With what is estimated to be a $40 million IPO, valuing the company in small-cap territory of $160 million, Vedan International is not exactly a megadeal.
However, it is an interesting company with a story that combines a cheap manufacturing story, with a China play and a potential biotech kicker.
The company is a Taiwan family-owned business with 40 years of history. It is a producer of fermentation-based amino acids and its biggest product is the food additive, MSG - a staple of Chinese food.
MSG is a $6-7 billion market and is growing at 5.5% per year and Vedan has about 10% of the market, producing 165,000 metric tonnes per year.
The company has two production facilities, with the largest one being in Vietnam and a smaller one in Xiamen. The facility in Vietnam covers 2 million square metres with the company having its own power stations, docks and control of the agricultural inputs.
The company's parent is Vedan Group, which a diversified conglomerate. The reason for listing the amino acid businesses in Vietnam and China are several. One is to boost the company's China business by using proceeds to fund M&A in China (where there are about 40 MSG makers). Another is to deal with family issues. The current CEO, Kun-Hsiang Yang is from the second generation and the third generation have other interests. Finally, the company wants to boost its R&D spending to $5 million per year.
The reason for the R&D requirement is the company's move into biotech. Chief operating officer, Joel Wang told FinanceAsia that the firm has patented a new poly glutamic acid that can absorb 3000 to 5000 times its own weight and is also biodegradable. This makes it ideal for baby diapers at one end of the scale and from an agricultural perspective it can mixed in with soil to retain moisture and rejuvenate soil. This is a particularly applicable to the agricultural areas around Beijing which have been hit by wind erosion from the Gobi desert.
"We have been working on this product for quite a few years," says Wang. "We have patented it in Japan, the US, China, Taiwan and Vietnam. We can already produce small quantities for testing and have been discussing with potential customers its application."
Part of the use of proceeds will be to fund the growth of this business and research new products of a similar nature. However, Wang is reluctant to label the company as biotech for the moment. "A lot of people use the term biotech and don't really know what it means," says Wang.
The other engine of growth will obviously be China where the company will look to buy about 10,000 tonnes of MSG capacity per year. Wang is keen to stress that the company has already bought a French company called Orsan in 2001, which was based in Vietnam. It paid $2 million for this business (net of cash) and within two years doubled its capacity and got the entire amount of its investment back. "We want to apply the same model to China," says Wang. The company currently produces 25,000 tonnes in China per year.
Wang says the company has proven very aggressive on costs. The company has grown net margins from 6% in 2000 to 9% in 2002 through aggressive cost control, says Wang. The company's net profit for 2002 was $16.4 million.
However, one investor concern may be the relationship between the Taiwan parent (a conglomerate that also makes MSG as well as owning golf courses) and the listed entity. Wang says the companies have signed a territorial delineation agreement for non-competition in the MSG market, but corporate governance issues will inevitably crop up in meetings with institutional investors. Early indications were that it would be valued at 10 times profit. The deal is being lead managed by DBS Asia.
