Origin Agritech Ltd (SEED) 2007 Q4 法說會逐字稿

Greetings and welcome to the Origin Agritech fourth quarter and 2007 year-end conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Kevin Theiss, the Global Consulting Group, for Origin Agritech.

Thank you and good morning, everyone. My name is Kevin Theiss; I am with the Global Consulting Group. On the call today are Dr. Gengchen Han, Chairman and CEO of Origin Agritech; Liang Yuan, co-CEO of Origin Agritech; Veronica Chen, Chief Financial Officer; Irving Kau, Vice President of Finance; and also Dixon Chen, who is an Investor Relations consultant, also with the Global Consulting Group. I hope all of you have had the opportunity to review our year-end financial press release, and I invite all of you to our company slide presentation, which is being made available through our Webcasting service.

The presentation and conference call may contain forward-looking statements. These statements include, without limitation, statements regarding our expectations, assumptions, beliefs, intentions, or strategies regarding the future. All forward-looking statements included in this presentation and conference call are based on information available to us on the date hereof. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results to differ materially from those implied by forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as may, well, should, could, expects, plans, anticipates, believes, estimates, predicts, potential, targets, goals, projects, continue, or variations of such words, similar expressions, or the negative of these terms, or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Neither we nor any other person can assume responsibility for the accuracy and completeness of forward-looking statements. Important factors that may cause actual results to differ from expectations include, but are not limited to, those risk factors discussed in Origin's filings with the SEC, including its annual report on Form 20-F, filed with the SEC on February 15, 2007. We undertake no obligation to revise or publicly update any forward-looking statements for any reason.

I would now like to turn the call over to Origin's Chairman and CEO, Gengchen Han.

(inaudible)

(technical difficulty) to position itself better for the future, the Company created three distinct business units -- Corn, Rice and Canola, and Cotton and Agricultural Chemicals. We expect this reorganization, which was completed last July, should provide the Company further efficiency in operation. We eliminated roughly 150 personnel in 2007.

While our near-term focus continues to be focused on China, we also had some success in foreign markets. The Company has begun marketing its hybrid rice in neighboring Vietnam. Biocentury Transgene China Company Limited was approved to market three insect resistant GMO hybrid cottonseeds in India in 2008. We believe these to be small steps towards a larger goal.

During 2007 Origin acquired another 9.18% ownership in the Jilin Changrong Seed Company. This acquisition brings the Company into a majority 51.7% ownership position, which enables the Company to gain access to over 40 proprietary hybrid crop seeds.

We believe that fiscal 2008 will bring an improving operating environment. While there were a number of issues that impacted 2007 financial results, overall we have positioned ourselves to participate in one of the most dynamic agricultural markets in the world. We expect ASP to be up around 5% in 2008, and we expect continued improvement into 2009 and going forward, as the worst is not behind us.

However, we believe the real excitement in the near future lies in GMO products. As our strategy remains consistent, our infrastructure helps to build out this future potential. We started our seed breeding program in 1997, and GMO research in 2002, and cooperation with local institutions in 2001. Our accomplishments as a company provide a foundation to launch this development into genetically modified products.

Our sales and technical service provide the platform for us to educate farmers regarding the differences in our product offerings. Our agronomists are often a trusted source to educate farmers on the benefit of genetically modified products. Our accumulated germplasms from conventional breeding techniques form a base to transform our genetic traits.

Our high-end processing, production and quality control will continue to assure high-quality seed production. Our nationwide footprint and data mining infrastructure also allows for the matching of products with their most appropriate locations throughout China. We believe this should provide stronger products for us in the long-term and benefit a wider customer base in the future, and is the best path to enhance shareholder value.

With the rapid growth of the economy in China, demands for higher food production have increased dramatically, most noticeably, a major shortage of pork meat. These demands include significant domestic price inflation of food products, the rising customer desire for higher quality food products, the increased need for fuel, including the usage of biofuels, and the growing constraints on land. Due to the high demand for corn feed products, China is becoming a net corn importer. The shortage of produced commodity corn and oversupply of corn seed clearly shows the low productivity of the corn acreage in China. Coupled with the already shrinking arable land in China under the pressure of industrial encroachment and environmental changes, the advantages of GM transgenic varieties of high-yield, high-quality are obvious. Farmers plant transgenic varieties to both save time and costs, while reducing field work. The Chinese authorities are beginning to promote genetically modified crop seed research and commercialization to meet the increasing demand for agricultural products.

