Durian, dubbed The King among all tropical fruits, has found a growing legion of fans in temperate China. Having tried different varieties of the fruit &mdash from &ldquo Musang King&rdquo to &ldquo D24&rdquo to &ldquo Golden Pillow &mdash during their holidays to Southeast Asia, many Mainlanders have acquired a taste of it.

 

According to United Nations data, China imported US$2.3 billion ($3.1 billion) worth of durians in 2020, a fourfold increase from 2017. And unfortunately for durian lovers in the region, demand from China for durians is expected to rise and rise, sending prices skywards.

 

In addition, out of China&rsquo s 1.4 billion population, less than 10% have tasted the thorny fruit so far, according to Cheng Meng, CEO of listed company NutryFarm, which wants to make the export of durians to China as its new key business.

In its annual report for FY2020 ended September 2019, NutryFarm&rsquo s chairman Terence Luk said that due to current travel restrictions amid the pandemic, several big Chinese companies have asked local fruit importers to help source for the fruit.

 

&ldquo While the current trading contracts are opportunistic, the group believes that it is a sustainable business with the demand of the Chinese market. As such, the fruit-trading business is a new business opportunity to counter the current state of the nutrition business and the failed venture into the internet business,&rdquo explained Luk.

 

Before adding the durian business into its repertoire, NutryFarm was solely in the business of distributing healthcare supplements in China. But the industry came under intense scrutiny from the Chinese government and regulations were tightened. This led to stunted growth, forcing the company to look for new businesses.

 

This diversification into durian exporting came on the back of Cheng becoming a substantial NutryFarm shareholder after he and another investor Alex Loo subscribed to new shares at four cents each in a placement exercise, raising $720,000 for the company. Cheng&rsquo s 13.3 million shares gave him a stake of 11.5% while Loo&rsquo s 5.7 million shares made him a 4.9% owner.

Cheng, 32 years&rsquo old, was first made a non-executive director in November 2020 and took on the CEO role three months later. A 

Chinese national, he has the right background and experience to drive this new business.

 

Eight years ago, Cheng made his acquaintance with durians in Thailand when he was an engineer. Seeing how interest in the fruit was growing back in China, Cheng, whose family is also in the fruit trading business, decided to try his hands at exporting the fruit from Thailand to China.

 

Thorns of the durian trade

 

At first, Cheng thought the business was an easy one: just buy durians, send them to China and sell them at a big mark-up. However things didn&rsquo t work out and he found himself in debt when the business chalked up losses.

 

But rather than falling back on his engineering job, Cheng chose to double down. &ldquo I did what I needed to do and left that career to focus on the durian trade and do right by it,&rdquo he tells The Edge Singapore.

 

Cheng visited durian farms in Thailand, picked up Thai so he could communicate better with his suppliers and learn the ropes of the business. &ldquo Technical knowledge is important when dealing with fresh produce and this serves as a key barrier to this industry,&rdquo he says.

 

NutryFarm&rsquo s latest 2QFY2021 ended March was its first quarter which saw contribution from its durian business. The company&rsquo s fruit business contributed HK$27.9 million ($4.9 million) in revenue, representing more than half the quarter&rsquo s total revenue of HK$41.0 million. With this new contribution, the company also managed to record earnings of HK$457,000, compared to HK$5.0 million in losses a year ago.

 

Since FY2018, NutryFarm has recorded consecutive full-year losses and although the company is not completely out of the woods yet for FY2021, Cheng says, &ldquo Our health supplement business will still remain because I do see some positive outlook as we get used to the new regulations in China. The profit margins are also healthy. So, in the coming few years, our durian business will be our growth driver due to its popularity in China and higher sales volume.&rdquo

 

&ldquo I expect revenue to increase in 3QFY2021 as we fulfil more durian orders,&rdquo adds Cheng, as the company on June 18 announced that is has fulfilled its obligations to Shanghai Yuqu Trading for the purchase and shipment of 180 containers of fresh durians amounting to some RMB117 million ($24.4 million).

