China seafood firms’ stock prices symptomatic of structural problems

Investors were nonplussed when leading Chinese aquaculture and seafood importing firm Zoneco recently reported a 52.4 percent fall in net profits for the first half of 2018, down to CNY 14.6 million (USD 2.1 million, EUR 1.8 million) on revenues of CNY 1.40 billion (USD 204 million, EUR 176 million). 

Once the darling of investors, Zoneco, which goes by its Chinese name Zhangzidao, said the results show improvement in its financial position after it embarked on a “slimming-down” strategy earlier this year to cut staff levels and dispose of non-core assets. That likely means a sell-off of its various units, such as its travel agency and leisure fishing trip businesses. The firm is also ramping up sales to producers in China’s huge snack market.

But investors don’t seem to be convinced. Shares of its stock dropped from CNY 9.62 to CNY 3.52 (USD 1.40 to 0.51, EUR 1.20 to 0.44). It stood at CNY 3.76 (USD 0.55, EUR 0.47) as of 22 August. 

Chinese stocks have been having a rotten year, but seafood stocks seem to be hurting more than most. Among the most high-profile of Chinese seafood stocks, The share price of China National Fisheries Corp. (CNFC) fell from CNY 9.50 (USD 1.39, EUR 1.19) on 24 July last year to CNY 6.50 (USD 0.95, EUR 0.82) on 13 August, 2018. And aquaculture and processing specialist Shandong Oriental Ocean saw its stock go from CNY 13.40 to CNY 6.68 (USD 1.96 to 0.98, EUR 1.68 to 0.84) on 13 August and stood at that price as of 22 August.

Chinese stocks in general have suffered because trade tensions with the United States have made Chinese investors nervous about the economy’s long-term direction. Meanwhile, a long-running attempt by government to deleverage the economy has dried up funds for stock market speculation. Up to mid-June 2018, the Shanghai composite had fallen 13.9 percent to its lowest level since 2016, into a sour bear market. 

But not all stocks in the fisheries sector are down. Investors are far more convinced by star performers like fish-feed maker Guangdong Haid – its share price went from CNY 17.50 (USD 2.56, EUR 2.19) on 24 July last year to CNY 20.40 (USD 2.98, EUR 2.56) on 13 August. 

Haid is projecting a 45 percent increase in revenues for the first half of the year – and has been on an acquisition drive over the past year to further diversify its sources of earnings. The firm has used scale – and enormous revenues from its pig feed operations – to expand distribution of premium feed products in China and Southeast Asia. Most recently it invested CNY 500 million (USD 73 million, EUR 62.7 million) in a new microcredit firm in Guangzhou. 

There is potentially a rebound on the horizon for seafood stocks. In the past month, the Chinese government has changed tacks and loosened some of its earlier monetary tightening to boost the economy. That’s led some stock watchers to predict a healthy rebound through to the end of the year for Chinese stocks. The Chinese office of Swiss bank UBS has predicted the CSI 300 (index of large-capitalization Chinese firms) will rise 14 percent by the year-end, basing that optimism on the government’s pledge to spend more on infrastructure projects. 

A rebound in the stock market would be good news for the likes of Zoneco or CNFC. But a speculatory stock market does nothing for the structural problems bedeviling these companies. For example, CNFC, China’s flagship fishing firm, is being weighed down by Dalian Nan Cheng Ship Repair Co. – a “zombie” firm, according to a company note to investors – with CNFC required to pay “displacement fees” to workers. CNFC is also struggling to make any money from an insurance joint venture, and it paid CNY 22 million (USD 3.2 million, EUR 2.76 million) to former partner Zhang Fu Ci to settle a dispute on the acquisition of the Xin Yong Zhuo Co. from Zhang. 

The company, which took in CNY 10.1 million (USD 1.48 million, EUR 1.27 million) in subsidies in September 2017, is projecting a loss of between CNY 100 and CNY 800 million (USD 14.6 million to 117 million, EUR 12.5 million to 100.3 million) for the first half of 2018. That would represent a drop of between 137 and 396 percent on the same period in 2017. 

Despite being a state-owned industry flagship, CNFC is relatively small today next to the (usually privately-owned) giants that have emerged in China’s farming and fisheries sector. China’s largest listed seafood firms in revenues terms are Guolian Aquatic, followed by Zoneco, Baiyang Investment Co., Homey, Dahu, and Oriental Ocean.  Even if seventh-ranked CNFC hits the optimistic end of the projections for the first six months of 2018, its revenues are weak compared to CNY 4.94 billion (USD 722 million, EUR 619 million) average for listed companies in the agriculture/fisheries sector on the Shanghai and Shenzhen boards. 

The meltdown in Chinese seafood stock prices obviously limits the ability of the seafood sector to raise more money on the stock market in the short-term. But the long-term outlook isn’t rosy, either.

Arguably the biggest threat to China’s marquee seafood firms is the arrival of much more nimble firms to the party – among them non-traditional entrants like Alibaba, which has revolutionized the retailing of seafood in China and in the process taken a much bigger margin in sales through its online and its conventional retail offerings (via its Hema Xiansheng grocery store chain) than traditional firms like CNFC can hope for. 

Chinese fishery companies are also battling rising imports – and many firms have adopted by launching their own import operations. Imports are cheaper, according to Xu Zhenhan – secretary general of the Shenzhen Association of Aquatic Animals Producers, Imports, and Exports – primarily due to more international flights coming into China and more efficient customs clearance. China imported USD 58.2 billion (EUR 49.9 billion) worth of food in 2017, up 25 percent year-on-year. When it comes to seafood, an increasing number of connections from China to locations like Bangladesh and Egypt have resulted in an influx of crustaceans and shrimp from those locations coming into the Chinese market.

Easier access across China to imported seafood puts increased pressure on local firms to compete. But without their own downstream distribution platforms in place, they’re competing in a very crowded space that’s dominated by well-resourced plyers like Alibaba who are able to guarantee authenticity, quality, and safety in their highly sophisticated supply chains. 

That reality will be factored into the companies’ stock price.  


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