I will now start the financial review. For the year ended September 30, 2007, we generated revenues of RMB489 million, (technical difficulty) $65.2 million, a decrease of 6.23% from RMB521.9 million, or $66 million in revenues generated in the 12 months ended September 30, 2006.

Gross profit margin was 5.4% in 2007 compared with 30% in 2006. Although our scrap sales only amounted to 2.1% of our total revenues for the fiscal year ended 2007, it materially impacted our overall gross margin by 8.25%. We took a conservative approach to write down $10 million of seed inventory. Excluding these temporary scrap sales of inventory impairments, our gross margins for the period were 30.09%, unaudited, as compared to our 30.7% gross margin for the 12 months ended September 30, 2006, also unaudited. Lower ASP and lower unit sales also impacted the gross margin. Exclusive of scrap sales, the normal seed products remain our strongest product, producing 74.36% of our sales, as compared to 65.03 in the 12 months ended September 30, 2006 period, unaudited.

Total revenue from corn feed grew 4.94% to RMB356.17 million in fiscal year 2007. Total revenue from cottonseed decreased 1.84% to RMB 31.99 million in fiscal year 2007, from 32.58 million.

Volume decreased slightly to 54.4 million kilograms in fiscal year 2007. Our first year of canola sales showed 454,521 kilograms with 53.3% margins, resulting in revenues of RMB17.96 million.

Our rice product sales in fiscal year 2007 were the most severely affected of all our products. Revenues for the rice unit, exclusive of scrap sales for the year ended September 30, 2007, decreased approximately 50.52% to RMB71.9 million.

The margin decreased from 21% for the 12 months ended September 30, 2006, unaudited, to 15.95% in fiscal year 2007. We wrote off during fiscal year 2007 an amount of RMB69.5 million -- that's $10.5 million -- in 2007 from an overly aggressive market assessment and seed production in previous years. Total expenses for the year ended September 30, 2007 were RMB178.68 million -- that's $23.85 million -- representing an increase of 46.39% from RMB122.06 million -- that's $15.44 million -- for the 12 months ended September 30, 2006, unaudited.

Most of the increase between these two periods was attributable to the impact of certain nonrecurring accounting adjustments. Causes for the increase in G&A expenses this year include the following.

One, increase in the cost of salaries and Social Security expenses due to the mandatory 13th month bonus for employees. Two, increasing professional fees due to the first year of SOx 404 implementation and the convertible debt capital raised. Three, additional four months of expenses from our Denong Zhengcheng acquisition. And four, additional six months of Jilin Changrong acquisition in our expenses. Five, severance fees and salaries as a result of the reorganization. Our average headcount during 2007 was 1047. Our current headcount is 930. Some of the payroll elimination has already taken place at the end of fiscal year 2007.

During fiscal 2007 we wrote off a significant portion of our seed inventory of RMB77.24 million -- that's $10.31 million -- net of RMB7 million, or $0.93 million, and inventory reversals during the year, 90% of which derived from the inventory of Denong. Our net loss in fiscal 2007 applicable to ordinary shareholders was RMB163.2 million, or $21.78 million. Exclusive of the aforementioned [RMB40.38] million -- that's $5.39 million -- in gross loss resulting from the scrap sales and RMB 77.24 million, or $10.31 million, in the impairment of inventory, non-cash charges amounted to RMB26.78 million, or $3.57 million, and other increased expense charges of RMB12.15 million, or $1.62 million. We had a net loss of RMB6.65 million; that's $0.89 million unaudited.

Today, Origin is one of the largest hybrid crop seed companies in China. Like many of our competitors, however, our results were impacted during 2007. Origin responded by lowering the price of our seed products to compete in the market, although to a lesser extent than our competition, due to the higher yield of hybrid seeds and the Company's reputation among farmers for service and aftermarket support. This is considered to be a nonrecurring event and should not impact results in 2008.

