Why investors in Chinese seafood firms should worry
It’s certainly a tough time to be an investor with exposure to China’s seafood sector. This week key shrimp processor and exporter Zhanjiang Guolian Aquatic Products Co. Ltd announced its shares will remain suspended from the stock market for the foreseeable future while it undergoes “restructuring.” The shares have been suspended since June.
Guolian has also announced it sees net profit for the first three quarters of 2015 at between zero and CNY 5 million (USD 786,204, EUR 709,515). Guolian has blamed the figure on decreased production and new product development investment. Whatever the cause, investors are looking at a major drop from the net profit for the first three quarters of last year of CNY 29.67 million (USD 4.7 million, EUR 4.2 million).
But this is not the first time Guolian’s listed arm – which has a price to earnings ratio of 62 – has underwhelmed. Guolian also blamed restructuring for a 2014 dip in profits at the firm. Though it remains China’s top shrimp exporter the firm faced delisting from the Shenzhen stock exchange after it lost money in both 2011 and 2012.
And it’s not the only listed Chinese seafood firm worrying investors. Last week it was leading fish feed and tilapia producer Tongwei Co., listed in Shanghai. It announced that the China Securities Regulatory Commission (CSRC) did not approve the company’s plan to raise USD 300 million (EUR 270.8 million) in extra capital through a private share issue and extra borrowings. Tongwei’s shares had been suspended pending the share launch but re-commenced trading on 22 October.
And the largest listed seafood firm in China, Zhangzidao Group Co., Ltd recently disclosed to investors that it was questioned on its stated profit levels for the first half of 2015 by the Shenzhen Stock Exchange, on which the firm has listed. Zhangzidao posted revenues of CNY 13.01 billion (USD 2 billion, EUR 1.8 billion) for the first six months of the year – up 4.36 percent – but net profit attributable to shareholders tumbled by 95.81 percent on the same period last year.
Corporate debt in China, at 160 percent of GDP, is twice the equivalent rate of the United States, according to a Reuters study of over 1,400 companies. The situation has worsened in recent years as government responded to lower economic growth by increasing lending through state-run banks. But it’s not sure that all of the borrowings by corporations in the seafood sector have always gone to valid expansion of business – such as investment in distribution channels which are needed to tap growing opportunities in the domestic market.
The problem is China’s seafood firms are all too often preoccupied with non-seafood matters. Guolian sought to ride the real estate boom while Tongwei is moving into solar power, an area which promises profits but also massive learning challenges for a newcomer investor like Tongwei.
This comes at a time when Chinese seafood corporations can least afford to take their eyes off the ball. Firms in under-performing sectors of the Chinese economy have sought to enter the food sector, to get better yields. These tend to be state-owned behemoths in areas like steel and construction, both of which are in over-supply in China.
Even though China’s seafood sector badly needs private investment, the recent performance of key seafood players makes such investment seem less likely. This is bad news for everyone, considering that modernization of China’s aquaculture sector – which unlike agriculture remains largely in private hands – depends on investment from leading corporations in improving standards and quality control, as well as branding and marketing to continue the expansion of the domestic market.