Origin Agritech: Monsanto of China, or Dud? - TheStreet



) --

Origin Agritech

(SEED) - Get Report

wants to become the



of China.

Investors have bid up the company's share price on just that ambition, valuing Origin stock like a biotech -- that is, based on the soaring hope that a bonanza awaits the company's promised pipeline of genetically modified seeds, rather than on its current business, which sells normal corn and soybean seeds to farmers in China.

Those outsized hopes were fanned in November, when the company announced that it had won approval from the Chinese government to produce and market a genetically modified corn seed. Laden with an enzyme called phytase, the corn that grows from the Origin seed apparently helps cattle absorb phosphate, an important nutrient. On the day of the announcement, the stock doubled in value, from $5.21 to $10.45, and it hasn't come down since, trading recently at a little more than $13.

But plenty of skeptics remain.

As it stands today, Origin remains little more than a feed lot with sci-fi dreams. It released fourth-quarter and year-end results on Thursday, posting 2009 revenue of about $86 million, up from $75 million a year ago. Because it sells only in Northern Hemisphere China, the company books nearly all of its revenue in the third period of each year, rendering its cash flow rather choppy.

China's crop-seed industry is balkanized; not one company controls more than 5% of the market. And, as one U.S. agricultural executive who recently returned from China has said, Chinese companies with ambitions of bringing bioengineered seeds to market have had trouble commercializing their products. Though the Chinese government has poured money into the development of high-tech corps, it's thus far had more success discovering technologies than applying those discoveries to the market.

Like many such Chinese outfits with issues traded on U.S. stock exchanges, Origin is of relatively obscure provenance. The company went public in 2005 through a reverse merger, its assets subsumed by a special-purpose acquisition vehicle, or SPAC.

All the rage back then, SPACs are publicly traded blind-pool shells whose existence depends on seeking out, and buying out, private companies. This one, listed on the over-the-counter bulletin board, was operated by a San Diego physician turned entrepreneur/investor named Richard Propper, who has had a few legal entanglements to his name, including run-ins with the Securities and Exchange Commission (the parties settled) and the Justice Department (a civil suit, also settled). Neither of the cases had to do with Origin Agritech, however, and Propper has denied any wrongdoing.

After some years prospecting for viable takeover targets in China, Propper in 2004 discovered the founder of Origin Agritech, Gengchen Han, a molecular biologist with a Ph.D. from Iowa State who had worked for


(DD) - Get Report

Pioneer seed unit in China during the early 1990s. Han was also the first person to petition the Chinese government for permission to start up a private-sector seed company. Han succeeded -- though his goal was always to get into the genetically modified crop business -- and in 1998 he formed the company that Propper's SPAC would eventually acquire.

Propper has since distanced himself from Origin, trimming his modest number of SEED shares, but holding on to some of them. He stands by the viability of the company, as well as the two other Chinese microcap start-ups his SPACs have brought onto the Nasdaq exchange:

Hollysys Automation

(HOLI) - Get Report


A-Power Energy

( APWR), which sells wind turbines.

"Pump and dump is not our object," Propper says. "It's not what we do." Of Origin, he says, "It's my baby -- or one of them."

During the boom years, which saw China-based equities soar in value along with everything else, Origin's shares reached all-time highs of more than $17 in early 2006 before beginning a long slow descent and then crashing in early 2009, sinking to less than $2.

Origin's fate appears to have taken a turn for the better, especially since the phytase-approval announcement in November. Historically owned by day-traders, retail investors and short sellers -- as of Sept. 30, just 8% of Origin's shares outstanding were in the hands of institutions and 13% in the hands of shorts -- the stock recently received a major endorsement. On Monday, mutual-fund giant Fidelty disclosed in an SEC filing that it had acquired nearly 3 million shares of Origin Agritech, or 13% -- a sizeable wager on the company's prospects.

Indeed, word of Fidelity's move appeared to lift Origin's shares, which spiked another 19% during Monday's regular session. (All of the stock's recent moves northward were likely exacerbated by short sellers squeezed into covering their positions.)

But just as Fidelity was stepping in, one of Origin's few other institutional holders was stepping out. Bill Nasgovitz, who runs the small-cap value fund Heartland Advisors, of Milwaukee, sold his entire stake in Origin in late 2009 -- some 3.8 million shares, or 16.7% of the company.

Heartland had owned Origin for several years. Nasgovitz says the company initially enticed him for the same reasons it had all those retail investors: "I like ag. I like China," he says.

For Nasgovitz, that interest eventually turned to frustration. "They're a habitual late reporter, and I've expressed that to the company for years. My patience wore thin."

More importantly, though, he believes Origin's stock price has run too high, even accounting for the company's genetically modified seed prospects. "I think it's all priced in." Asked about Fidelity's move, Nasgovitz would only say, "Gee. I wish them well."

Another Origin bear is the well-know short seller and stock blogger, Andrew Left. On his Web site,

Citron Research

, Left

argues that Origin's phytase is no great shakes

(it simply combines two readily available things that farmers already combine by hand: cattle feed and phosphorous) and that the company's debt position is precarious.

The only analyst covering Origin Agritech -- Joe Giamichael, of Rodman & Renshaw -- disagrees. He's bullish on the company, though with some qualifications. A visit to Origin Agritech in China -- its headquarters in Beijing, its distribution centers throughout the Chinese farm belts, where he says he spoke with the company's customers -- reinforced his belief that Origin has much promise.

The company's phytase product was said to be the first genetically modified food-seed ever approved for sale by Chinese authorities. China already allows for the planting of genetically modified cotton -- the national authorities felt the homegrown textile industry was falling behind -- and it allows for the importation of fully grown soybeans cultivated from genetically modified seeds.

Giamichael argues that the most exciting thing about Origin isn't phytase corn seeds. Instead, it's that Origin appears to have a substantial head start on the competition in its bid to dominate what many believe will become an enormous business: selling higher-yielding, bioengineered seeds to the vast Chinese agricultural industry. The government's approval of the phytase corn seed signals that Chinese authorities no longer look at bioengineered food with suspicion.

This, says the analyst, is what has excited investors, including Fidelity. "Most of the interest is around what the company possibly can become."

Also helping Origin, Giamichael says, are laws in China that prohibit any foreign-controlled entity from selling genetically modified seeds domestically (with the exception of cotton, as noted above) -- rules that would eliminate the likes of Monsanto as a competitor. The analyst also praises the company's management. Like many Chinese companies, Origin is "chairman driven," Giamichael says. The company's founder has a stake -- emotionally as well as financially -- in seeing Origin make it big.

But Giamichael, with his 12-month price target on Origin's stock of $15, is almost, in some ways, as cautious as a bear. For one thing, trying to peg values on a distant-future line up of products is a difficult endeavor. For another, he says, "It's just going to take time for the story to unfold."

Origin shares finished trading Friday at $12.51, down 44 cents, or 3.4%. The decline follows a 4% drop on Thursday.

-- Written by Scott Eden in New York

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Scott Eden has covered business -- both large and small -- for more than a decade. Prior to joining TheStreet.com, he worked as a features reporter for Dealmaker and Trader Monthly magazines. Before that, he wrote for the Chicago Reader, that city's weekly paper. Early in his career, he was a staff reporter at the Dow Jones News Service. His reporting has appeared in The Wall Street Journal, Men's Journal, the St. Petersburg (Fla.) Times, and the Believer magazine, among other publications. He's also the author of Touchdown Jesus (Simon & Schuster, 2005), a nonfiction book about Notre Dame football fans and the business and politics of big-time college sports. He has degrees from Notre Dame and Washington University in St. Louis.