Our cash and equivalents position at September 30, 2007 was RMB162.314, $21.6 million, with debt investments of RMB111.5 million. Accounts receivable declined from RMB12.5 million in September 2006 to RMB2 million, or $376,000 in September 2007.

We have long-term convertible notes of RMB173.669, or $23.3 million. We also have an embedded derivatives redemption feature consisting of RMB86.937, or $23.2 million.

Turning to the outlook for 2008, we believe fiscal 2008 will bring a favorable operating environment, as many items that affected us in 2007 were nonrecurring in nature. We continue to see further industry consolidation. As a result, the overall capacity will gradually return to a rational range, and the decline of average selling price will likely slowdown.

However, we still see overall inventory remains high throughout the industry and total seed supply still outstrips the demand. Based on its current outlook with existing and anticipated business conditions, Origin expects to report revenues ranging from $75 million to $80 million, and bottom-line (inaudible) of $0.5 million to $2 million for the fiscal year ending September 30, 2008. This net income figure is inclusive of roughly $2.7 million and expected non-cash interest expense from our convertible debt offering. Exclusive of this non-cash expense, we expect a net income range of $3 million to $4.5 million.

We continue to push on our goal to become China's leading agriculture technology enterprise. Our ongoing investments and initiatives include the following -- in-house biotechnology research center; academic and state alliances; international collaboration in biotech research and commercialization; build up a nationwide system to identify and demonstrate best products; build up an efficient supply distribution system to deliver the high-quality products; accelerate GM corn R&D and commercialization.

We also announced that we plan to introduce seeds to grow new GMO trait producing phytase corn, what we expect -- we expect to be the first genetically modified corn product in China. Phytase is currently used as an additive to animal feed to break down phytic acid, which holds 60% of the phosphorus in corn. Phytase increases phosphorous absorption in animals by 60%. Phosphorus is an essential element for the growth and development of all animals, and plays a key role in skeletal structure and vital metabolic pathways. Phytase is currently used as an additive in animal feed to break down phytic acid in corn, which holds 60% of -- of the phosphorus in corn.

Phytase is an additive for animal feed, is mandatory in Europe, Southeast Asia, South Korea, Japan and Taiwan for environmental purposes. The worldwide phytase potential market size is $500 million, including $200 million for China alone, according to the China feed industry studies.

The corn seed market in China is estimated at $1 billion. China is the second-largest corn market in the world. While currently microbiology is universal used to produce phytase, Origin plans to be the world's first to introduce transgenic phytase corn. Ultimately this means we can charge more for phytase corn seed and still add more value to the farmer since he can sell his corn at higher prices and more value passed on to the feed producer. Ultimately this will benefit the environment by also eliminating phosphorus pollution (inaudible) phytase has been mandated by several countries. This is just one example of (inaudible) moving forward as a leader in technology crop seed industry. We've been talking about being first into genetically modified seed, and now we are doing it.

At this time we would ask for the listening audience to ask questions. Operator?

(OPERATOR INSTRUCTIONS). Albert Lee, Maxim Group.

Regarding the acquisitions, with the reorg that eventually took place there, I think you guys now believe that some further diligence could have been done with Denong. And obviously, further diligence with Guangxi Fortuneland led you guys to believe that the acquisition wasn't worth following through with, which I suppose is not a terrible thing. But both were considered leaders in their respective areas, with, I'm assuming, reputable leadership. So I guess the question here is how have these experiences kind of changed the way you guys approach acquisitions going forward? And maybe if you can lay out some of the things that led you to believe that Guangxi wasn't worth it to help answer this question.

(inaudible)

Just to summarize what Dr. Han said, in terms of acquisition in the past couple years, we did a number of acquisitions, including Denong, which gave us access to 50 different seeds. Also (inaudible), which is a leading corn producer in [Southern] China (inaudible) a very high gross margin, and the product has a pretty good reputation in the marketplace. So we consider those (inaudible) and reasonable good acquisitions.

When you look at Fortuneland, we did a very thorough due diligence, and also we analyzed the market potentials and our core competence (inaudible) seed business and technology is our core competence. And fertilizer, that type of business, usually their margins are substantially lower. That's why we decided to continue to focus on our core competence in the seed, especially when we talk about the GMO product we're going to discuss later this quarter. So we're very excited; we're actually moving the right direction.

