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Mitigate depletion of fish stock underpatent-pending biotech with automationLingnan (University) College, Deli Worm Inc. Confidential Jun. 20101．Executive summary1.1 Market opportunityFishmeal, the product of capture fisheries, is a food source for animals, widely used asdietary protein by the animal feed providers who mix the fishmeal with other ingredients andsell to the animal farms as the animal feeds. According to the UN's Food and AgricultureOrganization (FAO) in 2008 after conducting research for 3 years, “Up to 75% of the world'sfish stocks are fully exploited, over exploited or depleted.”1 FAO also predicted that if thetrend continues and nothing is done in the following 10 years, 90% of fish will be gone by2048.China, heavily depending on import for fishmeal, is the largest fishmeal consumerglobally, accounting for 40%2, out of which >70% is imported3. The fishmeal market inChina sizes 2 million tons or US$6 billion4. The shortage of supply has driven many animalfarms out of the fishmeal market, but the prices are still soaring.Chicken feed market, previously the largest fishmealwas crowded out of the fishmeal market 10 years ago. Thefarms have turned to plant protein instead such as cornsand beans, which are hard to digest for the chickens. Inorder to facilitate the growth of the chickens and toExhibit 1: Lifecycle of Houseflyprevent the casualties among the chickens, the chickenfarms use hormones and antibiotics, which are harmful to the consumers who eat them. Thedocumentary “Food Inc.” has expressed great concerns for the practices of chicken farmingindustry.1 Vidal, J.,2009: Pirate fishing causing eco disaster and killing communities, says report, from Environment (Fishing), Guardian, UK, 8 June 2009 00.05 BST (/environment/2009/jun/08/pirate-fishing-eco-disaster-report)2 Source: Jackson A., 2009: The continuing demand for sustainable fishmeal and fish oil in Aquaculture Diets, September/October 2009 Issue, International Acqua Feed, Perendale Publishers Ltd, United Kingdom.3 Source: Editorial – The situation and expectations of the Chinese Feed Industry, 13 Oct. 2008, Agricultural Economics4 Note: This is an estimated figure based on two sources: Editorial – Data of Chinese fishmeal import since 1999, China Feed Industry Information () Fishmeal import statistics since 2005, China Feed online ()1.2 ProblemsScientists have concluded that housefly worm (see exhibit 1, larva stage) is the ideal substitute for fishmeal5. Some Chinese farmers manually rear housefly worms with manure for their own use since 1980s. But low yield (10kg/day) and contamination (bacteria on the bodies of the worms from the manure) have left the mass production of housefly worms unachievable resulting in the over dependence of the animal farming industry on fishmeal for dietary protein in the marketplace.1.3Deli Worm SolutionsDeli Worm Inc. has successfully solved the contamination and low yield problems with worm farming, which have puzzled the scientists for more than 40 years and thus will be the 1st mover to mass product live organic worms. We have 3 pending patents plus trade secrets with custom-designed automation system to run the production. The theoretical capacity is 100 tons/day. We use wheat bran instead of manure to eliminate contaminations and facilitate the mass production.We have run a test plant in Zhanjiang producing 100 kg/day with three partners, the most prominent of which runs total 20-hectare ponds of prawns, selling all to exporters. By using our worms, they managed to increase the survival rate from 60% to 80%, resulting in an increase of US$700,000 revenue in 2 years. More farms are on the waiting list. The initial demand from these farms could total >15 tons/day.The major advantages of live organic worms over fishmeal are the rich content of antimicrobial peptides, the natural antibiotic substances inside the worms, which can help the farmed animals to strongly resist infectious diseases; and the living organism that are essential for all the farmed animals, on which the animals can grow faster and larger.1.4 Market AnalysisOur target market sizes 6.4 million tons yearly, including 5.7 million tons for chicken and 5 Reference: 1) Calvert et al, 1971: Biodegraded hen manue and adult houseflies: Their mutritional value to the growing chick.. P. 319-320. In Livestock Waste Management and Pullution Abatement, Proc. Internat. Syrup. Livestock Wastes, Columbus, OH; 2) S. Sophie et al 2007, Fly prepuae as a feedstuff for rainbow trout, Oncorhynchus mykiss, from Journal of the World Aquaculture Society, Vol. 38 page 59-67, Mar 20070.7 million tons for prawn 6. If we take the current market price of fishmeal US$3000/ton as our benchmark, we are addressing a market of US$19 billion with 15% annual growth in China alone.We will first penetrate into the prawn feed market, since the prawn feed contains up to 40% of fishmeal and many farms do not have stable access to qualified prawn feed due to the shortage of supply. Besides, we have soundmarketing ground in Zhanjiang, the largestprawn production base in China, accountingfor 21% of the total national output.As for the chicken feed market, Chinaproduced 11.4 billion chickens in 2007 with15% annual growth. We aim to replace theadditives including hormones and