"Maybe before this lawsuit, few people outside the industry knew about our 'small business' in Anhui. To some extent, the 337 investigation proves that 'small town youth' like us and 'rich and handsome' like Celanese are competing in the niche field." Recently, Jinhe Industry (002597) one of the actual controller, director Yang Le and Jinhe American responsible Ma Qing in the company's office on the third floor accepted the securities Times reporter interview.

Yang Le doesn't seem too stressed. The world's largest producer of acesulfame and maltol, based in the small city of Lai 'an, has been quietly leading the food additive industry in recent years: from Waha Ha to Coke, you can think of top domestic and international food and beverage manufacturers are its long-term customers.

But the US's latest case of 337 patent investigation against China has brought this "hidden champion" to the forefront. The United States International Trade Commission (ITC) officially decided on November 22 to launch a 337 investigation against three Chinese high-efficiency sweetener companies, including Jinhe Industry, in response to a lawsuit filed by companies affiliated with chemical giant Celanese.

Born in 1989, Yang Le once worked in the investment banking department of securities firms after studying in the United States. After that, he started his own business and established Lioptoelectronics (837808), which specializes in touch control and display industry, and is now listed on the New Third Board. In 2014, Yang Le took over the 23% equity of Jinrui Investment, the controlling shareholder of Jinhe Industry, from his father Yang Yingchun. Yang Yingchun, Yang Le and his son became the actual controller of Jinhe Industry, and Yang Le entered the board of directors of the listed company.

In this interview, in addition to the progress of the 337 investigation and the foreign market expansion plan, Yang Le also responded to the focus questions about the strategic transformation and the extension merger and acquisition of Jinhe Industry.

The 337 survey had little impact on the company's exports

"Jinhe did not copy the patent of Celanese. Our internal judgment is that this is a competitive means taken by Celanese to compete for market share, which will not affect the company's export in the short term." To initiate the 337 investigation, Jinhe Industry's response is quite confident.

This is the 19th 337 investigation involving Chinese products launched by the US this year. Under Section 337 of the U.S. Customs Act of 1930, the U.S. International Trade Commission can initiate investigations and impose sanctions against unfair practices in imports. At the end of October, Celanese filed a complaint to the ITC, claiming that Acesulmi products of Jinhe Industry and other three Chinese enterprises violated its valid patent No. 9024016 registered in the United States, and requesting the issuance of a general exclusion order and an injunction against high-efficiency sweetener products of Jinhe Industry and other companies.

In the view of Jinhe Industry, this is only expected to "boot landing". At present, Celanese has an annual acesulfamil production capacity of 3000 tons, which only reaches 1/3 of the capacity of Jinhe Industry. While benefiting from the advantages of cost and capacity, the cost of Acesulmi of domestic enterprises such as Jinhe Industry is far lower than Celanese, more cost-effective. Considering that most of Celanese's supply contracts with downstream customers will expire between 2018 and 2019, and the closing cycle of the 337 investigation is generally around 15 months, the timing of the "strike" is more likely to be a competitive means for Celanese to renew the contract after the expiration.

At present, Jinhe Industry has joined with other two domestic enterprises to actively respond to the lawsuit, and hired lawyer Gary Hnath, who has rich experience in such cases, to deal with the 337 investigation. Considering that there has been an industry standard for Acelhoney products in China since the late 1990s, and a large percentage of the products are exported, Gary Hnath's preliminary judgment is that there is still a good chance for Chinese companies to gain from the 337 investigation.

In 2008, Yancheng Jiekang won the sucralose 337 investigation case. At the very least, even assuming the worst, a loss would have little impact on the company's performance. Yang said the allegations of infringement were not about the product itself, but one of the manufacturing processes involved in making acesulfames. Acesulfamil's exports to the United States will not be affected during the investigation. Jinhe Industry can continue to produce acesulfamil products by changing the manufacturing process if necessary. In the first three quarters of this year, the company exported about 870 tons of acesulfamil products to the United States, accounting for only 12% of the company's total Acesulfamil sales, which contributed very little to the company's sales revenue and profit. The international food and beverage giants that the company has cooperated with for a long time are all multinational enterprises that carry out global procurement. Changes in the US market will not affect their procurement outside the US.