 

As of June 15, NutryFarm has shipped 227 containers of Golden Pillow durians from Thailand to China Railway Production Control (Chengdu), The lot represents about 38% of the 600 containers committed from March 1 to Dec 31. On June 21, NutryFarm secured new sales orders of about RMB195 million from Moonda (Beijing) Agriculture Science and Technology for 300 containers of fresh durians from Thailand.

 

In an unrated report by KGI on July 9, analyst Megan Choo likes NutryFarm for its durian diversification and believes this may be a chance for the group to turn around earnings as the new durian business largely boosted 2QFY2021&rsquo s results. Choo noted that revenue for the second quarter came in at an &ldquo outstanding&rdquo HK$40.9 million, almost equivalent to full-year revenue for FY2019 as well as full-year FY2020&rsquo s annualised revenue.

 

Correspondingly, shares in NutryFarm have risen some 2.63% year to date to close at 39 cents on July 21. This gives the company a market capitalisation of $45 million.

 

Have your fruits in more than one basket

 

With this growth momentum, NutryFarm is stepping up a gear by forming new ventures. It recently entered into a JV agreement with local durian retailer, Kong Jun Durian to expand its durian business in Singapore. Under the JV, NutryFarm will supply the pre-packaged durians and Kong Jun will leverage its strong retail experience and extensive sales channels to sell the fruit.

 

Kong Jun was founded by Ang Seck Puan who has over 50 years of experience trading fruits. His son, Joseph Ang, who is also managing director of the JV company tells The Edge Singapore, &ldquo There is a huge market for durians in Singapore. Cheng and ourselves decided that we should launch pre-packaged frozen durians, so that during the off-peak seasons, consumers can enjoy durians from Thailand and Malaysia every day.&rdquo

 

According to Joseph, the JV company has already started harvesting the fruits and packaging them. They intend to &ldquo capture the market as soon as possible&rdquo and will be launching the products on e-commerce platforms and supermarkets. The duo intends for their product to launch some time in September, just after the durian season is over.

 

Ultimately, the JV plans to bring these pre-packaged frozen durians to China. &ldquo My father&rsquo s reputation for his durians have definitely spread to China,&rdquo claims Joseph. &ldquo Before Covid-19, many tourists from China sought my father for vacuum-packed durians to bring back to China. Since Cheng also acknowledges our presence in China, we do target for our durians to enter the China market,&rdquo adds Joseph.

 

Apart from this joint venture, NutryFarm has also secured a sole distributorship of Malaysia&rsquo s DKING&rsquo s Musang King frozen durian pulp in Singapore for a period of two years from June 24.

 

Naturally, Cheng is positive that demand for durian in China will keep growing. To capture this expanding market, he has already drawn up a two-phase plan. First, NutryFarm will focus on building its brand in the durian market. And, if all goes well, Cheng will next expand its range of fruits and enter new markets. Cross-trading is also in the books, as Cheng hopes to bring fruits from China into Singapore.

 

&ldquo Personally, I believe that there is high growth potential in this business. I would like to establish NutryFarm as a leading player in the region. Once that platform has been established, we can move on to offer other varieties of fruits and export to other countries such as the US,&rdquo says Cheng.

 

Thailand, with its abundant fruits, is known in China as the " Kingdom of Fruits&rdquo . Durian, a fruit produced in Thailand known as the " King of Fruits" , is sought after by Chinese consumers. According to the Department of Trade Negotiations (DTN) of Thailand, thanks to the Free Trade Agreement between the two countries, durians from Thailand are still the leader in the Chinese market. The Director-General of DTN said that in the first quarter of this year, durian exports to China from Thailand amounted to 5.8 billion baht (US$186 million), showing a year-on-year increase of 14%. Last year, durian exports to China were US$1.5 billion, showing an increase of 78% over 2019.

 

Yu Haiqiu, Director and Researcher of the Thailand Institute of the China (Kunming) Institute of South and Southeast Asia, said that in recent years, Chinese consumers&rsquo love for durians has grown. In the shops that specialize in imported fruits, durians are the top-selling product Among the various bakery products, durian flavored products are the most expensive and the most popular. Although many countries in Southeast Asia produce durians, to most Chinese consumers, the country that comes to their mind when thinking of durians is Thailand. There are many varieties in Thailand, but Chinese consumers are most familiar with MonThong.

