Dahu Aquaculture flags losses on bad investments, environmental crackdown
One of China’s leading aquaculture companies has reported a poor 2019 financial performance due to a troubled diversification strategy and a stricter enforcement of new environmental rules by the Chinese government.
Dahu Aquaculture Co., which produces crabs and freshwater fish largely for the domestic market, is flagging losses of CNY 120 million to CNY 140 million (USD 16.8 million to USD 19.6 million, EUR 15.5 million to EUR 18.1 million); Losses at one of the firms it’s invested in through two subsidiaries has forced Dahu to write down CNY 60 million (USD 8.4 million, EUR 7.8 million) in impairments. Zang Dahu Investment Management and Hunan Dahu Private Equity Investment Fund (both vehicles set up by Dahu to invest in other companies outside the seafood sector) put the money into the Ao Ji Te Biotechnology Co., but now Dahu blames “poor corporate governance” at Ao Ji Te for its losses.
Conflict with local government over enforcement of environmental regulations has also dented Dahu’s 2019 earnings. The company is claiming between CNY 12 million to CNY 15 million (USD 1.7 million to USD 2.1 million, EUR 1.6 million and EUR 1.9 million) of its loss was down to a dispute with local government over Dahu’s right to put aquaculture facilities into Shanpo Lake and adjacent mudflat areas in the company’s home province of Hunan.
The company is in a legal fight over the withdrawal of a license it claims was secured in 2009 after government in 2019 sought to enforce national rules on mudflat protection. Likewise, the company claims government actions are counter-productive because its fish farm in the lake was contributing to drinking water quality due to “parasite-eating, purification fish.”
A similar dispute with local government in far westerly Xinjiang Province has cost Dahu CNY 36 million (USD 5 million, EUR 4.7 million) in losses in 2019, according to the company’s estimates, which it shared with investors. The company has been faming fish and crabs in Ulungur Lake, near the border with Kazakhstan, but is now fighting with the provincial government over whether its operations there can continue.
Dahu’s case is indicative of much tension between local government, national enforcement teams, and seafood firms over whether or not environmental regulations should be tailored and implemented by local officials, who have long been accused of ignoring policy from Beijing that hurts economic growth.
On the financial side, diversification is proving difficult for seafood firms. Tilapia exporter Baiyang has reported major losses for 2019 from its investments in media firms. Chinese companies and funds compete ferociously for investment opportunities in promising start-ups and small- and medium-sized enterprises – a competition which has become more urgent due to the slowing economy and mounting overcapacity in many traditional industries.
However, lack of due diligence and a comparative lack of transparency often means investments are poorly thought-out, a China-based compliance professional at a risk management company told Seafoodsource.
“There’s lots of me-too investments and bad bets because there’s relatively limited places for the cash to go, especially since there’s limits on currency exiting China, and there’s lots of cash in Chinese private equity firms,” he explained.