From the past performance, these years Jinhe industry overseas business development steady. Even after the EU decided to impose anti-dumping duties of 2.46 to 4.58 euros per kg on China's Acesulmel at the end of last year, the export revenue increased by 40% to 220 million yuan in the first half of this year, and the gross profit rate of export sales reached 38.62%.

According to Ma Qing, the person in charge of Jinhe USA, in addition to dealing with the 337 investigation, Jinhe USA will be responsible for the subsequent business of the whole Americas (including South America), and will expand all aspects of talent, and realize the complementary advantages of the domestic. At present, the penetration rate of Jinhe Industry Acesulmi in the whole overseas market has reached 60%-70%. In the next step, we plan to dig the overseas market deeply through the strategies of channel sinking, intensive farming and increasing value-added application services. In the past, the company's overseas sales department mainly connected with foreign large and medium-sized food manufacturers, and overseas small enterprises mainly connected with distributors. In the future, the company will have closer cooperation with overseas small and medium-sized customers, "bringing more professional food and beverage solutions to the vast number of customers in South America, Africa, the Middle East, Southeast Asia and other regions."

"Low sugar" brings sweetener industry new space

Generally speaking, Jinhe Industry's food additives tend to give priority to developing the international market, but in the middle of April this year, Jinhe Industry's annual output of 500 tons of sucralose just started to run at full production, in the domestic market is already in short supply. Data show that sucralose has risen from 220,000 yuan/ton at the beginning of the year to the highest 450,000 yuan/ton.

Among the main products of Jinhe Industry, Acesulfame is always considered to be the fourth generation of synthetic sweetener with good taste and safety. The newly added sucralose this year is the fifth generation of synthetic sweetener and the only sweetener with natural sucrose as raw material. Last year, Pepsi announced that it was ditching aspartame for its Diet line in the U.S. in favor of a combination of sucralose and acesulfame. In regular cola, high fructose corn syrup is commonly used.

To put it another way, this is a change in the food and beverage industry as the number of diabetes patients around the world rises sharply, consumers become more health-conscious and low-calorie. Food and beverage manufacturers are juggling the need to reduce the amount of sugar added and maintain the taste of their products, ditching calorie-dense traditional sugar and fructose in favor of functional sweeteners. In addition, many countries have launched "sugar tax", using new sweeteners to produce low-sugar, sugar-free products has become the general direction of the development of the global food and beverage industry, as "substitute sugar" sweeteners still have a great space for development.

And this is the development logic of Jinhe industry. Yang Le believes that in fact, the food additives used in China or the United States have gone through the certification process of the United States and China Food and Drug Administration. The negative health effects of excessive consumption of sucrose or fructose are far greater than the psychological panic caused by "substitute sugar". He believes that at present, it is mainly illegal to add substances that cannot be used as food additives, such as the former Sudan red, melamine and so on, affecting the reputation of the whole food additive industry.

The additives themselves, on the other hand, are survival of the fittest. In recent years, saccharin, cyclamate and other due to consumer concerns about safety, has been reduced by manufacturers, acesulmi and sucralose and other new sweeteners as an excellent substitute, is expected to gradually older generation sweeteners to tens of thousands of tons of market space.

Recently, Jinhe Industry launched a bond financing plan, planning to issue convertible bonds to raise 600 million yuan, of which 400 million yuan is invested in the project with an annual output of 1,500 tons of sucralose and 200 million yuan in the project with an annual output of 400 tons of pyridine salt. At present, the above two projects have been under construction, the annual output of 1,500 tons of sucralose project is expected to reach production by the end of March 2017, when Jinhe Industry will become the largest sucralose supplier in China.