But you guys knew that the fertilizer margins were considerably lower than the seed margins, and I thought the synergies were tied more to the distribution capabilities of Fortuneland versus the product itself.

The answer is when you have a GMO product which can dramatically reduce the fertilizer usage, then it will make more sense to just go with the GMO corn seed.

With respect to opportunities, you mentioned -- Dr. Han mentioned with acquisition opportunities in GMO technology, if you guys are at the forefront -- and apparently it sounds like you guys are pretty much the only players domestically that are making traction in this area -- what type of acquisition opportunities are there?

(inaudible)

Also, genetically modified product, especially (inaudible) has been widely used in many countries from South America to the US. So we think this technology actually is becoming more and more mature, and Chinese government is paying more and more attention to this space. Like Dr. Han just mentioned, the Chinese Agriculture Ministry in 2006 allocated $800 million to focus on funding those GMO production and commercialization. Unfortunately, those money hasn't been touched yet, because (technical difficulty) a product ready until we announced we're going to launch this product, which was the GMO phytase corn seed.

So that being said, and GMO, with those crops being prevalent in the rest of the world, is there -- doesn't that doesn't raise the opportunity for the government to be a little bit more lenient with the restrictions for foreign entry and international players to enter the market? Or are they still kind of skeptical? Or do they want to keep it within their borders, the technology or the development within their borders? Maybe you could elaborate on that.

(inaudible)

So you don't see any reason or any chance that the government will loosen up the restrictions to allow these guys to enter the market? That's your position.

We don't see it in the near future, no (inaudible).

Agriculture industry is highly protected in China. As you know, foreign companies can never own more than 49% of a seed company in China. Also (inaudible) [five spaces] can take years to complete. Even this company will have a great track record in other markets. When they enter China markets, they still have to go through those lengthy five phases to have their product to be approved into the marketplace. So we see there is a tremendous opportunity for us because our product is already at phase 5; we're just waiting for government to open the GMO door.

Last question. In your '08 outlook, you talk about further consolidation in this space, and how capacity could return to a rational range, and then how pricing declines could moderate, or should moderate. So based on what you're seeing so far early in the '08 growing season -- you've already got the advances, right, from October through January I guess -- can you collaborate a little bit on the magnitude of the recovery that you're seeing relative to the 15% or so declines you experienced in '07? And do you eventually expect pricing to recover back to '06 levels? And kind of what is your worst and best case scenario for this for this year?

The ASP in 2006 -- in 2007 compared with '06 was a 15% across the board decrease, but we see a healthy potential recovery in '08. We're looking at probably around 5%. If you look at our corn product, in the first couple months, we're looking at a corn product -- (inaudible) average 5% up right now. And base product is flat. The other product is 10% down. We're talking about ASP price. So we see overall the market is recovering, and we just want the market to continue to consume those inventories, and ASP will even recover better.

Thank you.

Jinsong Du, Credit Suisse.

I would just like to -- if possible, could you share with us the (inaudible) we talk about the GMO and all that. That's very exciting. But in the near term, what do you see (inaudible) particularly in the seed business, comparing to your key competitors in China?

(inaudible)

The other thing I want to add is it normally takes eight to 10 years to develop a new product in the seed business. (inaudible) business last few years, we've been still using the old developed seeds, and now we're coming into a new cycle beginning this year and next year. And we will have -- we'll be rolling out a number of new products. We will update the market with our press release in the coming months.

Then the other thing is, for the GMO sector, we believe, we will continue to invest in that area on the R&D. The situation with China is you see a major shortage of corn product, because we just don't have enough corn, the consumption is so high. On the other side, the market is flooded with corn seeds. We're talking about hybrid seeds. So there is a gap in between, which means that the Chinese geographic coverage on the corn (inaudible) is very limited. And the only way to solve the problem, the domestic supply problem, is to bring in GMO seeds, which they produce a higher yield and they have a much higher margin. And with the different traits being added into the seed, farmers will enjoy those products. For instance, phytase, once you add it to the corn seeds, those (inaudible) customers, which is the hog farms, they will love those products because they can save a lot of money from buying additives such as phytase.

