Orient Securities: The global agrochemical value chain is ushering in a new round of reshaping domestic enterprises to go overseas and enter a high value-added link

The Zhitong Finance App learned that Orient Securities released a research report saying that with the strategic adjustments of multinational companies in recent years, the global agrochemical value chain is expected to be reshaped, and Chinese companies are expected to go overseas and enter high value-added links on both sides of the smile curve, winning a new round of structural growth opportunities. The global agrochemical value chain is undergoing a new round of reshaping, and now Chinese companies are already at the head of this era. The bank is optimistic about opportunities for local Chinese agrochemical companies to enter the high value-added end of the global smile curve and reshape the value chain pattern in the context of strategic adjustments of traditional multinational companies in a new round.

Orient Securities's main views are as follows:

The agrochemical industry narrative shifts from price increases to overseas growth

Market performance in the agrochemical sector has been weak recently. The fundamental reason is that after expectations for the continuation of this round of price increases fell through, the market feared that the industry would return to a long-term slump due to oversupply, and it would be difficult to have investment highlights if there was no catalyst for price increases. Admittedly, although China's pesticide industry has 70% of the world's original drug production capacity and accounts for nearly 90% of exports, it has long been stuck in the raw material supply chain in the middle of the smile curve; in recent years, the continuous expansion of domestic production capacity has turned traditional product overseas routes into a homogenized Red Sea battleground. The increase in the share of pharmaceutical exports may just be a passive shift from “internal volume” to “external volume”, and a new paradigm is urgently needed to break the situation. However, the bank believes that structural growth opportunities in the industry will bring about a new round of value discovery in the industry, and the investment value will also shift from a simple logic of cyclical price increases to differentiated overseas growth. With the strategic adjustments of multinational companies in recent years, the global agrochemical value chain is expected to be reshaped, and Chinese companies are expected to go overseas and enter high value-added links on both sides of the smile curve, winning a new round of structural growth opportunities.

The strategic contraction of multinational giants brings new opportunities to go overseas with high value

For a long time, traditional multinational agrochemical giants have held high value-added links at both ends of the smile curve, but in recent years they have begun to strategically shrink the agrochemical business through business divestment, spin-off and listing, and shutdown of production lines. It is difficult for big ships to turn around, and the high operating costs brought about by the organizational structure support the demand for higher profit margins. However, for a long time, the high gross profit of multinational companies mainly comes from their ability to create products and terminal brands, but these two dimensions are currently slightly exhausted. On the innovation side, the development cycle of a single compound exceeds 12 years, and the cost is over 300 million US dollars, and the number of new compounds marketed has dropped sharply from the peak; while R&D investment intensity in the agricultural sector of core players has not increased but declined, seed and digital agriculture are also crowding out the resource allocation for compound innovation. On the brand side, the expansion of China's generic drug production capacity is suppressing the product boom, and low overseas food prices are also forcing farmers to switch to more cost-effective product portfolios. The traditional brand premium bubble is being pierced, and giants are being forced to withdraw from business lines with relatively low returns. It seemed like they were doing their best to defend, but in fact, they barely made up for positions.

Chinese companies have reached a historic point in the reshaping of the value chain

Demand will not disappear; local enterprises that have followed a differentiated development path have gradually entered the stage at both ends of the smile curve in this process, creating a new paradigm for Chinese agrochemicals going overseas with the attitude of entrepreneurs. On the innovation side, locally created compounds are at an inflection point of 0 to 1 commercialization. Tahoe Ciprofloxamine has reached a global cooperation with UPL, and Benzentazol of Jiangshan Co., Ltd. and Syngenta have jointly developed overseas markets. The products were launched at the end of last year and the beginning of this year. It is expected to fill the gap of new compounds from multinational giants while simultaneously achieving global commercialization of original Chinese products. On the brand operation side, operations represented by Runfeng Co., Ltd. have already entered the deep-water zone. The company has established a large number of independent global registrations based on a long-term overseas mechanism, and is gradually iterating to a high gross margin model, product, and regional structure in the commercialization process. Unlike traditional commodity exports, pesticide brands operating overseas require enterprises to have first-tier market awareness and global risk management and control capabilities. There are few examples of domestic peers here, and they can only explore on their own. The team and cultural self-confidence that Runfeng has built up through middle school is also the most rare asset for Chinese companies to go overseas. The global agrochemical value chain is undergoing a new round of reshaping, and now Chinese companies are already at the head of this era.

Risk Alerts

Market progress falls short of expectations; risk of uncertainty and cost fluctuations in overseas operations; risk of changes in assumptions affecting calculation results.