China’s aquaculture firms are facing a triumvirate of challenges: tighter environmental rules, competition from big feed companies, and a more challenging corporate debt environment for privately-owned enterprises.
The scale of the impact of China’s tougher enforcement of environmental regulations is apparent in Baiyang Industrial Investment Group’s 2019 financial documents. The tilapia farmer and feed producer suffered a 15 percent drop in aquafeed sales due to the “reduction in fresh-water [aquaculture] cages in Guangxi Province,” a draft of Baiyang’s 2019 audited report revealed.
While the company’s aquafeed sales fell, Baiyang’s feed unit suffered a much steeper drop of 41.5 percent (49,900 tons) in sales of pig feed. The swine flu outbreak, which was the primary driver in the drop in pig feed sales, is creating a vicious cycle of competition as pig feed firms seek to diversify into aquafeed, putting pressure on Baiyang’s margins.
Big players are also moving into aquaculture operations, the auditor’s report noted. Large Chinese companies that have recently moved into the aquaculture sector include feed giants Tongwei Group, Guangdong Haid, and New Hope Liuhe.
“Some commercial feed-based companies have stepped up their development in the downstream aquaculture industry, and some of their production capacity has shifted to producing feed for self-use,” it said. “Competition has intensified, sales prices have fallen, and the gross profit level of aquafeed has also fallen.”
While Baiyang has been damaged by its unsuccessful venture into the education sector, and the report makes it clear the firm faces a tough outlook in its traditional business. That could explain why management made the decision to join forces with Qingdao Guoxin Development (Group) Co. Ltd., a large state-owned conglomerate, last month. Qingdao Guoxin is another new player in China’s aquaculture scene, having recently bought out the salmon farming assets of another firm, Oriental Ocean.
Faced with slower economic growth and high leverage levels, China’s privately-owned enterprises have over the past year been courting investors from the state enterprises, which control key chunks of China’s economy such as banking, energy, and telecoms. The country’s flashiest privately-run real estate developer, Soho China, announced in March it’s in talks with U.S.-based financier Blackstone over a buyout of the company equity and debt.
Even though China’s government has sought to encourage the state banking sector to increase its support for the private sector, the spread in corporate bond coupons for private and public enterprises has been widening as investors have become increasingly nervous about private companies’ corporate debt, Alicia Garcia Herrero, chief Asia economist at the Hong Kong offices of investment bank Natixis, told SeafoodSource.
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