Convertible bonds raised funds to invest in the annual output of 400 tons of pyridine salt project, is to break through the methyl and ethyl maltol products "ceiling". At present, Jinhe Industry is the world's largest methyl-ethyl maltol producer, with an annual production capacity of 4,000 tons, accounting for more than 50% of the global market share. Ethyl maltol is mainly used to enhance the flavor of food, but in recent years, with the change of residents' consumption habits and the saturation of the first and second tier catering and baking markets, it is difficult to sustain rapid growth in the long run. Using the advantage of methyl maltol as raw material, it extends downstream to produce intermediate pyridine salt of Pantoprazole, the third-generation new drug for the treatment of gastric ulcer, which is conducive to Jinhe Industry to further open the pharmaceutical intermediate market and expand the market scale down the industrial chain.

"The food additive industry has changed a lot in the past few years. Why can the company's mainstream products bet on the trend and become popular?" In the face of securities Times reporter's questions, Yang Le attributed the reason to the parents' keen observation, long-term research and development investment and the team's execution. "The chairman spends a lot of time researching and tracking the market and technology progress of new products. For example, he has always been optimistic about sucralose, but in the past decade, China has not been able to break through the complex production process of sucralose, low output per set and high production cost. After a long track and pilot trial, we felt ready to launch an industrial sucralose plant last year."

"Buy real money with real money"

Yang Le revealed that at the beginning Jinhe Industry is ready to develop sucralose through the form of acquisition. But after looking around, the company still decided to introduce technology and build on its own: "First, the company has an industrial chain layout from basic chemical industry to fine chemical industry, with good cost and management advantages; Second, the survey found that many enterprises in environmental protection facilities, management level, asset quality and so on are not satisfactory, it is better to do it by themselves."

This can also partially explain why Jinhe Industry, with stable performance and a debt ratio of less than 40%, has been relying on endogenous development to achieve growth since its listing in 2011. In the external merger and acquisition, in addition to once to 270 million yuan to increase the capital of Huertai Chemical, Jinhe Industry almost no action, since the listing also did not issue additional financing.

Chairman Yang Yingchun is in the prime of her life, and it may be too early to talk about full succession. However, Yang Le, who majored in finance and once participated in the mergers and acquisitions of securities and investment banks and IPO projects, has gradually taken charge of the investment and financing business of listed companies. He admits that now most of his energy is spent on researching various projects, and he also needs to "painfully learn the knowledge of chemistry, biology, materials and other aspects" to avoid the minefield of mergers and acquisitions.

"The shareholders of listed companies are paying real money, whether it is cash acquisition or through the issuance of additional shares to acquire the underlying assets." Apparently, Yang Le inherited his father's patience and prudence. "If it's a real deal, you have to buy something that brings real money. A lot of companies are overvalued or just 'fake growth' and we don't buy them just to tell a story."

The ideal M&A target is: the target company has a certain correlation with the main business of Jinhe Industry, the other side has core technology or resource advantages, and Jinhe can support the development of the target company in the market, channels, funds and other aspects, to achieve a win-win situation. Jinhe's vision is to become a "relying on chemical and biotechnology, for food and beverage, daily consumption, agricultural environmental protection, medicine and health industry customers continue to provide high-performance products", so the subsequent mergers and acquisitions will focus on these directions.

Data show that, benefited from acesulmi and sucralose and other fine chemical products price volume rise, basic chemical products price recovery, Jinhe Industry in the first three quarters to achieve a revenue of 2.57 billion yuan, profit of 350 million yuan, expected annual profit of 430-470 million yuan, handed over the listing 5 years of the best performance.

"Slightly more than expected." According to Yang Le, there is also an element of "chance" in the performance. Since the beginning of this year, a number of peer enterprises due to environmental protection, safety accidents and other reasons were forced to shut down, also pushed up the price of products. "Increasing environmental protection has brought about a reshuffle in the chemical industry. The current situation is, don't be afraid to spend money on environmental protection. As long as you can stay in this industry, you will make money."

(Editing by Fang Shuyan)