly from the cash compensation paid by DSM. In previous financial reports, Kabiyou has warned that if DSM cannot strictly perform the contract, no longer purchase ARA products or pay cash compensation, there is a risk of decline in Kabiyou's net profit.
In the first half of 2022, Gabiu's overseas revenue accounted for nearly 50%, and it began to deploy new distribution channels in the European market. According to Capitu's reply to investors in November 2022, the customer certification of its ARA products has been basically completed, and the supply to Nestlé and Danone has been achieved, and the DHA product certification of some customers is under way.
Increasing the market expansion of new products and new businesses has led to a significant year-on-year increase in sales expenses in 2022, and changes in product structure and customer structure have also reduced its comprehensive gross profit margin, which in turn will affect the net profit of the whole year.
In 2023, DSM's ARA patent restrictions will be lifted, and Capit will usher in the opening of the international market and face head-on competition with DSM. In response to the Beijing News reporter on March 23, Kabiyou said that the company's participation in global competition can refer to the prospectus.
According to the prospectus, the main products of JABI ARA and DHA are facing intensified market competition at home and abroad, and foreign DSM companies maintain a leading position in the world, and there are also competitors such as Guangdong Runke Biotechnology in China. The competitive advantage of Capityou lies in being the largest ARA supplier in China, opening up the international market with the help of the global distribution channels and brand influence of distributors such as Cargill and Wolf Canya, and entering the supply chain of major multinational companies in the world of infant formula through cooperation with DSM ARA patents. The competitive disadvantage is that the scale is still small compared with international companies such as DSM, and the procurement share of well-known international dairy companies is relatively small.
Bird's nest acid "stealing" lawsuit pending
According to the data, Kabiyou has reached cooperation with many well-known infant formula milk powder companies at home and abroad since 2010, and engaged in bird's nest acid business in 2016. In recent years, Kabiyou has developed animal nutrition, personal care and cosmetics business on the basis of infant formula food and nutritional products, in which bird's nest acid plays an important role.
Bird's nest acid, also known as sialic acid, SA or N-acetylneuraminic acid, is mainly derived from breast milk and dairy products, and is often added to infant milk powder as a nutritional supplement. From 2019 to 2021, the revenue of Jiabiyou was 312 million yuan, 323 million yuan and 351 million yuan, and the net profit was 118 million yuan, 131 million yuan and 129 million yuan, respectively. Among them, the revenue of ARA products continued to decline, the growth rate of DHA product revenue slowed down, and the revenue growth rate of bird's nest acid products reached 73.68%, 141.32% and 76.79%, respectively, mainly due to the growth of children's milk powder industry.
However, Kabiyou's bird's nest acid preparation technology was involved in litigation. In November 2021, Zhongke Hongji Biotechnology Co., Ltd. ("Zhongke Hongji") filed a lawsuit against Kabiyou, Wuhan Zhongke Optics Valley Green Biotechnology Co., Ltd. ("Zhongke Optics Valley"), a subsidiary of Jiabiyou, and Tomson By-Health on the grounds of infringement of trade secrets, requesting the court to order the three defendants to pay a total of 5.15 million yuan in economic losses and rights protection expenses.
Zhongke Hongji claimed that Kabiyou and Zhongke Optics Valley jointly obtained the plaintiff's production and application trade technology secrets based on the combination of relevant strains and the preparation of N-acetylneuraminic acid through improper means; Zhongke Optics Valley uses this technology to produce and sell products that are identical or substantially the same as the plaintiff's products; By-Health still uses products produced by Zhongke Optics Valley, and the three defendants jointly infringed its trade secrets.
According to the external statement of Zhongke Hongji in August 2020, the company is the only manufacturer approved by the National Health Commission to produce N-acetylneuraminic acid. The production sialic acid strain SA-8 marked in the announcement of the National Health Commission is owned by Zhongke Hongji, "the only one in the world, and the production process cannot be replicated". Wu Shenglong, general manager of Zhongke Hongji Beijing Branch, previously said in an interview with the media, "If bird's nest acid is produced by microbial fermentation, Kabiyou may be suspected of theft or infringement of trade secrets; If it is produced by genetically modified methods, it may be suspected of the crime of producing and selling toxic and harmful food. ”
In this regard, Kabiyou responded to the Beijing News reporter at the time that the company mainly produces bird's nest acid through biological fermentation technology, and the chassis is made of E. coli, but the production process is different. "From the perspective of strains, he (Zhongke Hongji) has his strains, we have our own strains, and our strains have independent intellectual property rights."
However, according to the announcement of Kabiyou, the N-acetylneuraminic acid product developed by subsidiary Zhongke Optics Valley with Escherichia coli (strain number CASOV-09) as a fermented strain was not announced until 2022 that it passed the review of the National Health Commission and was determined to be basically the same as the production process of N-acetylneuraminic acid (strain number SA-8), a new food raw material approved and announced in 2017, and has substantial equivalence.
What kind of strain was used in Capito's related bird's nest acid products before? What is the outcome of the lawsuit so far? On March 23, Kabiyou replied to the Beijing News reporter, saying, "Regarding the issue of the substantive equivalence of new food raw materials, your understanding may deviate from the regulations, and the lawsuit between the two parties has not yet been heard." ”
Chief reporter of Beijing News Guo Tie
Edited by Li Yan
Proofreader Zhao Lin