CLSA BISI Reap a Harvest

The business Jakarta Comp @ 1,332.67 Indonesia

The business
Bisi International is Indonesia's largest and only publicly listed producer of hybrid seeds‚ producing corn‚ rice‚ fruit and vegetables. It has a strategic alliance with Monsanto‚ which provides the firm with high-quality breeder corn seeds. The company expects a continued shift towards hybrid corn‚ the adoption rate of which rose from 25% to 43% in 2006-07 and should reach 55-60% in 2008 and 90% by 2012. Hybrid rice‚ on the other hand‚ should see accelerating growth as the penetration level is below 10%. We expect faster adoption for hybrid rice as Bisi leverages its success in hybrid corn and believe the firm will progress on the back of these two products.

Competition & market franchise
Developing hybrid seeds is a lengthy and ongoing process of intensive research and development (R&D). The company has 12 R&D facilities across the country engaging in testing corn‚ rice and vegetable varieties. It also possesses 25 years of experience in specific breeding programmes to develop superior-quality hybrid seeds suited to Indonesia. Imported hybrids are often susceptible to pests and diseases. Bisi‚ with its long-standing relationships with contract farmers‚ local R&D conducted across the country‚ nationwide marketing‚ sales and distribution platform makes it difficult for new entrants to establish a foothold.

Current issues
Bisi's challenges include its inability to raise prices, lower volume and earnings as well as a tough business environment. Earnings will suffer from higher interest and selling and distribution expenses as well as from falling corn and rice prices that impair the firm’s ability to raise seed prices next year. A tougher environment this year will also make it difficult to convince farmers to try hybrid corn and rice as they require 25% more fertiliser than the conventional breeds, lowering Bisi's yields from contract farmers. As such, although we are more positive about its hybrid-corn business as the benefits are well demonstrated, management has cut its guidance on rice and corn volumes. On the bright side, pesticides, which accounted for 25% of the company's revenue in FY07, should experience sharp-price corrections.