Thank you.

Michael Weisberg, ING.

A few things I want to be -- I may be confused about that I need some assistance with. Because you consolidated Changrong last year, they added to your revenues. And my understanding is they were not in the revenues for the prior year. And I guess from conversations with you, I thought that Changrong did about 18 million in US dollars in fiscal '07. So is that right that they -- in terms of what you reported, it would be about 18 million from Changrong, the acquisition, versus nothing the year before? Or am I wrong about that?

The answer is correct. Because we -- in doing this year, we increase our -- we acquired another (inaudible)% of Changrong, which increased the total share ownership in that subsidiary to 51%. That allowed us to consolidate that division. That's how we can consolidate the revenue. Last year it was below 50%, so we're now controlling shareholders.

Just to understand, the revenue -- if you exclude that, if I'm correct, the revenue decline was more like 28 or 29% last year.

(inaudible)

The other thing about inventories, most of the inventories were -- you said the write-down was from Changrong. The inventories were -- excuse me; I apologize. Most of the inventories write-down was from the rice area. But I'm wondering how much inventories are on the balance sheet because of the acquisition of Changrong in '07?

To answer your question, actually, to be more accurate, we wrote down roughly $10 million. 90% of that is coming from rice, then 10% coming from corn, which is different divisions.

(inaudible)

If there's no inventory from Changrong, it looks like for the year, inventory is 59.9 million versus 43 million a year ago. And I remember from a year ago the inventories were -- you thought the inventories a year ago were very high, and you hoped to work them down. So my concern is, is there a chance there could be a write-down in your corn inventories similar to what you had in rice? Because of some of that inventory is a couple of years old. And I thought that, generally, for older corn hybrids, prices go down maybe 8 or 10% a year. So is there some risk of an inventory write-down there?

(inaudible)

You have taken some write-down in the value of the corn inventory?

(inaudible)

Very minimal.

Very minimal. Okay. And then, would you explain the -- you've had it on the balance sheet for a while. You have debt securities as part of assets. What is that?

Debt security as a part of asset?

That's what it shows on the balance sheet. Doesn't it say debt securities (inaudible) assets?

That's a compensation to the minority shareholders.

Say that again?

That's a compensation to the minority shareholders.

The debt securities on the balance sheet?

Yes. That's a compensation to the minority shareholders when we do a Denong subsidiaries acquisition.

I see. Okay. And then, what is the convertible notes? They are 23 million, and then there's an embedded feature of 12 million. Could you explain that? And explain -- I forget what the shares are convertible into, how (inaudible) at what price.

The convert is at 11.50.

And how long do they have -- how long (multiple speakers)

Five-year term note.

So if the shares are not -- that would just convert to straight debt if the shares trade below 11.50?

If it isn't converted after five years they would convert to straight debt. That's correct.

What does the embedded -- tell me what the embedded feature means. I'm not clear on that.

The embedded derivatives redemption feature line that you're referring to on the balance sheet is the way the accounting firm deems to value the security. So 11 million was noted as embedded derivative, while the convertible note itself in debt form was written as 23 million. So the sum total comes close to the 40 million number.

I see. So those two parts together make up the 40 million convertible note that we took out.

Great. Thank you very much. I appreciate it.

Alex Harbin, Toll Cross Securities.

I have got a few questions, actually. I'm wondering, in terms of the actual rice sales, not just the write-down, but -- why were rice sales down so much relative to your other business units?

(inaudible)

Okay. I mean, do you guys think that you'll be more hesitant to, say, acquire more of Changrong going forward, given the experience you've had with Denong?

(inaudible)

To add a couple of things, (inaudible) even in a very bad year, with $9 million rice write-down, they still produced $20.3 million revenue. That's mostly coming from -- still coming from rice. And also, they give us access to 50 different seeds. They're quickly expanding -- helping us to expand our portfolio. So we consider this a strategic move, and it's probably good for the long term.

Another question. In terms of your new GMO corn, it seemed that you were the only international player that had that kind of corn. Are you going to be marketing this internationally, given the fact that you can't be doing it in China at this point?

