Industry overcapacity and slow transformation.
On July 2, 2025, the National Health Commission officially approved Cofco Biotechnology Co.,Ltd. (000930.SZ)'s self-developed enzyme production process for allulose as a new food ingredient, making it the first company nationwide to receive such approval.
Following the approval announcement, the company's stock price rose slightly due to this sugar substitute concept.
Cofco Biotechnology Co.,Ltd. is a listed company under COFCO Group, which is 100% controlled by SASAC. Looking back at performance over recent years, the company earned over 1 billion yuan in profit annually during 2020-2021, but suddenly reported losses of over 600 million yuan in 2023. Why such a dramatic change?
Losses continued into the first quarter of this year. Why has performance remained weak for so long?
This reflects both industry overcapacity factors and the company's slow transformation.
**Corn Deep Processing: A Microcosm of Chinese Manufacturing**
**(1) Severe Industry Overcapacity**
Cofco Biotechnology Co.,Ltd. operates in the corn deep processing industry, which suffers from serious product homogenization and overcapacity: In 2023, China's corn deep processing capacity reached 120 million tons, with actual corn processing volume of approximately 76 million tons, representing an average capacity utilization rate of only 63%.
Corn deep processing products are mainly corn starch. China is the world's largest corn starch producer and consumer. According to China Starch Industry Association data, China's corn starch output was 37.81 million tons in 2022. Cofco Biotechnology Co.,Ltd. ranked 9th with 1.36 million tons output, accounting for 3.6% market share.
However, the corn starch industry structure is very fragmented with low concentration that needs improvement. The industry has entered maturity and even shows severe overcapacity.
In 2023, overcapacity in the corn processing industry triggered fierce market competition. Downstream demand recovery fell short of expectations, forcing companies to halt or limit production. Bulk product prices declined, and industry profitability hit historical lows. Cofco Biotechnology Co.,Ltd. also suffered major losses that year, with gross margin dropping to only 5.51%.
**(2) Complete Industrial Chain**
Overall, Cofco Biotechnology Co.,Ltd. has established a complete "corn-starch-glucose-alcohol, MSG, organic acids" industrial chain. Simply put, the company uses corn as main raw material, processing it into food and food ingredients, bioenergy, and biodegradable materials, divided into three main businesses:
(1) "Alcohol and byproducts" including fuel ethanol and edible alcohol, accounting for 49% of 2024 revenue; (2) Starch, starch sugar, MSG, citric acid, etc., also accounting for nearly half of revenue; (3) Biodegradable materials based on polylactic acid (PLA) and polyhydroxyalkanoates (PHA) renewable materials and products production and development, which has not yet generated revenue.
Businesses (1) and (2) are mature, low-margin operations with limited growth potential, while business (3) has been repeatedly delayed in achieving production success.
**Alcohol Industry: Difficult Transformation Under Overcapacity**
**(1) Fuel Ethanol's Downstream Customers are Oil and Gas Companies**
Fuel ethanol has the highest proportion in the alcohol industry: In 2024, domestic alcohol consumption was approximately 8.5 million tons, including 3.3 million tons of fuel ethanol, 1.6 million tons for liquor, 2.45 million tons for chemicals and pharmaceuticals, and 1.25 million tons of anhydrous ethanol.
Apart from emergency production of medical and disinfectant alcohol during the sudden 2020 pandemic, fuel ethanol has always been the company's main alcohol product.
Theoretically, fuel ethanol can completely replace gasoline, but in practical applications it's usually mixed with gasoline. Domestically, about 10% is added, while the US and Brazil use higher proportions up to 40%.
Therefore, the company's top two customers for years have been PetroChina and Sinopec.
If oil prices increase, it benefits Cofco Biotechnology Co.,Ltd. for two reasons: first, fuel ethanol product prices rise as a gasoline substitute; second, oil and gas companies increase substitution ratios.
**(2) Non-grain Biomass Fuel Transformation**
The core problem facing Cofco Biotechnology Co.,Ltd. is severe overcapacity in both the alcohol industry and fuel ethanol:
(1) Alcohol industry: Demand side saw 2024 domestic annual consumption decline year-over-year, while supply side experienced rapid expansion of coal-based ethanol capacity over three years, reaching 2.5 million tons capacity, already accounting for 30% of total demand, bringing impact to traditional alcohol industry;
(2) Fuel ethanol: In 2023, domestic fuel ethanol capacity was 5.875 million tons, but total demand was only 3.76 million tons, with output of only 3.72 million tons, representing a capacity utilization rate of just 64%.
