What China’s market crash means for seafood company valuations

Published on
August 20, 2015

Chinese processor Haikui Seafood AG drew some stares when it announced it was delisting from the Frankfurt exchange. The firm said the move was caused by its inability to raise significant funds long-term on the German exchange (partly given the fact that only 10 percent of the firm’s equity was listed there) and because the European exchange continued to under-value the company.

Haikui had likely been looking enviously back home where seafood firms have been enjoying sky-high valuations – in a stock market which recently crashed. Lots of firms raised more cash and paid down borrowings in recent years thanks to a bull market.

Many Chinese companies which went abroad for listings have been faced with laborious disclosure requirements whereas at home many of Chinese firms have enjoyed listings on the stock market which are in many cases not correlated to their financial performance or outlook.

By inflating the stock market over the past year China’s government has hoped that corporations will rely less on bank loans for cash to expand their businesses. But the bull run which ended disastrously in a July crash also meant that share prices became detached from the fundamentals of the companies and the industry. In the run up to the recent stock market crash analysts at Credit Suisse in a report claimed that the Chinese stock market was over-valued by 20 percent.  

And yet even after the recent crash China’s seafood firms still look overvalued. For example, leading aquaculture-processor player Dalian Tianbao Green Foods boasts a price to earnings ratio of 43, but that looks modest given Shandong Oriental – China’s sole developer of salmon farms, among other things – is on a P/E ratio of 121.

Leading tilapia exporter Baiyang Aquatic is on a P/E of 78 while catch fisheries firm Shanghai Kaichuan is on an equally optimistic P/E of 78. The average P/E on the Nasdaq is 22.95 while the FTSE 100 average P/E is 31.5. While the Shanghai stock market has an average P/E of 23.35 the figure for the Shenzhen stock market – where many of the Chinese seafood firms are listed – is a dizzy 50.

Companies like Shandong Homey and Dalian Yiqiao have both been praised in the past by investment analysts for their profitability with Yiqiao boasting margins of 40 percent and 42 percent in 2013 and 2014 respectively – even with a slump in demand for sea cucumbers, a business to which both firms are much exposed.

A survey of several years of earnings reports from seafood firms listed on China’s exchanges suggests to the rational observer that too often company earnings are inflated by investments in real estate and non-seafood assets: several Chinese seafood firms in particular have rescued their earnings through sales of buildings in the past year. Likewise, a common practice among Chinese corporates of booking share portfolios as earnings helps inflate the top-line figures.

Profitability is a major problem in China’s seafood sector, but the other worry about China’s seafood firms is the debt load they’re carrying. Several of the biggest listed names list cost of finance as the biggest drag on their bottom line. This is dangerous at a time when China’s companies are being forced to pay a premium for debt, at home and overseas.

Debt went from 2.8 times profit to 5.3 times profits between 2010 and 2014 at materials processing companies surveyed by Reuters. Chinese corporate debt is now at 160 percent of GDP which is twice the equivalent level in the United States. Slower sales in a weaker domestic and global economy will reduce the ability to repay this debt.

Chinese corporations have drawn down a massive USD 74 billion (EUR 66.2 billion) in dollar and euro denominated debt so far this year – that’s up 35 percent on the same period last year.

Of course there is the unspoken promise or expectation of a government bailout. Many of China’s leading seafood firms are “dragon heads,” or companies championed by local government as creators of jobs, taxes and scale in a particular commodity: Zhangzidao in shellfish, Baiyang in tilapia and Guolian in shrimp.

China uses an old ploy of forcing state-run banks to issue loans in order to create economic activity. Yet in an economy already plagued with overcapacity in industry (including segments like meat, seafood processing) the loans tend to go into risky real estate plays rather than the real economy.

China in 2007 suffered a stock market crash similar to the one experienced this past month. And because the market isn’t allowed to self-correct, it’s likely there will be more such crashes. China’s seafood firms are facing profitability problems – and juggling a debt load. One hopes investors will be patient.  

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