(inaudible)

Another thing we need to clarify is Origin Agritech is considered a domestic company in China. That's why we are granted the right to become a potential GMO producer and sell in China. So that's very different from other companies, the multinationals; they will always be deemed as a multinational company; they won't have access to those markets unless they go through this lengthy five-phase evaluation process. So it's very different.

Is there -- I guess, on that note, is there opportunity for you guys to partner with a multinational like Syngenta or Monsanto, maybe gain access to some of their expertise, and they would, obviously, get benefits from a partnership with you as well?

(inaudible)

The other thing is just China (inaudible) give you little bit of update on the GMO side. Chinese scientists actually developed a number of new products in the GMO space. (inaudible) still in the lab stage, but they are highly competitive in the science field. So in terms of GMO, China is one of the leading forces. For instance, the rice GMO in the lab level, the Chinese is probably the first country [that] has GMO prototypes. So in that sense, the Chinese agricultural science is fairly well developed. That will give us more opportunity and discussion with those multinationals, because we bring to the table both our sales and production capability -- also our expertise within China.

You guys don't have anything on the table right now. It's not in discussion.

(inaudible)

Just to summarize, we actually open to both international and domestic technologies, as long as it's good for the Chinese agriculture market, where we see a major demand for a number of GMO products. And we're ready because this market biotech space is very diversified. We're open for a new product coming into the space. We're willing to facilitate those multinationals to enter the Chinese market.

In terms of your G&A expenses, can you sort of break down which -- what portion of it was nonrecurring? I know that you said -- you mentioned that a number of it was nonrecurring. But I mean, it's doubled since last year, and, obviously, the results aren't there to keep the operating margins at all. So what portion of that specifically is nonrecurring that we can expect to see go away next year?

There's a couple things. I'd like to give you a little more color on the G&A. The big portion of G&A is salary and wages. That's about $3.3 million. The second biggest is professional fees, $2.7 million. And the only items I see in my list, which is a large nonrecurring item, is the acquired intangible asset through our -- one of the acquisitions. So it's $1.4 million. That's a large one.

In terms of how to control the G&A expenses, we are actually making an effort to cut down headcount. So we're reducing some of the salary and wages in that space already. That [was taken] place in the late fiscal year 2007. I believe it's August 2007.

And then, in terms of these professional fees, how many of those are recurring? How much of that is (multiple speakers)

Professional fee -- there are a few acquisitions we've done. And also, some of the expenses related to the Citadel debt category, and also the SOx 404 initial installation. So those are the first-year nonrecurring items; we believe it's going away next year.

So of [the professional fees], what is that? 2 million?

(inaudible) and right now, as of fiscal year 2007, it's 2.7 million. And we're looking to reduce that at least by 30%.

Okay. And then finally, I guess there's -- I'm wondering first of all, in terms of your operations, how they are affected by the snowstorm. And then secondly, kind of on an unrelated note, more on the biotech side, you said that you've got several products in phase 2 to 4. Could you elaborate on this specifically in terms of numbers and which phases they're in? And then just clarify if that one product in phase 5 -- is that this GMO corn that was press released?

(inaudible)

Basically, the snowstorm has very little or no impact to our business. Our major product is corn. That accounts for more than 70 -- probably 74% of our revenue; then rice and cotton. Those three main products of ours is all -- it's in (inaudible) a different season. And only those fruit and vegetables they're planting in the snow season. The only one we see maybe has some impact is canola, but canola only accounts for 4% of total revenue. So it's not a major impact to us.

(inaudible)

Thanks.

Lisa Leventhal, ThinkEquity Partners.

I have two questions. My first question was that you mentioned the importation of corn. I wanted to know if you would consider importing (inaudible) products from the US to supplement the nutritional content for swine.

(inaudible)

I'm sorry; what was that?

(inaudible)

We don't have a plan at this moment, but we're looking to that in the future. And also, just so you know, the market landscape is -- China is short of corn product [already]. We are quickly growing into a net corn importer, so export is not something we're concerning right now. We have to really speed up to feed the domestic demand.

Okay. Do you consider your feedstock product better than those produced in the US?

(inaudible)

In the case of DDGS.

