Deal focus: Navis pursues durian farm modernization

Pizza Hut introduced a durian topping in its China-based restaurants more than three years ago with a view to capitalizing on local cravings for the Southeast Asian fruit. However, the small-scale farmers that account for the bulk of Malaysia’s durian output have always struggled to break into mainstream buying channels operated by Yum Brands and other quick-service restaurant groups.

“Upstream, all you have are smallholders with plantations of 5-10 acres who sell at the farm gate to traders and smaller factories that do processing,” says Nick Bloy, a managing partner at Navis Capital Partners. “There is massive demand from China – not enough durian is grown to satisfy it – yet the current industry structure cannot provide what large Chinese buyers want in terms of guaranteed volumes, traceability and product verification.”

Navis has responded to this demand-supply mismatch by planning Malaysia’s first large-scale integrated durian farming operation.  It has pledged to invest MYR400 million ($95 million) in the expansion of existing local processor Hernan Corporation and the acquisition and cultivation of up to 10,000 acres of new plantations. The upstream portion of the transaction – a joint project with a Malaysian partner – is expected to close in the next month.

Hernan was established in 1996 as an exporter of Malaysia-made goods, chiefly fruits, snacks, and desserts. It started shipping frozen durians to Australia in 2004 and signed its first export agreement with China seven years later. The company has a 40-acre durian orchard and now produces premium Musang King durians, but the operation is small-scale. Revenue is around $30 million a year, with China contributing 40%. Navis has much bigger ambitions.

China’s durian imports came to approximately $1 billion in 2018 and this figure is expected to double by 2023. Malaysian exports of the fruit have grown nearly threefold over the past five years, rebounding from a disappointing 2017 to hit a record $29.3 million last year, according to UN statistics. Shipments to China have fluctuated over the same five-year period, reaching $6 million in 2015 but coming in at less than half that figure in 2018.

Fluctuations in weather and price might be every bit as significant as the lack of reliable, large-scale suppliers. Another factor is the ban on shipments of whole durians to China, which only lapsed in 2018. Malaysian exports were restricted to pastes and purees, while Thailand met Chinese demand for whole durians. China accounted for half of the country’s $948 million in exports last year.

Navis must be patient – a newly-planted durian tree takes five-and-a-half years to produce its first fruit – but the firm is confident it can use technology and best practices to turn a cottage industry into a fully-fledged industrialized supplier.

“Demand in China has barely been scratched, it’s only a few first-tier cities. We estimate Malaysia would have to plant another 100,000 acres of durian to meet Chinese demand,” Bloy adds. “More capacity will come onstream, causing supply and prices to normalize, but that is 15-20 years away, in my opinion. In the meantime, the trick is to develop downstream brands.”

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• Topics
• Southeast Asia
• Buyouts
• Consumer
• Malaysia
• China
• Agriculture
• Navis Management