antibioticswith 5g live worms/chicken day in average, which amounts to 6.4 million tons a year. The chickens fed by live organic worms instead of hormones and antibiotics, are recognized as “organic” chickens, enjoying 200 - 300% premium prices in the marketplace.Exhibit 2: Market Analysis (tons/day)We will aim at the high-end large prawn and chicken farms in south China, where 100% prawns and 1/3 of the chickens are produced every year. The highly concentrated market helps us to save the marketing expenses.1.5 Marketing StrategyWe will adopt a 3-phase marketing strategy by establishing 2 plants in 5 years, mainly to target the potential customers shown in the above exhibit 2; under the following roadmap (see exhibit 3). The total daily need of our target customers is 561 tons (see exhibit 2). We only6Source: Editorial – Zhanjiang Prawn Farming Industry Research Report, Issue 18, April 2009, Journal of Guangdong Feed; Li G, 2008, Analysis on the 2008 Chinese Feeding and Feed Market, Journal of China Poultry Introduction, Issue 9 - 2008.need to sell 37 tons daily or to capture 6.6% of the total demand from the target customers to actualize our entire 5-year budget.Phase 1 plant will be built in Zhanjiang,where our test plant was located; targetingZhanjiang prawn feed market for export.Phase 2 may involve an expansion of theZhanjiang plant to target Zhanjiang prawnfeed market for domestic consumption,Hainan to the south and Guangxi to thewest. Phase 3 will start in early 2013,when we are to build plant 2 close to one of the chicken farms of the potential customers.This plant will be serving the chicken farms to replace the additives in the chicken feeds. Exhibit 3In order to fulfill our marketing plan, we are going to promote a free sample distribution campaign, which invites the interested parties to apply for a 9-week free sample trial at 10 kg/day. We shall select potential customers from the application pool. From the trial users, we may select half as our customers. This sample distribution system will be an on-going program along the 5 years of operation.1.6 Competition and RisksWe may have followers and imitators when the business goes profitable. Yet, in order to serve the large-scale prawn farms or chicken farms, the primary requirement is to ensure every worm to be of the same length and weight, which is impossible without our patented technologies and automated production systems. If the followers want to develop their own technology, it will well take minimum 4 years to accomplish.Fishmeal importers and feed manufacturers may also like to enter into this market. But they want to ground the live worms into powder so as to mix with other ingredients, which involves raising the worms with manure. Yet, no research has been started in mass producingworms with manure.Some researchers are trying bio-generic worms, which are larger in size and don’t fly much. But the safety of bio-generic worms is under skepticism.1.7 Company and Management TeamDeli Worm Inc., aiming to mitigate depletion of fish stock by building “green” plants of live worms, will be managed by a group of MBA candidates of Sun Yat-sen University and will be supported by the advisory board, Guangdong Entomology Institute (GEI) – the patent owner.Dr. Ri-chou Han, the chief advisor, is also the chief designer of the patents as well as the president of GEI. He has 30 years experience in the insect research field and is a PhDadvisor of Sun Yat-sen University. Yuewen Qu (Wendy), CEO, has 7-year entrepreneurial experience. All the management team members have years’ managerial experience in their specialized fields with multinational companies.1.8 Financial HighlightsOur net profit will be 55%. The breakeven will fall in the 18th month. (See the chart below).Financial Briefing -2040608020112012201320142015M i l l i o n s Year U S $Total Revenue Net Profit IRR remains positive even if revenue drops by 92.8%; sales price reduces by 47%, or material cost increases by 285%.1.9 Offers and ExitWe seek investment of USD1.5 million in exchange for 33.3% stake, aiming to yield NPV US$40million (discount rate 12%7) and IRR 190% in 5 years. GEI and themanagement team will equally share the remaining 66.7%. Within the management team, the 33.35% equity will be allocated below.7 Chinese State Development and Reform Committee and Construction Ministry, 2006: Parameters for Investment Projects in China (7% cashdiscount rate was the official index for culturing industry, but 2008 new tax laws make the investment more profitable. So, 6% is used for this reason. Plus the expected extra inflation rate 6%, the eventual discount rate is 12 %.)CEO (Yuewen) VP HR(Yanzi)VPOperations(Jingjing)VP sales andmarketing(Lingjing)Subtotal16.40% 5.65% 5.65% 5.65% 33.35%The uses of the fund are listed below (left). We may choose to go for IPO as an exit strategy; the projected enterprise value will be US$329 million8 (below right).Item USD(‘000)% offundprojected enterprise value in2015USD(’000)Rental, Plant and equipment 1,101 72%Projected Yearly Net Profit 39,970Office set-up and expenses 100 7%Valuation Multiple (P/E ratio)10Marketing and sales 99 6% Sub total 399,704 Working capital 219 15% Adjustment: Cash 70,853 Total 1,519100%Projected Enterprise Value 328,851 8 The Valuation Multiple in the Chinese stock markets is more than 15 in average。