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Soruce : Financial Times

FT Tilt-Luxury in China includes high-quality riceFT Tilt-Luxury in China includes high-quality rice

Soruce : Denise Law 

The boom in Chinese consumption is even changing the type of rice locals eat. Banking on changing consumer tastes and higher food prices, Origo Partners has invested $13m in a privately-owned Chinese food processor operating mainly in the northeast region, where healthier japonica rice is grown.

AIM-listed Origo Partners, a Beijing-based private equity firm that targets mostly clean tech, consumer and agricultural companies in China, will take a 21 per cent stake in China Rice, with an option to invest another $10m in the form of a note convertible into equity before the company goes public. China Rice will use the proceeds to acquire a number of smaller processors and develop a national brand in higher quality and organic rice.

Investing in the agricultural sector represents a more contrarian approach in China’s PE market. Larger foreign players such as Bain and Carlyle have traditionally favoured the healthcare, technology and financial services sectors. KKR has made some inroads in China’s food and beverages industry, with stakes in China Modern Dairy and VATS, a chain store liquor operator.

Clearly, Origo sees immense potential in sectors that will benefit from the rise in consumer spending, and the higher-end rice market is one example.

“Not many foreign investors are interested in rice, but eventually, more and more will want exposure to this market,” Chris Rynning, Origo’s chief executive, told FT Tilt. “As incomes rise, consumers change their eating habits, and shift towards more nutritious choices.”

China Rice, for instance, processes and produces japonica rice in the northeastern province of Jilin. Demand for japonica rice – which is rich in vitamins and minerals, and softer in texture – is expected to rise by more than 12.5m tons by 2015, according to China’s minister of agriculture, with purchase prices set to rise by 22 per cent to Rmb128($19.4)/50kg this year. Japonica rice is priced at a 20 per cent premium to the standard indica rice. Prices for middle-late indica rice are predicted to rise by 10.3 percent to Rmb107/50kg.

Further, China’s 12th Five-Year Plan aims to spur consumption in the rural regions. China Rice already has an annual production capacity of 300,000 tons, making it one of China’s largest. Only 5 per cent of Chinese rice processors produce more than 75,000 tons per year. The biggest players – such as Sinograin – are state-owned.

With more than 1,000 processors fighting for business, the Chinese market for rice is also highly fragmented, and the government plans to make this industry self-sufficient.

But as China Rice’s production is concentrated in one region, the biggest risk is unpredictable weather. Severe droughts in central and eastern parts of China, for instance, have put pressure on the government to control grain prices. In February, food prices rose 11 per cent compared with a 10.3 per cent rise in January.

Origo’s investment also underlines a major step for a foreign PE firm operating in China, which is highly-controlled by the government, and largely dominated by local funds. In fact Origo Partners was chosen from a pool of potential investors that included local funds that offered even higher valuations, Rynning said.

“We spent more than a year trying to develop a better relationship with China Rice and getting to know the founder. The company was courted by many local investors who were willing to offer a lot of money, but little help,” he said.The boom in Chinese consumption is even changing the type of rice locals eat. Banking on changing consumer tastes and higher food prices, Origo Partners has invested $13m in a privately-owned Chinese food processor operating mainly in the northeast region, where healthier japonica rice is grown.

AIM-listed Origo Partners, a Beijing-based private equity firm that targets mostly clean tech, consumer and agricultural companies in China, will take a 21 per cent stake in China Rice, with an option to invest another $10m in the form of a note convertible into equity before the company goes public. China Rice will use the proceeds to acquire a number of smaller processors and develop a national brand in higher quality and organic rice.

Investing in the agricultural sector represents a more contrarian approach in China’s PE market. Larger foreign players such as Bain and Carlyle have traditionally favoured the healthcare, technology and financial services sectors. KKR has made some inroads in China’s food and beverages industry, with stakes in China Modern Dairy and VATS, a chain store liquor operator.

Clearly, Origo sees immense potential in sectors that will benefit from the rise in consumer spending, and the higher-end rice market is one example.

“Not many foreign investors are interested in rice, but eventually, more and more will want exposure to this market,” Chris Rynning, Origo’s chief executive, told FT Tilt. “As incomes rise, consumers change their eating habits, and shift towards more nutritious choices.”

China Rice, for instance, processes and produces japonica rice in the northeastern province of Jilin. Demand for japonica rice – which is rich in vitamins and minerals, and softer in texture – is expected to rise by more than 12.5m tons by 2015, according to China’s minister of agriculture, with purchase prices set to rise by 22 per cent to Rmb128($19.4)/50kg this year. Japonica rice is priced at a 20 per cent premium to the standard indica rice. Prices for middle-late indica rice are predicted to rise by 10.3 percent to Rmb107/50kg.

Further, China’s 12th Five-Year Plan aims to spur consumption in the rural regions. China Rice already has an annual production capacity of 300,000 tons, making it one of China’s largest. Only 5 per cent of Chinese rice processors produce more than 75,000 tons per year. The biggest players – such as Sinograin – are state-owned.

With more than 1,000 processors fighting for business, the Chinese market for rice is also highly fragmented, and the government plans to make this industry self-sufficient.

But as China Rice’s production is concentrated in one region, the biggest risk is unpredictable weather. Severe droughts in central and eastern parts of China, for instance, have put pressure on the government to control grain prices. In February, food prices rose 11 per cent compared with a 10.3 per cent rise in January.

Origo’s investment also underlines a major step for a foreign PE firm operating in China, which is highly-controlled by the government, and largely dominated by local funds. In fact Origo Partners was chosen from a pool of potential investors that included local funds that offered even higher valuations, Rynning said.

“We spent more than a year trying to develop a better relationship with China Rice and getting to know the founder. The company was courted by many local investors who were willing to offer a lot of money, but little help,” he said.