Overseas acquisitions by Chinese seafood firms deserve more skepticism

Published on
December 23, 2015

Some industry news wires were quick recently to herald an overseas acquisition plan by China’s leading shrimp firm - yet another Chinese seafood firm is hedging its bets by investing overseas as export demand wanes.

Without naming the target company, Zhanjiang Aquatic League of Nations recently announced that the company will “cooperate with industry funds” to buy a “foreign company and its core business and assets” with the total amount of the transaction expected to eventually involve “equity and debt of no more than one billion US dollars.”

Promising to complete the deal within “several months” Guolian has said the target company “belongs to the aquaculture industry” and boasts “outstanding” competitiveness and performance in fiscal years 2012-2014 with annual sales revenue of approximately USD 600 million.”

A look at the company’s financial numbers begs the question: is Guolian over-reaching with this overseas acquisition or is it simply seeking to keep its shares in favour with investors? Guolian’s share price has swayed from a low of CNY 9.31 (USD 1.43; EUR 1.31) to a high of CNY 41.50 (USD 6.4; EUR 5.87) this year and currently trades at CNY 26.25 (USD 4.05; EUR 3.71), which is still remarkable given in mid-2013 the shares were worth only CNY 5.10 (USD .78; EUR .72) each.

With Chinese share prices diving in the wake of a stock market bubble bursting this summer, Guolian managed to keep investors excited in its shares by offering 12 new shares for every 10 shares in lieu of cash as the dividend payment plan for 2015.

But profitability has recently been elusive for Guolian which in October projected net profit for 2015 Q1 to Q3 to be “zero to 5 million yuan”, way down on the RMB29.67 million recorded for the same period last year. The production and new products development investment are the main reasons for the forecast, said the firm in a note to investors.

Guolian shares closed at CNY 25.41 on December 11, down slightly. But the company’s shares have soared in the past 12 months, going from RMB9.32 in December 2014 to RMB41.50 in June. The company, which now has a market capitalisation of CNY 9 billion (USD 1.38 billion), looks very optimistically priced on a price to earnings ratio of 45.2.

Bear in mind that China’s corporate sector had racked up CNY 1.2 trillion in bad debt in the third quarter of this year, up 10 percent on the previous quarter. Given the economic slowdown in China –the worst in 25 years – it becomes harder for firms to service debt or to attract investors in writing more debt.

With over 3,000 full time staff, Guolian has struggled with declining profit margins – these slipped from 10.5 percent in 2014 down to 7.3 percent in the third quarter this year. All the key margins are in decline, the company’s return on equity was down over three percent while return on assets was down by a similar figure.

This is naturally prompting Guolian to seek new sources of profitability. But this is also a dangerous time for highly leveraged companies – and most of China’s major listed seafood companies fit into that category. This is doubly so when you consider China’s stock market is (still) overvalued by 20 percent according to many respected observers.

It may excite investors in the short-term to say you’ve got an unnamed foreign acquisition in your sights. But how do you generate the cash to pay for this acquisition and service current debt without diluting current shareholder value and investor confidence beyond sustainable levels?

Consider that corporate deleveraging and cutting excess industrial capacity are the top economic priorities for 2016 as stated by China’s government at its recent economic think-in. This hardly bodes well for ambitious overseas acquisitions by any firm struggling with profitability. At the very least it should give plenty of cause for reflection before announcing such deals.

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