Chinese seafood firms struggling to earn investors’ favor
Even though Chinese demand for seafood continues to rise, there appears to be a major disconnect between the performance of China’s leading seafood firms and the prices of their public shares, suggesting a lack of investor confidence.
For the first three quarters of 2018, revenue at Zoneco (Zhangzidao) totalled CNY 2.1 billion (USD 302 million, EUR 266 million), up 9.42 percent year-on-year. However, its profits – at CNY 23.38 million, (USD 3.36 million, EUR 2.96 million) – dropped by 69.9 percent and the company’s share price has fallen over the past 12 months from CNY 9.40 (USD 1.35, EUR 1.19) to around CNY 3.50 (USD 0.50, EUR 0.44).
Baiyang Investment Group, which is a major player in China’s tilapia sector, booked revenues of CNY 2.17 billion (USD 312 million, EUR 275 million), up 37.2 percent year-on-year, and its profits rose 159 percent to CNY 129.8 million (USD 18.7 million, EUR 16.4 million). Yet the company’s share price is down from CNY 20.38 (USD 2.93, EUR 2.58) to CNY 9.20 (USD 1.32, EUR 1.16) over the last year.
Even though CNFC Overseas Fishery Co. Ltd. has hundreds of vessels on the high seas, its finances look modest next to its privately-owned peers. But it still saw drops of 27 percent year-over-year in revenue – at CNY 142 million (USD 20.4 million, EUR 18 million) over the first three quarters of 2018 – and a decrease of 29 percent in year-over-year profit, at CNY 63 million (USD 9.1 million, EUR 7.8 million). The state-run enterprise, which has vessels and processing facilities at home and abroad, has seen its share price fall from CNY 9.50 to 5.40 (USD 1.37 to 0.78, EUR 1.20 to 0.68) over the past year.
It’s a slightly better story at leading shrimp exporter Guolian Aquatic, which announced revenues its revenues had ticked up 15.1 percent to CNY 3.46 billion (USD 497.5 million, EUR 437.7 million) and its profits had risen 102 percent to CNY 226 million (USD 32.5 million, EUR 29.6 million) for the first three quarters of 2018. Yet the company, which has moved focus from exports to the domestic catering industry, saw its stock price slide from CNY 6.81 to 5.65 (USD 0.98 to 0.81, EUR 0.86 to 0.71) over the past 12 months, down from a high of CNY 8.75 (USD 1.26, EUR 1.11) in July.
There’s a big reason for investor apathy towards seafood firms: China has excess capacity of eight million metric tons (MT) in its processing sector, according to official data. A total 9,674 companies in the seafood processing sector have capacity of 29.26 million MT, compared to 21.96 million MT – up 1.42 percent year-on-year – of production in 2017, according to Li Shumin, deputy director of the Fisheries Administration Bureau of the Ministry of Agriculture and Rural Affairs.
China was able to rapidly expand exports once it achieved World Trade Organization membership in 2001, Li said. However, the new phenomenon of overcapacity means Chinese corporate profits are being eroded, as there are too many players competing on price.
Liu Yonghao, an agriculture and foods sector expert who is heading Chinese conglomerate New Hope’s efforts to shift to higher-value products, including in its aquafeed department, agreed that China’s seafood sector is overserved. Speaking at the annual China Aquatic Processing Conference held in Dalian in November, Liu said China’s seafood processing sector suffers from “overcapacity and a lack of innovation.”
“We badly need innovation,” Liu said in an interview with the Economic Observer newspaper. “More than 90 percent of industry in China is in overcapacity.”
Such overcapacity and price-driven competition erodes the space for innovation, according to Liu. He called for tax breaks to cushion firms like his from new costs – in particular, higher wages and environmental compliance.
Despite the gloomy forecast at the Dalian summit, many stock pickers in China are surprisingly optimistic about the future of Chinese seafood firms. Wu Jing Cao, an analyst at Guo Jin Securities, points to a 2018 project profit of CNY 192 million to 215 million (USD 27.7 million to 31 million, EUR 24.3 million to 27.2 million) at Baiyang, up by 70 to 90 percent year-over-year. But Wu is basing his optimism on Baiyang’s newer business units, in particular the education and graphics businesses it has acquired in recent years.
Investors are also thus far convinced by aquafeed maker Guangdong Haid; its share price rose from CNY 19.10 to 21.12 (USD 2.75 to 3.04, EUR 2.42 to 2.67) over the past year. The firm has used scale – and enormous revenues from its pig-feed operations – to expand distribution of its premium feed products in China and Southeast Asia.
There are many reasons for investors in Chinese seafood firms to be optimistic, according to Wu. The higher value side of the seafood industry remains. Likewise, improved cold-chain logistics is leading to a proliferation of restaurants serving seafood, with seafood-themed chains like Hua Jia and Hai Xian Yu Shang Mian popping up in cities like Yangzhou, where previously the bulk of the convenience market was held by dried product.
Yet there are a slew of new entrants battling for space in the seafood distribution sector, drawn by the perception of high margins. And new firms like Alibaba and Tencent have taken a wedge of the business, from sourcing to sales.
In addition, criminality and the gray trade of seafood remain a strong feature of the import market in China. Last month, police arrested 25 people in Xiamen who allegedly were part of a group that smuggled 7,800 MT of seafood worth CNY 417 million (USD 60.1 million, EUR 52.8 million) into China – much of it shrimp from Vietnam – since 2015, according to Chinese police. The police didn’t comment on how the gang, which distributed as far north as Shenyang and to major cities like Beijing and Shanghai, was able to get away with such an extensive operation for so long.
With so many factors in play, perhaps it's best to rely on the old investing maxim when looking into Chinese seafood firms: "Buyer beware."