Chinese seafood stocks miss bull run in stock market
China’s stock markets are going through a bull run, but seafood firms haven’t been invited to the party.
Revenues at tilapia farming firm Baiyang Industrial Investment Group rose by 32.3 percent in 2018 to CNY 3.16 billion (USD 470.4 million, EUR 416.2 million) in 2018, while its profits slipped 59.5 percent. Profits attributable to shareholders fell by 72.7 percent. That’s resulted in investors shunning the stock.
Baiyang saw its share price go from CNY 19.54 (USD 2.91, EUR 2.57) on 13 March last year – and a high of CNY 25.60 (USD 3.81, EUR 3.37) in early June 2018 – to CNY 6.67 (USD 0.99, EUR 0.88) as of 13 March this year.
In 2015, Baiyang Aquatic Group changed its name to the Baiyang Industrial Investment Group Co. as it began to invest in healthcare (and later education and graphics) companies. The company grew revenues from CNY 1.78 billion (USD 265 million, EUR 234.4 million) in 2014 to CNY 3.16 billion (USD 470.4 million, EUR 416.2 million) last year.
Ironically, while investors backed the Baiyang strategy of diversification, it’s the firm’s traditional business of feed that has proven the more stable performer in the past year, and the company recently announced a goodwill impairment of CNY 211 million (USD 31.4 million, EUR 27.8 million) in a “high-tech” subsidiary of one of the firms Baiyang purchased in the media space.
Meanwhile, Zoneco (known as Zhangzidao in Mandarin) – one of the darlings of the Chinese stock market – has ridden the recent bull market, with prices up from CNY 4.99 (USD 0.74, EUR 0.66) a year ago to CNY 5.64 (USD 0.84, EUR 0.74) on 13 March, having been at CNY 3.52 (USD 0.52, EUR 0.46) in mid-November. This, despite the fact that the company is still being investigated by the Chinese Securities Regulatory Committee over information disclosure issues. The company, which risks the ultimate CSRC sanction of delisting as a result of the investigation, appears to be one of the few seafood stocks in favor with investors, judging by its share prices.
Another listed firm, CNFC Overseas Fishery Co. Ltd., is down from CNY 8.25 (USD 1.23, EUR 1.09) per share a year ago to CNY 7.08 (USD 1.05, EUR 0.93) as of 13 March. Guolian Aquatic’s share price, meanwhile, is back from CNY 8.48 (USD 1.26, EUR 1.12) 12 months ago to CNY 6.65 (USD 0.99, EUR 0.88) as of 13 March.
All of this is happening at a time when China’s stock markets are in bull territory in part because foreign investors are piling in. China has sought to boost its previously off-limits markets with foreign cash by opening up various channels to allow international money in. The response has been enthusiastic. International investors see the Shanghai and Shenzhen exchanges as cheap by the standards of New York or London and they see more growth potential in China compared to more mature Western economies. The increasing weighting of Chinese stocks by the Morgan Stanley Capital Index (MSCI), which tracks market performance globally (and is used as a bellwether by the mutual funds industry) has also buoyed up foreign interest. Already in 2019, USD 22 billion (EUR 19.5 billion) has flowed into Chinese markets from abroad – equal to half the total 2018 figure.
So why are Chinese seafood companies not sharing in the boom? Investors like stocks that allow them to tap into rising Chinese consumer incomes and spending. Several big seafood players like Baiyang and Guolian are seen as export-driven, even though they’ve been shifting to a greater dependence on domestic market sales. That means they suffer from investors’ fears over the ultimate end-game in the ongoing trade war between China and the U.S.
China has been seeking to internalize demand, particularly since the financial crisis left its exporters high and dry as Western financial systems and economies hit serious turbulence. Remarkably, the contribution of exports to China’s GDP fell from 36 percent in 2008 to 18 percent in 2018.
Seafood firms also appear to be suffering from a surge in demand for alternative meats, in particular poultry. Importantly, China’s poultry sector is dominated by a range of listed firms whose market is largely domestic and whose scale is well beyond anything seen in the seafood sector.
Giants like Sheng Nong and Guangdong Wens Foodstuffs have integrated feed, breeding, and meat processing businesses and established a strong presence across all of China’s regions. Some firms like New Hope Liuhe are active in both pork and poultry. Investors bet on these firms’ exposure to China’s growing demand for meat products.
Seafood firms, by contrast, are less understood, and their historical emphasis on exports has worried investors, who look at Western economies in less favorable terms than they used to.
As they grow to understand the sector better, investors may be more willing to invest in seafood firms. But they’ll also need assurances an unprecedented environmental crackdown in China, which has resulted in a vast number of closures of aquaculture facilities – most of which were located illegally or not properly permitted, won’t hurt their investments.
The other challenge faced by seafood firms is a general unease about the impact of a gradual slowing or maturing of China’s economic growth on consumption of things like seafood, a product category found everywhere from cheap supermarket aisles to Cantonese-style seafood restaurants selling delicacies like live grouper fish for upwards of EUR 400 (USD 452).
At the recently-concluded National People’s Congress, the GDP growth target for 2019 was set at 6 to 6.5 percent. Still struggling to de-leverage from previous stimuli, China’s national government won’t be turning the credit taps on this time around, but will be offering tax cuts and an effort to eliminate red tape to encourage business sentiment.
All of these changes are causing uncertainty for investors. Meanwhile, China’s seafood sector remains a low-tech, highly-fragmented industry in dire need of more professional advice and investment to create brands and sustainable businesses.
That time could be coming, as international investors warm to Chinese stocks. But seafood firms aren’t drawing many takers – not yet anyway.