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Is China Fishery A Good Catch?

Contributed by Shares Investment

By Soo Yin Ling

Fish is an important part of our diet. In Asia, more than a billion people rely on fish as the primary source of animal proteins. In developed countries, with increasing health awareness, fish is recognized as a healthier protein source rather than meat. Hence, global demand for fish is ever rising.

To cope with the rising demand, supply of fish has to be fulfilled by both wild and farmed fishing aka aquaculture. However, over-fishing has become a growing problem and fishing in oceans is currently highly regulated with limited quota, hence aquaculture has become increasingly important to fulfill the rising gap between demand and supply.

Mainboard-listed China Fishery Group (CFG), a leading fishing company, has an edge over others as it specializes in a variety of ocean catch with government rights to fish in important fishing grounds around the world. Additionally, in 2006, the same year CFG was listed, it has also ventured into the fishmeal processing industry via acquisitions of fishmeal processing factories in Peru. Fishmeal is dried fish and is used to supplement feeds for farmed fish, pigs and poultry and the industry is growing as a result of the booming aquaculture with Peru being the world’s largest fishmeal processing country. CFG’s efforts have paid off as the fishmeal processing operations segment now constitutes almost a quarter of total revenue.

In its trawling operations, CFG has utilized state-of-the-art technology which enables it to harvest, process its catch onboard and deliver the final end products via its distribution network. This helps CFG to make full use of the time out at sea since its vessels can be deployed at the high seas for a stretch of 6 to 9 months at a go. Its main operations are in the North Pacific waters and recently, it has ventured into the South Pacific waters to tap into the relatively under-utilized fishing grounds which will drive growth in the future.

Sterling Performance

FY09 consists of 9 months due to the recent change in financial year end from 31 December to 28 September (please refer to page 94). FY09, CFG recorded a 7.9% revenue growth over that of the nine months ended 30 September 2008 due to increased sales volume and higher selling prices of fish. However, earnings remained flat mainly as a result of CFG’s strategic move to defer part of its fishing activities to the fourth quarter of calendar 2009 to improve efficiency and margin.

Both its trawling and fishmeal processing business segments registered growth of 8.8% and 5.3% respectively, demonstrating resilience amidst the global economic slowdown. The fishmeal segment’s growth was underpinned by the higher sales volume despite lower selling prices. However, the fishmeal price has been trending upwards since September 2009, which could boost FY10 fishmeal margins and hence profitability. FY10 profitability would also be impacted by the strategic move to conserve part of calendar year 2009 fishing quota to 1Q10.

CFG is highly leveraged as it utilizes debt financing to fund expansion via acquisitions of fishmeal processing plants and buying and upgrading of vessels in order to capture more market share. As a result, capital expenditure for FY09 doubled with the bulk of its debts in the form of senior notes. Notably, net debt to equity ratio improved from 92.2% to 84.3%. As at the end of 28 September 2009, cash and cash equivalents stood at US$22.9m.

Catalysts For Growth

Global demand for fish will continue to outpace supply. CFG depends heavily on the Chinese economy where circa 66% of its FY09 revenue is derived. With rising demand that is fed by the deeply entrenched belief in the nutritional value of fish and growing affluence of the Chinese population, China would be the main engine of growth in coming years. The rising importance of aquaculture will also boost demand and prices of fishmeal which would further enhance growth.

As mentioned in its FY09 report, CFG’s trial operations in the South Pacific waters which began in June 2009 has already yielded revenue of US$7.8m. More and more vessels will be deployed to the South Pacific and operation efficiency will be significantly boosted by the addition of the nearly completed flagship vessel Lafeyette, with a refrigerated cargo of 14,000 tonnes of fish.

Lafeyette is touted as the world’s largest factory ship and was previously converted from a panamax oil tanker at a cost of US$100m. It is designed to stay at sea all year round and will serve as the mother ship where the other vessels will unload, process and freeze their haul.

The aforesaid factors would provide the catalysts for more sterling performance in the near future and exert a positive impact of CFG’s stock price and that of Pacific Andes Resources Development which holds a 78% stake in CFG. Since the beginning of the year, CFG has experienced a run up in its stock price, rising from $1.39 to close at $1.86 on 20 January 2010, prior to its official announcement of a secondary listing on Oslo B?rs of Norway. Due to the sharp rise in price, DMG & Partners downgraded CFG from Buy to Neutral with a target price of $1.84, citing the stock to be fully valued.

This article is contributed by Shares Investment. Visit Sharesinv.com for the latest Singapore, Malaysia and China stock market news and reports.