If you compare our (inaudible) -- are you asking us about the hybrid corn product, hybrid product, or just GMO product?

The co-product.

(inaudible)

Basically, there are many factors -- will have to come in (inaudible) the seed when you compare one seed is better than the other. Because the environment, the climate and the insects -- type of insects are all different in different countries. So that being said, (inaudible) the US corn seed yield looks like 20% higher yield than the Chinese corn seed. But that doesn't mean the seed itself determines the yield. It's also many factors we just mentioned. That's why the product GMO comes in very important, because without GMO product, it's totally tailored to the Chinese market. Where our BT corn product, which is in phase 2, and [herbicide] product in phase 3 of the evaluation process with the government -- so those products (inaudible) totally tailored to the domestic climate and insects.

Thank you.

Jay Harris, Goldsmith & Harris.

As you move into genetically modified corn seed, is that going to make the Company revenues more dependent on corn seed, or are there other programs that will keep the current balance?

(inaudible)

We're not just focusing on the corn; we're also looking to different products. Hybrid rice is one of the (inaudible) major staple for the [$1 billion] population. So if there is a good product in that space, we still continue to venture into that. And also, just so you know, no staple right now is using GMO technology anywhere in the world. So that means there is no GM wheat or GM rice being used in any -- used in any country. So it's not at our dining table yet. However, if you look at the GM corn seed, those eventually can be used -- those are (inaudible) used for pig feeds. Basically, (inaudible) consume a lot of those nutrition products. So we see there is a lot of potential market. And also, the Chinese market alone for the corn seed is a $1 billion market. So if you say we don't want to go into a $1 billion market, the [answer is probably not].

I'm not sure -- you provided a lot of useful information, but I'm not sure you met the substance of my question. I don't have your press release in front of me. But for the year that you're reporting, corn seed represented a percentage of the total company. Will that percentage go up or stay roughly where it is over the next couple of years?

[I think it will go up].

(inaudible)

That will give you a higher margin structure for the GMO seed than you're getting from the hybrid seed. Just to follow up on an earlier question, the trait that you're developing for corn -- I'm not sure that that kind of trait is available outside of China. And it occurred to me that you may be able to license companies outside of China for that trait in return for licensing for sale in China traits that are now common in other corn growing regions of the world. And I wondered if that's part of your strategy going forward.

(inaudible)

I have a request, and that is that when you report your earnings, such as the ones that you reported yesterday, it would be very helpful if you would report the most recent quarter in addition to the year-to-date. And I wondered if going forward into your -- in fiscal 2008, you could implement that, so that when you report your March quarter -- your December quarter, obviously, will be your quarter -- but when you report the March quarter, you show the March quarter results as well as the six-month results; in the June quarter, the June quarter results as well as the nine-month results. It would be very helpful.

(inaudible)

Thank you very much.

(OPERATOR INSTRUCTIONS). [Robert Hugh], [JM Cohen and Company].

I want to ask you, is there a GMO phytase corn seed license from CAS? I presume it's a nonexclusive (inaudible)

Its exclusively for the local companies, Chinese companies.

It's exclusive for the Chinese companies. It is exclusive in China.

So you have an exclusive license, or it's only for Chinese companies, for which you are one of them?

We're the only Chinese company.

You're the only Chinese company so far. But you don't have an exclusive license, so other people can come behind you and license it?

(inaudible)

Okay. So you do have an exclusive license.

Yes. We are the exclusive.

How long is the exclusivity?

(inaudible)

That's terrific. Can you just paint the broad strokes, kind of the economic terms for the license as a percentage of revenue, revenue royalty, or [there's] certain upfront components?

The license agreement is basically RMB0.10 per kilogram for the seed sold, so per kilogram seed sold.

That's terrific. Thank you.

Just so you know, it's about $0.10. Yes, correct.

In terms of the yield for the GMO seed and for your traditional hybrid corn seeds, is there a significant yield difference in the two, or it's only just the phytase that's the main selling point?

(inaudible)

I see. So [it will be the same] as the hybrid corn seed that it's actually derived from. Okay. In terms of timing, you said in your press release that it will be ready for the '09 planting season. So I presume currently you are planning on having the seed farmers grow the GMO seed in the current season so it will be ready for the next year?

