In 2015, Ust-Kamenogorsk Poultry Farm was listed among the future Competitive Leaders of Kazakhstan. In that year, UKPF production output amounted to 22,9 ths. tons, and in 2016 there was yet another increase by 2,4 ths. tons. Those indicators along with the operational volumes in meat processing provided for the overall Company's growth by 30 % and generated profits of 14 bln. tenge last year. For the first four months of 2017, activities of the Poultry Plant have resulted in 8,3 ths. tons of ready products, and meat processing has arrived at the level of 1,8 ths. tons.
Today, Serik Tolukpayev, the shareholder of the managing company Aitas Group and the CEO of UKPF, is at the helm of the construction of a new poultry farm in the Akmola region and leads the development of meat processing and crop production. He shared his plans about these Projects with Forbes Kazakhstan and gave his own assessment of the current agricultural market activities.
F: Would you tell us about the progress of the construction of the broiler poultry plant in Makinsk, which was initially planned to be launched in the end of 2017?
– It was decided to defer the start-up for one year, and now we plan to launch the production activities in November 2018. This decision was driven by a significant devaluation which took place last year, and we had to re-calculate all investment costs, in particular, the returnables. We make investments in the US dollars since European Bank for Reconstruction and Development has a share in the capital, while the revenues are generated in KZT. In doing so, we did our best to minimize the dollar component. We had to find an optimum solution, carry out some of the construction works with the use of domestic materials, so we could fit in the initial payback period. As of the exchange rate of 2015, the estimate overall cost of the Project was equal to $ 150 mln.
F: So how much does it require now to invest in the Project based on the updated calculations?
– In total we plan to invest approximately 37 bln. KZT. In 2016, we spent 2,5 bln., this year we will go in for another 17 bln., and in 2018 we will need 18 billion KZT. The Project involves the construction of a feeding stuff plant worth of $ 10 mln.
F: It was originally intended that EBRD and Fund CITIC Kazyna would be the co-investors of the Project with 30 % ownership. What is going on now?
– Once it became apparent that the Chinese and Kazakhstani sides had failed to reach an agreement concerning their respective interests in the project, the Chinese side refused to participate in the Project which meant the withdrawal of the most of the funds. At present, Baiterek Venture Fund has taken the chair of CITIC Kazyna and holds a part of the Company's equity.
I used to think that we would really need 30 % of the investors' involvement, but it has turned out to be that we ourselves are not bad in generating the cash, and thus we will need less money from outside. We have come to realize that we need only 18.5 % of the investors' share in the capital to implement the Project, i.e. 12,5% from EBRD and 6 % from BVF. And we are ready to invest. The State is going to put 5 bln. KZT into the infrastructure of the Project. There are certain questions related to the tender processes, but we hope they will be resolved this year.
F: By the way, talking about your relationships with the State: could you agree with the government on the matter of the road construction?
– Earlier, in the framework of the State Program " Business Roadmap -2020", the state committed itself to the arrangements of the roads, but last year it was decided to pull the financing. As of now, we have budgeted the costs for the construction of the temporary unsurfaced roads, and the amount is pretty large - we will spend about 800 mln. KZT. Anyways, the question is still open as we do not include any asphalt or other permanent road topping.
I understand the grounds for that decision of the government since this road construction would require for about 5 bln. KZT, which contributes the total cost of the overall energy, gas and water supply and sewerage. But still, roads are essential for the establishment of a production enterprise. We continue to hope that we will find some solution of this problem together with the specialized Ministry.
F: Let's have a talk about your business prospects in Makinsk. How much will the new poultry farm contribute to the strengthening of your competitive advantage?
– The main advantage resides in the location of the facilities in the north because the primary materials are quite cheap there. The difference between the eastern and the northern prices for the wheat arrives at 10 %, and between the north and the south it reaches 15 %. It is not reasonable to bring the grain from the north to the south when you can offer a ready meat product, especially since it takes 2 kg of grain to produce 1 kg of meat. Moreover, we will be based nearby such large agglomerates as Astana and Karaganda with over a million of potential consumers. And the last but not the least, Makinsk facilities will have the very up-to-date energy-saving equipment that should result in the reduction of the primary costs by 5-7 % as opposed to the Ust-Kamenogorsk Poultry Farm.
F: How will it affect your production outputs?
