Detention of Chinese tycoon causes jitters for China fishing company

Published on
December 17, 2015

The detention of one of China’s richest men has spooked investors in one of the country’s leading fishery companies. Billionaire investor Guo Guangchang, boss of the Fosun Group, which has a 14 percent (105 million shares) of Shenzhen-listed CNFC Overseas Fishery Co, was detained last week by state security officials but reappeared Monday to attend the AGM of Fosun, which is one of China’s largest privately run conglomerates. It paid CNY 681 million (USD 111 million) for its CNFC stake, making Fosun the fishery company’s second-largest shareholder.

CNFC shares fell 3.7 percent on the news of Guo’s detention and while they rebounded Monday with news of his release (he said he was being held for ‘personal’ rather than corporate reasons) there is much nervousness among stock watchers over what the Fosun arrest may mean for the company which is also struggling with weak profitability and seeking cash to expand into more profitable operations abroad.

CNFC is a key state enterprise with major assets in overseas fishing and processing businesses scattered around China where investors have this winter been worried about a slowing economic growth, a weakening yuan and an unpredictable anti-corruption campaign which has continued to throw up arrests and investigations into top corporate and official figures.

It hasn’t been a great year for CNFC which has seen its share price on the Shenzhen exchange go from CNY 7.91 - 25.00 and now stands at CNY 12.10. The company currently trades at an eye-watering price to earnings ratio of 217, suggesting much room for improvement in company earnings. The net profit margin was a negative 5.58 percent in the third quarter of the year, having grown by 5.15 percent in 2014. But the operating margin improved from a minus 15.4 percent in 2014 to minus 10.7 percent in the third quarter.

But the red ink isn’t confined to CNFC – other Chinese fishery companies are also struggling to balance the books. In November Shanghai Kaichuang Marine International Co Ltd announced a plan to raise up to RMB880 million (US$137.76 million) in private placement of shares to fund overseas acquisitions and replenish capital. Investors have been turned off Kaichuang shares which trade at a price to earnings ratio of 82.

Fosun’s 14 percent CNFC stake, acquired through four subsidiary investment funds under the Fosun umbrella, is part of CNFC's restructuring in 2014. CNFC also issued new shares to Taiwan's Sino-Aqua Corporation in exchange for assets from Sino-Aqua.

China’s corporate sector is currently carrying a huge amount of debt: according to government data, the banking sector's total burden of bad loans rose in October for the 16th consecutive quarter to CNY 1.92 trillion. Toxic debt levels have climbed by more than CNY500 billion yuan since January. Worryingly, the local governments which have traditionally bailed out prized companies are no longer in a position to do so. China is currently in the middle of restructuring over CNY15 trillion in local government debt to long term bonds.

There is the fear meanwhile that government will increasingly intervene to wind up so called "zombie companies". China's cabinet earlier this month called for the elimination of centrally-administered state-owned enterprises (SOEs) that survive only on government bailouts. "Zombie companies" in oversupplied industries should be closed or restructured in a drive to "markedly reduce" losses incurred by central SOEs due to poor operation by the end of 2017 according to the cabinet’s statement.

Operating over 250 vessels and transportation facilities in the Atlantic Ocean, Indian Ocean as well as the Pacific and Antarctic oceans, China National Fisheries Co is China’s longest-running fishery company. Formerly known as the China Fisheries Joint Company, the firm in the mid-1980s started to sail into Africa waters – today it has boats and docking facilities in almost a dozen nations, including Morocco, Senegal, Nigeria and Gabon.

CNFC focuses on fin-fish, molluscs and crustaceans and has sought to increase its catches of tuna and shrimp for the domestic Chinese market. The company also processes cod, squid, shrimp and tuna in China and in an international network of 20 “advanced” and modern sea product processing establishments both in China and globally. It has fish processing factories in Mauritania, Senegal and in Spain’s Las Palmas. Assisted by China’s massive bureaucracy and network of embassies, CNFC has licenses to fish in several other countries. CNFC often operates through subsidiary or joint venture companies: in Senegal it operates through a local subsidiary company known as the 12-vessel Senegal Pêche which also processes in-country. In Mozambique and Madagascar the company fishes for shrimp under locally registered firms.

CNFC has stated it wants to further increase its fishing, aquaculture, processing and marketing operations. CNFC also has a strong logistics fleet as well as 120,000 tons of cold chain logistics which it contracts to third parties. CNFC like other giants like state-owned Liaoyu in Dalian is licensed to supply Chinese staff for international trawlers.

It’s clear that CNFC wants to expand its global footprint but a long-term challenge for CNFC is competition from fellow state-controlled behemoths. Among them its sister company China State Farms Agribusiness (Group) Corporation - a subsidiary of China National Agricultural Development Group Corporation (CNADC) which also ultimately controls CNFC. In Argentina CNFC bid against fellow Chinese state owned Shanghai Jinyou Deep Sea Fisheries Co paid US$21.5 million for Altamare SA, a shrimp and fish catcher/processor in the port city of Puerto Madryn. As the Beijing government encourages local firms to secure resources around the world, state owned firms in China have the benefit of cheap financing from the country’s government-controlled banks such as the China Development Bank.

Other competitors include state-run China Poly Group Corporation, has built a new fish processing factory in Mauritania, partly in return for access to the nation’s waters. It also has operations in Ghana. Also present in Mauritania: China Fisheries Group, a subsidiary company of the Hong Kong based multinational company, Pacific Andes.

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