(inaudible)

We are expecting the final approval in calendar year '08; then we can move on to the fully launch commercialized production '09.

Do you need approval in order to have seed production, or only for commercial sales?

(inaudible)

(inaudible). Last question; my apologies. You gave a 5% ASP expectation for the current year, and you also gave some very nice colors on the corn seed ASPs. I wonder what's your expectation with regard to the rice ASPs? And can you also give some color on volume?

(inaudible)

The ASP on the rice is pretty much flat, but we will increase the volume of sales.

Eric Rosenfeld, Crescendo Partners.

On December 5th, Bloomberg carried a story from Briefing.com saying that an ICR Asia conference company says corn prices have risen 40% year-over-year in China, macroenvironment is very favorable. How does that fit with what you're saying today?

Basically, like I mentioned earlier, there is a major shortage for corn in China. That's why it's driven up the corn price in China. However, there is a disconnect here. The seed market is flooded with seed. So that shows there is a low yield problem in the limited farmable land in China. So basically, this is a question for GMO.

(inaudible)

So what would be your estimate for next year as to what seed prices would do, foreign seed prices?

You mean '09 compared to '08?

Yes.

(inaudible)

10% increase, '08 to '09.

And 5% '08 from '07? Okay. And how much have prices fallen from where they were two years ago at their peak?

15 to 20%.

So can you explain then, with corn prices going up so much, and with all the inventory having worked out of the system, why over the next year and a half won't seed prices dramatically increase? Why would they just get back to where they had been two years ago?

(inaudible)

And also, the seed we're producing is much higher-quality seed. So we believe the market condition is going to be favorable to us.

[Stan Gertseg], private investor.

The 10% cost that you're going to be giving back to CAAC per kilogram of the phytase corn, how much of a savings is that for the Chinese farmers for the phytase you don't have to use?

First, I want to correct that. It's not 10%. It's $0.10 per kilo seed sold.

So how much of a savings will that be for the Chinese farmer?

(inaudible)

The other question that I have -- here in your newsletter, you said that the phytase potential market in the US is $500 million. But according to you, will you be able to penetrate that market, or you won't be able to penetrate that market?

Phytase market globally, yes; it's $500 million. However, what we see more interesting is -- and also, the Chinese market is only $200 million. What we see interesting is most of the corn produced will be consumed by the hogs, by the pigs, basically. So we see more and more demand for those hog farms who are really using phytase as an additive into their pig feed. So with -- it's almost a [bundle] product.

[Jeff Harris], private investor.

Could you talk about the competitive landscape in China now that the government has exited the subsidization of seed companies, and if you expect a number of the 5000 or so players to disappear? And if so, what might be a reasonable estimate of the number of remaining competitors? And sort of related, how many players have a 5% share or more in corn that you have?

(inaudible)

To add to that, even the largest corn seed producer in China is probably only around 5% of market share. So the market itself is highly fragmented. That's why we see the barrier to entry for the low-end seed is very low. And lots of people are setting up their own shop when they're dealing from those government agencies. The only way to enter this -- to [dominate] and to [consolidate] the market is to introduce a (inaudible) application, which we believe GMO corn seed product is one of the examples.

Can I have a follow-up? I'm wondering, I would think there be some mutually beneficial advantages to partnering with a large multinational player who would really like to access what looks to be at least the second-largest global marketplace in your distribution channel. And I'm wondering what thought you might have given to perhaps joint venturing or partnering with a larger multinational entity.

(inaudible)

Your suggestion is well taken.

So that's something you have considered?

Yes. Correct.

There are no more questions at this time. I would like to turn the floor back over to management for closing comments.

Thank you, everyone, for coming for Origin Agritech's fiscal year 2007 earnings conference call. We welcome you to join us for the next conference call. Thank you.

I'd also like to remind everyone that there is a replay number available, if anyone joined us late. That replay number is 1-877-660-6853, or internationally, 1-201-612-7415. There may have been some difficulty in getting access to the slides at the beginning of the presentation. Those slides are now available on our Web site, as well as a frequently asked questions file as well. Thank you again, and we look forward to the next conference call.

This concludes today's teleconference.