Significantly lowered half-year performance, Zhengda Seed Industry heavily relies on distribution channels

Backed by the Thai billionaire Xu family, Xiangyang Zhengda Seed Industry Co., Ltd. is pushing hard to list on the Beijing Stock Exchange. As a seed-industry leader controlled by CP Group with voting rights of over 60%, the company has deep roots in its regional布局. However, its strong shareholder background has not dispelled external concerns about its underlying data quality. Its operating metrics also show characteristics that differ from those of typical industry peers.

In the latest financial data, an abnormal accounting adjustment has drawn market attention. Zhengda Seed Industry’s revenue depends on distributor channels for nearly 100% of its income. Yet during the preparation of its interim report, it once-off reduced net profit for the first half by more than 25% because it had a serious misestimation of the scale of cross-period returns. This downward revision of profits driven by subjective estimates exposes the fragility of its inventory checks.

Profit relies on “forecasting”

Large-scale profit revisions expose a company’s fragility in channel control and accounting foundations. Zhengda Seed Industry states that “agricultural seed sales are extremely easily affected by uncontrollable factors such as local weather and plant diseases and insect pests.” Since its distributor network is widely distributed, data collection on end-customer return rates is severely lagged. The company’s early financial recognition relied heavily on management’s subjective estimates. Even only in the first half of 2025, the deviation in relevant accounting estimates affected the net profit amount by more than RMB 4 million.

Image source: Zhengda Seed Industry performance correction announcement

A business model that over-relies on a single channel is the core factor behind the above financial risks. In its replies to the inquiry, Zhengda Seed Industry previously said, “From 2022 to 2024, the proportion of transactions with non-legal-person customers was around 70%, and sales by individual customers accounted for more than 60%.” To capture the spring sowing market, channel partners typically advance large-scale stock-ups in the fourth quarter of the previous year; this model can mask the true digestion capacity.

The existence of a return mechanism was originally intended to share downstream risk of overstock and unsold inventory, but it has instead amplified the intensity of financial volatility in the opposite direction. In the exchange’s review and inquiry, it pointed out that “the actual return rate surged from 8.23% to 13.84%,” and the amount of returns also increased sharply. When farmers face large-scale extreme droughts or floods, their actual sown area will shrink rapidly. Seeds that are not consumed will be returned to the company through the circulation network. In this multi-month circulation cycle, the potential scale of returns is sufficient to pierce the original expectations.

A large reduction in profit not only hits surface-level performance, but also hits asset quality during the company’s expansion phase. Hong Jie, a certified public accountant, told the reporter from Jiemian News that “there is an inherent link between the logic used to accrue inventory price-loss provisions and the actual return situation. When a large volume of cross-period returns floods into the warehouse, it will not only directly reduce current-period revenue, but will also trigger a new round of impairment testing.”

Generally, when the vitality of some out-of-season seeds declines, they can only be treated as price reductions for commodity grain, and the extent of value shrinkage typically exceeds 30%. Because feedback from the channel side is not smooth, it is likely to weaken Zhengda Seed Industry’s underlying asset quality, thereby exacerbating pressure on the funding side.

Funding turnover pressure

The matching degree between long-cycle seed production and sales determines the working-capital occupation characteristics of seed industry companies. Zhengda Seed Industry says that “corn seed production and sales have significant seasonal characteristics; in a normal production and operating cycle, the timing of product sales is clearly delayed relative to the timing of seed-production procurement.”

Because the seed-production stage is moved forward significantly, the company must plan in advance each spring and pay seed-production fees, then shift to processing and the sales season after harvesting in autumn. For FY 2024, Zhengda Seed Industry’s seed production costs for self-operated varieties reached RMB 165 million; for FY 2025, the self-operated seed-production acreage was 47,800 mu. In a long-cycle, heavy-asset turnover model, the company is required to maintain sufficient cash reserves even when sales at the terminal are blocked.

Fluctuations in capacity utilization indirectly reflect the risk of a mismatch between supply and demand rhythms. Data show that from January to June 2025, Zhengda Seed Industry’s total output was 2,763.96 tons, and “capacity utilization was only 18.43%,” which is clearly lower than 59.94% for the full year of 2024.

This is mainly attributable to an industry commonality where processing periods are concentrated in the fourth quarter and the first quarter of the following year, but the company’s fixed costs and depreciation continue to be incurred. In addition, from January to June 2025, the net cash flow from operating activities of Zhengda Seed Industry was -RMB 44.18 million, indicating that during a phase where a sales receivables collection off-season overlaps with the return settlement period, the company’s daily operating working capital faces objective outflow pressure.

Unsold products during the variety iteration process directly reduce inventory turnover efficiency. In FY 2024, except for core authorized varieties, sales and revenue for some authorized operating varieties showed contraction. Zhengda Seed Industry explained that the Zhongtai 206 variety “suffered large-scale rust during planting and promotion in 2023, leading to poor product performance, which reduced market acceptance; and there were many returns during 2024 as well.”

Accumulation of inefficient varieties in inventory not only raises warehousing costs, but may also drag down overall gross margin through price-cut handling. Although in the first half of 2025 the company’s gross margin rebounded to 48.39% due to factors such as lower seed-production costs in the prior period, if subsequently there is no effective handoff from new, high-gross-margin varieties, the process of clearing inventory through price reductions will still compress the overall profit space.

The intensity of R&D spending determines a variety’s lifecycle. From FY 2022 to January-June 2025, Zhengda Seed Industry’s R&D spending as a proportion of operating revenue was 7.04%, 5.70%, 5.37%, and 11.01%, respectively. Although the proportion rebounded somewhat, the absolute amount of R&D expenses for January-June 2025 was also only RMB 9.8585 million.

For Zhengda Seed Industry, in order to maintain long-term market competitiveness, it must sustain high-intensity R&D investment in new plant varieties.

Market structure is fragmented

In horizontal comparisons within the same industry, the Jiemian News reporter found that Zhengda Seed Industry’s operating scale is relatively small, leaving limited buffer space to withstand systemic risks. Based on calculations from the prospectus, in FY 2024, the company’s overall market share for seed products was about 1.13%.

Constrained by the current situation of China’s seed industry having “low concentration and a relatively dispersed competitive landscape,” Zhengda Seed’s gross margin fluctuates significantly across different regions.

Image source: Zhengda Seed Industry prospectus

Zhengda Seed Industry’s annual seed-production acreage has long stayed above 40,000 mu. For stable production capacity delivered each year from the seed-production side, actual orders must be found in the terminal market. However, because of changes in local agricultural policy orientation (for example, in some areas of Yunnan, promoting switching to cash crops such as sugarcane) or the impact of regional droughts, farmers’ actual corn planting area may suddenly shrink. A sharp drop in such front-end demand is quickly transmitted upstream, causing channel partners’ inventories to be unable to be digested.

Against a backdrop where stock-holding games intensify, defensive promotion often comes at the cost of giving up some profit space. When the industry enters a cycle of supply exceeding demand, passive inventory reduction becomes a realistic pressure for companies. To seize market share in fiercely competitive regions, the company must continuously increase the promotion efforts and channel incentives for new varieties such as Zhengda 3310 and Zhengda 506.

Zhengda Seed Industry also said that if it “cannot occupy or continuously expand market share, it may lead to a decline in market share of the company’s main products and a decline in product prices.” Regional distributors have a clear upper limit in their ability to withstand product backlogs; during periods when demand is weak, the growth logic driven solely by pushing out more inventory appears extremely fragile.

In the short term, a business model that relies heavily on distributors is the biggest risk at the operational level of Zhengda Seed Industry.

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Responsible editor: Wei Zirong