Chaoda farming falls short of organic label
Mainboard-listed Chaoda Modern Agriculture (Holdings) has misled investors about being a pure organic food producer, according to CLSA.
The brokerage house said it found press reports alleging that Chaoda's vegetables were not truly organic were 'somewhat correct' during a three-day fact-finding trip to the vegetable grower's headquarters in Fuzhou this month. Chaoda had invited 16 analysts, fund managers and bankers to visit its production plant.
'It is true that Chaoda uses chemical fertilisers in their production,' CLSA said. 'In fact, more than 90 per cent of their produce are qualified as A-grade green food in China, in which the standard is lower than that of organic food in the West.'
CLSA said the higher AA-grade green food conformed to the international standard of organic food. At present just 54 of 2,400 approved green foods in China qualified as AA grade.
Chaoda management had told CLSA only a small proportion of its produce qualified as AA grade.
CLSA also cast doubt on Chaoda's claims that its low-cost cultivation method was a key competitive advantage over overseas organic food companies.
'We believe this claim is not valid, since it is much cheaper and easier to grow green food than organic food,' it said.
However CLSA believed Chaoda had not lied to investors, saying the company had just not conveyed a clear message.
'In short, Chaoda is only a green food producer,' it said.
However, the allegation made by a Hong Kong magazine that Chaoda had inflated its sales was flawed, CLSA said.
In Fuzhou, there were more than 40 wholesale markets which were of different sizes, CLSA said.
'Sales made in one wholesale market in Fuzhou are not a reliable indicator of sales in other markets,' it said.
'We must admit that robust sales figures look very suspicious on first glance. However, auditors have endorsed their numbers.'
CLSA expected more new entrants would erode the green food industry's gross margins.
Chaoda said gross margins fell to 73.9 per cent in the 12 months to June 30 from 75 per cent the previous year. Net margins fell to 54 per cent from 60.8 per cent.