– It is planned to launch both the poultry farm and the feeding stuff plant in two phases, i.e. two lines. The first line will be put into operations in November 2018. The second line is planned for the start-up in 2018-2019. These two lines will produce 25 ths. tons each, meaning the overall product output will be 50 ths. tons per annum. At present, our maximum production volume at the east is limited at the point of 28 ths. tons. I guess it is clear that our fixed costs will naturally go down with the increase of the production output.
F: Will the launch of the new plant influence your export opportunities towards Russia?
– I don't think so. First and foremost, we aim to provide the substitution of the import. As of now, Kazakhstan imports about 150 ths. tons of the poultry meat, including American chicken legs and Russian and Belarus frozen chicken meat. This new poultry farm will seriously toughen the competitive environment at the market. Despite the participation of our country in the EEU, I still consider Kazakhstan and Russia to be the antagonists towards each other from the market point of view. They both are commodity-dependent non-diversified countries with the very similar economic structures, and that's why, I guess, a synergy in one food chain is simply not possible.
F: The managing company, Aitas has enterprises that deal with the crop farming and meat processing under its umbrella. How strong is the competition in those segments?
– Our main competitors in the meat processing sector are again Russian companies. They have such powerful producers as CHERKIZOVO and MIKOYAN. These large players take up to 50 % of the current market of Kazakhstan. And our goal is to win these 50 % over, back home to the domestic producers. We have a vision and an action plan of how it can be done. For the last year, we produced about 6-7 ths. tons of the sausage products, and for this year we have put a target of 9 ths. tons. Talking about the mid-term strategy, we would like to reach the level of 20-25 ths. tons of the production output in the meat processing department.
As to the crop farming, here we compete with various companies from all around the world. If you can produce your products at the global prices, then you are competitive. For the last four years, we have been investing into crop-farming in the East-Kazakhstan region acting through our company Aitas Agro, which has a very strong management team from Belarus. The first two years were loss-making, but the recent two have generated some profits. This year, I think, we will pursue a more qualitative growth which, in its turn, will strengthen our development in future.
Crop-farming is very complementary to the vertical integration within the poultry production cycle. In a long-term perspective, it will improve our competitive advantage because we will have our own feeding stuffs at the cost of production. Now, our own feeding stuffs meet only 25-30 % of our overall needs.
F: How would you explain such an extensive presence of the Russian producers at our meat product market?
– Russian companies have developed quite an attractive reputation for their products, but it is primarily due to the marketing factors. The quality of their products is not very remarkable at its own, and their success and popularity come mostly from the bright packaging and professional promotion. So, it is a long way ahead for the domestic products to prove their own advantages. As of now, our local producers need to grope for the right messages to the customers and bring their attention to the Kazakhstani products which have both a good quality and a good branding. So far, local companies cannot claim to be professional in marketing, especially in the agricultural sector. I have an experience of working with FMCG, and that has always been my strength. In the early going, we, perhaps, were not enough prepared in terms of production, but we were quite skilled in marketing, and that became our competitive advantage from other companies of the agricultural industry.
F: How do you evaluate the overall situation in the national agricultural sector now?
– If to compare with our principal competitors, which are Russia and Belarus, then Kazakhstan falls behind them for probably five-eight years, and when talking about Ukraine - then we should admit that it is all eight-ten years ahead us in the agricultural development. In global terms our development gap is even larger. Evidently, this is due to the fact that any agri-business implies that you will need to work heavily and work every day, sometimes with manure, sometimes knee-deep in mud and slush, and all of this does not seem very attractive for the young specialists who age from 20 to 40 years old. Our people have got used to live at the expense of the primary commodities. We have to recruit specialists from Russia, Ukraine, Belarus. Agricultural sector in those countries is better developed since these nations were historically closer to farming. But we have been working at the development of our own agricultural personnel, and today we can actually witness a tendency when many specialists move to the agricultural sector from other industries. But, anyways, this problem cannot be solved in one go.
F: Apart from the construction of the poultry farm, what are the other directions of the Company?
– We are working at the establishment of an adaptive company which would have an adjustable structure to any changes of the business environment. We see many opportunities for growth which can be achieved through the development of the corporate culture. Today, our philosophy, the cornerstone of our business, is to develop talents and bring benefits to the society. The market is changing, and we have to adapt to its requirements and needs.
Author: Aisha Erkebulan, Interviewer: Forbes Kazakhstan
Photo: Sergei Baturin