Euro-Asia: sowing the seeds

We spoke to Euro-Asia on the day that the Shanghai International Evening News reported that its chairman and China's second-richest man according to Forbes Magazine, Yang Bin, had fled to North Korea from charges of fraud. He had returned to the company's seat in Shenyang by the time CFO Yan Chuang was ready for the interview.

"We're a Hong Kong-listed company, and sometimes the Chinese press doesn't really know what we are doing or truly understand our company. We must invest more in investor relations on the mainland," was the CFO's diplomatic response.

Yan speaks quietly and calmly, yet a recurring cough makes you wonder whether the upsets of the past 48 hours have not caused him to go overboard on cigarettes.

Unlike the company's chairman, Yan has not studied abroad and is more comfortable speaking in Mandarin. He graduated from the Jilin Finance and Trade college and is a certified public accountant as well as a chartered securities accountant in the PRC.

Euro-Asia was listed on the Hong Kong main board in 2001, one of a crop of private Mainland companies that emerged to great fanfare at the time. UBS Warburg even set up a special private company index that excited a lot of investors. Euro-Asia was among the first unambiguous fruits of China's economic reforms.

Chairman Yang seemed the kind of driven, charismatic entrepreneur that foreign investors could finally relate to. His background is colourful. He emigrated to Holland in 1988 at the age of 25 after growing up an orphan and serving in the People's Liberation Army, almost the only avenue for upward social mobility in China's deprived rural areas. Yang took courses in politics and textiles before returning to China in 1992 to set up Euro-Asia, although he was then a naturalized Dutch citizen.

The ramifications of the newspaper report that Yang had fled still have to be worked out, but it would seem safe to say that in the ultra-competitive world of modern China, what the Chinese call the 'red eye disease' - envy - may have played a role.

But although envy cannot be discredited as a motive, it's also true that private Chinese companies are being scrutinized more closely by investors. Greencool Technology, for example, has come under suspicion following allegations of false accounting.

The debacle about Yang's confusing itinerary adds fuel to the contention that Chinese companies operate in an environment which non-China based investors find very hard to understand.

What exactly is Euro-Asia? Euro-Asia exports fruits and vegetables to developed markets, on the back of low labour prices in China. It has an upstream and a downstream component. Domestic sales have made up less than 40% of total turnover in the past two years and the fastest growing export market is Japan, up six percentage points to 22%. China-grown vegetables are the import of choice for Japanese consumers, eager for relief from the extortionate prices charged by their highly protected, small-scale farmers.

The upstream component consists of nurturing seedlings in greenhouses, and the downstream component involves aggregating the harvest of its producers and shipping it abroad.

Europe is also a major market for Euro-Asia, and it is fascinating for a European to know how a foreign fruit and veg company can compete against the molly-coddled European farmers who take up almost half of the European Union budget in subsidies.

"Since China joined the WTO, it's not problematic to export to the EU. Nor do we undercut them by a large margin; 5%-10% is enough," comments Yan.

Still, radically lower labour costs in China means that the company can reap net profit margins of 22%.

While that looks promising, it also struck FinanceAsia as rather mysterious how a company like Euro-Asia can exploit China's agricultural sector. Although it boomed in the early years of reform, China's rural areas have been suffering from stagnant incomes for the past several years. The farms tend to be very small and unmechanized and tied to China's desire to maintain some autonomy in its key food sources. Numerous taxes imposed by out-of-control local officials also make life a misery for China's farmers.

So how does Euro-Asia manage to capitalize in this unlikely sector?

Yan is not to be drawn. Laughing, he brings the shutters crashing down.

"In China business methods are copied shamelessly. Anything we do which leaks out into the wider world is automatically copied by our competitors. In fact, the way we organise our agricultural producers is top secret and our principal competitive advantage," he says.

This is actually quite typical of Chinese companies. Every company needs an angle, but in China the angles can get quirkier than elsewhere. It is possible Euro-Asia has connections with the local governments that allows the farmers to produce crops on demand for the company.

"All I can tell you is that our most active input is at the upstream and downstream stages - first we produce our top-quality seedlings, all fully in accordance with European, US and Japanese safety standards, then we provide the farmers with the seedlings, and then we finally organize the export of our produce," he says.

But Yan emphasises that the quality of Euro-Asia's produce is just as important a factor as lower slighter price for penetrating the regulations protecting first world consumers from potentially dangerous produce.

He also mentions the 'value-added' that Euro-Asia brings in terms of the Dutch technology it brings to greenhouse cultivation and the integrated processing of orchid seedling and other flowers and vegetables for sale to wholesalers, growers, export agents and importers.

But Yan believes that it is the company's successful but mysterious method of handling its producers that will continue to reap benefits in post-WTO China, not just in terms of exports.

"When foreign hypermarkets such as Tesco and Carrefour come to China, they will need to work with one consolidated supplier. We are quite special in China for the bulk and quality advantages we achieve by working with our producers (farmers), and we feel sure that we will be the first choice for these foreign companies," says Yan.

Companies like Euro-Asia are becoming a familiar sight in Hong Kong. As the territory stagnates, more and more companies from the Mainland are piling into Hong Kong to obtain access to capital. Capital is reserved for the state-owned enterprizes in China, while private companies face huge difficulties before being able to list. So Hong Kong's boards, especially the 'buyer beware' Growth Enterprize Market with its non-existent profit and turnover requirements, comes in handy.

Not that Euro-Asia ever needed to be a candidate for the GEM. On the contrary, the company has seen vigorous growth since listing on the main board. Turnover jumped 64% to Rmb1.1 billion 2001 from Rmb670.1 million in 2000, while net profits surged 173% to Rmb521.1 million in 2001 following a nationwide enterprise tax holiday and agricultural tax concessions. Mirroring this performance, its share price has also performed very well since IPO and fell just 7.7% on the day of the news of the chairman's overseas 'holiday'.

How well Euro-Asia weathers this latest storm is anybody's guess. Wealth in modern China seems to be built on brittle foundations. It's tempting but by no means conclusive to recall that one of the greatest and earliest stock market bubbles was based on of Euro-Asia's favourite products: Dutch orchids.