 

In recent years, there has been an increasing supply on the Chinese market and their prices have soared. The price of a general-grade MonThong durian generally costs about 200 yuan per half a kilo. According to industry analysts, there are a few reasons for the increase in prices. First, the number of people willing to taste durian, a fruit with a unique smell, is increasing, and the number of repeat customers is also increasing. Secondly, farm gate prices continued to rise. Although Thailand has expanded its planted area in recent years, it usually takes 5-6 years for trees to bear fruit, and the market is currently in short supply. Moreover, there are more and more products that use durian as an ingredient, making the shortage of fresh fruit more prominent. In the past, when fresh durians were on the market, consumers had access to them but for a limited time. Now, the variety of durian products makes up for this. Processing technologies such as freeze-dry have been continuously improved so that dried fruit can also retain the flavor.

 

Although durian prices keep rising and durians from other Southeast Asian countries have also made their way into the Chinese market, Thai durians still remain the No.1 spot. Yu Haiqiu said that if Thai fruit traders want to further strengthen their ties with the Chinese market, they need to pay attention to several issues. Firstly, they need to ensure quality. During the growing process, they need to pay attention to environmental protection, and should not use chemical fertilizers, oxytocins, and ripening agents against the regulations. Secondly, they need to ensure that the entire process complies with international laws and regulations, such as the use of labor. " Of course, the Chinese market should also have a sensible consumer attitude towards Thai durians and not blindly raise farm gate prices.&rdquo Yu Haiqiu pointed out.

 

According to the Vice President and Secretary-General of the China-Thailand Chamber of Commerce, Thai durians account for more than 90% of the market share of all imported durians, making China the largest export market for Thai durians. Thai fruits are mainly imported through southern China, especially the Guangdong market, followed by markets such as the Yangtze River Basin and Shandong.

 

Turnaround from Durian. In 2021, the group entered the durian distribution business to sell Thailand-sourced durians into China. This largely boosted 2QFY21&rsquo s results with revenue at an outstanding HK$40.9mn, almost equivalent to full year revenue for FY2019 as well as full year FY2020&rsquo s annualized revenue. The group managed to pivot into profits of HK$0.46mn in 2QFY21 compared to losses of HK$5.0mn in the prior year. Before 2QFY21 when the durian business took off, the group recovered slightly in 1QFY21, with losses reduced to HK$0.96mn from HK$3mn in the prior year.

 

Tapping on China&rsquo s love for durians. According to the Ministry of Agriculture and Cooperatives of Thailand, the Chinese appetite for Thai durian remains strong despite the coronavirus pandemic. China imported 575,000 tons of durians worth RMB14.7bn (US$2.2bn) from Thailand in 2020, up 78% YoY. China was the top export market for Thailand in 2020 and this continued to grow in 2021. According to Kasikorn Research Center, in the first 5 months of 2021, Thailand saw its fresh durian exports total US$1.8bn, up 45.2% YoY. This was attributable to the robust export growth boosted by the strong demand from the Chinese market.

 

3QFY21&rsquo s top line expected to grow. Given the strong demand in 2QFY21, Nutryfarm fulfilled and secured more orders in 3Q21. The company recently fulfilled its obligations to Shanghai Yuqu for the purchase and shipment of 180 containers of fresh durians amounting to RMB117mn. It has also secured an additional sales agreement with Moonda of approximately RMB195mn for 300 containers of fresh durian. With healthy demand from China, we expect 3QFY21 sales to increase.

 

Nutryfarm&rsquo s experience and track record. China&rsquo s top e-commerce platform, JD.com recently entered the durian business in 1H21. Despite JD&rsquo s big branding, Nutryfarm has a greater competitive advantage given that their new CEO, Mr Cheng, has approximately 7 years in the durian trade. This experience has helped to ensure the group&rsquo s quality of durians.