Debt is scaring away investors in China’s seafood companies
High levels of debt are scaring investors away from China’s seafood industry.
Seeking bigger returns and faster expansion, many of the biggest seafood firms in China – and the world – have taken on large amounts of debt. But with a national economy whose growth has recently slowed, that debt is proving harder to service, and as a result, stock prices for most listed Chinese seafood firms are at a five-year low and well below where they were a year ago.
Nothing quite matches the share price demise of China’s biggest seafood firm by capitalization, ZoneCo Group Co (which also goes by its Chinese name, Zhangzidao. On 27 July, it was trading at CNY 9.68 (USD 1.45, EUR 1.31), compared to CNY 19.70 (USD 2.95, EUR 2.66), in May 2015.
The latest decline in ZoneCo’s share price may prove the end of any hopes of recovery in investor confidence in the stock after the company’s calamitous incident in October 2014, which saw the firm write off a huge part of its scallop stocks due to what it described as a freak weather incident.
With the company’s shares now trading at around one-third of their 2011 value, it appears that ZoneCo will struggle to collect the kind of investment support required to meet the company’s ambitious expansion plans. Not surprisingly, the company announced it was selling off several subsidiaries and assets this summer to raise cash.
Even seafood firms that are buying assets haven’t been in favor with investors. Shares of trawler operator and processor Shanghai Kaichuang Marine International Co were trading at CNY 18.11(USD 2.72, EUR 2.45) at the end of July, down from CNY 30.40 (USD 4.56, EUR 4.11) in June 2015 before the entire Chinese stock market bubble burst and stocks slid southwards.
But Kaichuang, which has state ownership, made a EUR 61 million (USD 67.7 million) purchase of Spanish firm Hijos de Carlos earlier this year. That hasn’t swayed investors, who will have noted the firm paid no dividend to its investors for 2015.
One of the best known processors of whitefish in China, Dalian Tianbao Green Foods, is seeking to raise CNY 500 million (USD 75.2 million, EUR 67.7 million) in a private placement of bonds, having already raised CNY 600 million (USD 90.2 million, EUR 81.3 million) in February. The company is projecting that its profits for the first half of the year rose by up to 30 percent on improved sales, putting its total figure at between CNY 77 million (USD 11.6 million, EUR 10.4 million) and CNY 100 million (USD 15 million, EUR 13.6 million).
While its share price a lofty 32 times earnings, Tianbao does boast a profit margin of 10 percent. Another processor, Shandong Homey Aquatic Development Co., which also has considerable activities in aquaculture, has a P/E ratio of 167, enough to explain why its shares are currently selling at CNY 4.13 (USD 0.62, EUR 0.56), well below a pre-crash peak of CNY 6.36 (USD 0.96, EUR .86) in June 2015. While the firm has been seeking to diversify into supplying Asian medical companies with raw materials like collagen, the company looks some way off from recapturing investors’ favor.
One seafood company that has found success in repositioning itself is tilapia player Baiyang Investment Group Incorporated, which has diversified into areas like medical ingredients. Baiyang in June paid a dividend in June of CNY 1.00 (USD 0.15, EUR .14) per ten shares. Its share price however remains historically low at CNY 18.92 (USD 2.84, EUR 2.56), compared to CNY 24.90 (USD 3.74, EUR 3.37) in December 2015 and CNY 31.60 (USD 4.75, EUR 4.28) in June 2015. A net profit margin of 3.29 percent and a P/E of 48 make the company off-putting to many investors.
Other firms appear to be finding some success from repositioning themselves to the domestic market. Shrimp exporter and processor Guolian Aquatic Group is projecting profits for the first half of 2016 will have risen by up to 129 percent on the CNY 40.2 million (USD 6 million, EUR 5.4 million) the company made in profits for the same period last year.
This may be taken by some as proof that the company’s strategy of diversification and shifting to domestic market sales has paid off. Rather than relying on exports of shrimp, Guolian has been seeking to create products for use by domestic convenience retailers and fast food chains. The company also this year signed a “strategic cooperation” deal with the massive Chinese frozen foods firm Synear Food Holdings, which will see the two firms co-launch and co-market new products for Chinese consumers.
The precarious position of China’s seafood firms should be seen in the context of the country’s enormous corporate debt –the IMF puts Chinese corporate debt at 145 percent of GDP – which makes investors fearful of investing. There are some reasons to be hopeful for improvements: ongoing and promised reform to the stock market bond market should give private corporations more access to finance and investors more confidence. Likewise China’s banking sector is gradually being exposed to competition and companies who need to raise money are getting other options.
But many of China’s seafood companies are champions in their regions, protected and nourished by local governments who see them as a tool for local growth. As such, access to loans from state banks isn’t an issue for them. But many of them have taken on massive debt, not necessarily to invest in seafood production, but to tap other industries perceived to offer richer returns – in particular the real estate sector ,which has soured due to oversupply.
The selloff of assets by ZoneCo/Zhangzidao earlier this summer is indicative of what Chinese seafood firms will need to do. Things may get worse before they get better.