Facing such industry difficulties, the company can only seek breakthroughs by adjusting product structure, such as expanding high-end alcohol, high value-added and small-package alcohol product markets, particularly cellulosic ethanol layout using non-grain raw materials.
The company has mastered related technology, owning a 500 tons/year cellulosic ethanol pilot plant in 2022 with industrialization technical conditions.
However, large-scale industrial production of cellulosic ethanol remains distant due to higher costs than corn alcohol, including reasons such as cellulose being harder to break down into sugar than starch, higher collection and transportation costs for raw materials like straw, and higher equipment investment and production costs.
**Other Industries: Making Do in Limited Space**
Besides alcohol products, Cofco Biotechnology Co.,Ltd. also produces starch and starch-based products including high fructose corn syrup, maltose syrup, maltodextrin, specialty new syrups, modified starch, MSG, citric acid, etc.
Corn starch and MSG are mature industries with low gross margins and oversupply, offering little prospects. Starch sugars (high fructose corn syrup, maltose syrup, maltodextrin) are slightly better with some varieties still growing, but gross margins are also single digits.
Only some small directions show potential, such as certain starch sugars (high fructose corn syrup, flavored specialty new syrups), citric acid, and functional sugars.
Citric acid has the highest product gross margin at 31.66% in 2024. Domestic capacity has reached 120,000 tons, with another 36,000 tons being expanded in Thailand in 2025.
Functional sugar allulose just received production approval on July 2. Its sweetness and taste are similar to or close to sucrose, with only 70% of sucrose's calories, serving as a healthy sugar substitute.
**Biodegradable Materials: Early Start, Late Arrival**
The most promising growth highlight business is biodegradable materials, mainly PLA and also PHA, extending from the corn starch industrial chain, such as "corn-starch-sugar-lactic acid-lactide-polylactic acid (PLA)".
Unfortunately, while Cofco Biotechnology Co.,Ltd. planned this early, results have been elusive.
**(1) Polylactic Acid Project Progress**
In 2019, the polylactic acid raw material polymerization production line successfully completed trial runs, providing 30,000 tons/year polylactic acid and products production capacity.
In September 2021, the company announced plans to invest in building a 30,000 tons/year lactide project in Wukeshu Economic and Technological Development Zone, Yushu City, Jilin Province, with an expected construction period of 2 years.
However, this project is far overdue. In 2025, the company relocated the project from Yushu City, Jilin Province to COFCO Industrial Park in Bengbu, Anhui, with an expected construction period of 18 months, citing proximity to polylactic acid production bases and East China and South China sales regions.
Meanwhile, competitors like Hisun Biomaterials and Fengyuan Biotechnology have been building capacity rapidly, already generating significant revenue and expanding scale.
The polylactic acid industrial chain will likely soon face overcapacity. By the time Cofco Biotechnology Co.,Ltd. enters, there may be little market space to capture.
**(2) PHA Project Progress**
Like PLA, PHA (polyhydroxyalkanoates) is also a new biodegradable material, typically produced through genetic engineering strain construction and biological fermentation technology synthesis, capable of replacing most synthetic plastic applications.
In August 2021, the company began building a 1,000 tons/year PHA pilot plant and process optimization project (Phase I). In 2022, it completed a PHA demonstration plant and successfully conducted trial runs. The company is also increasing R&D efforts in PHA and PLA blend fiber technologies, but none have achieved successful production yet.
**Conclusion**
The entire corn processing industrial chain that Cofco Biotechnology Co.,Ltd. operates in - "corn-starch-glucose-alcohol, MSG, organic acids" - sees most products facing overcapacity, including corn starch, starch sugar, alcohol including fuel ethanol, and MSG, leaving only small improvements in niche segments.
While there are some growth highlights (such as citric acid and functional sugars), they cannot help overall revenue scale, and the company's gross margin remains too low. The major changes the company is striving for show no near-term results:
(1) Shifting fuel ethanol raw materials from grain-based starch ethanol to non-grain cellulosic ethanol is difficult to achieve industrialization in the short term; (2) Biodegradable materials projects progress too slowly, and by the time they're ready, the market will likely be highly competitive.
Over the past two years, transformation has been the key word for Cofco Biotechnology Co.,Ltd., but this transformation path remains too difficult for the company.
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