China stock analysts pick seafood on stronger retail prices, demand

Published on
July 3, 2014

Better prices, government policy support and a rebound in sea cucumber sales are among the key reasons why China’s securities houses are sounding bullish on local seafood stocks this summer.

Analysts have been pointing to a Chinese Ministry of Agriculture survey of 80 seafood markets nationwide which showed prices for seafood up 2.21 percent and 4.95 percent year on year in April and May respectively. A research note by Qilu Securities also notes shellfish prices rose by 3.43 percent and 9 percemt in the same period. “Prices had been depressed in 2012 and 2013 by bad weather and pollution incidents, now there at a turning point,” said the Qilu Securities note.

Qilu analysts expressed confidence in the revenue and production potential of the so-called “dragon head” firms — a core of large seafood producers and processors who get preferential support from regional governments keen to modernize the sector: Among them shellfish specialist Zhangzidao Group Co. as well as sea cucumber leaders Shandong Homey Aquatic Development Co. and Dalian Yi Qiao Marine Seeds Co.

Better management and marketing are also being highlighted by stock analysts. “Companies are leaving the pure expansion mode and focusing more on value add and efficiency, they are following the modern agriculture model set by government,” said Yang Tianming, analyst at Guoxin Securities, who points to Zhangzidao’s ability to rise scallop yields and use of higher quality seeds while also engaging in eco-tourism and new sales channels such as online sales through its own and third party websites.

Tianming explained how agriculture and fishery firms are being leaned on by officials to heed government policies for agricultural modernization set by the 18th Congress of the Communist Party two years ago which made modernization and industrialization of agriculture as a top priority of the government. This requires companies to “…add value and reduce low-quality capacity.”

Likewise, Yiqiao is becoming more self-sufficient in its requirements for seedlings, according to Guo Weiming at Northeast Securities, who is predicting a brighter future for Yiqiao based on what he sees as increased medical uses of sea cucumbers that will support a recovery in prices. Weiming is therefore predicting a 2.3 percent rise in revenues to CNY 545 million (USD 88 million, EUR 65 million) in 2014, rising 24.5 percent in 2015 to CNY 679 million (USD 109 million, EUR 80 million).

The importance of sea cucumbers — which have tended to be high margin and focused at the domestic market — is suggested by the focus that Chinese analysts put on sea cucumber prices in examining firms like Homey and Yi Qiao, which also have fish and shellfish processing activities.

Prices for sea cucumbers fell in the past two years due to oversupply and a Communist Party crackdown on high-end consumption among its members that started in 2012. But prices are now rebounding with June average prices in Weihai wholesale market of CNY 120 (USD 19.33, EUR 14.19) per kg showing a big improvement on CNY 100/kg (USD 16.10, EUR 11.83) average in the first quarter – though some way off the previous CNY 160/kg (USD 25.76, EUR 18.92) high in 2011.

China’s analysts put much store in government policy backing for fisheries, with many quoting vice minister for agriculture, Niu Dan, who in April called for “building a modern fisheries industry,” stressing several priorities: better seed stock for fish farmers, a reduction is antibiotics use and residues in seafood, as well as improving the sustainability of aquaculture.

State policies to promote fishing in international waters are behind the optimism on China National Fisheries Corp said Luo Jia Quan at Changjiang Securities. He forecasts the listed firm getting a boost from an injection of assets from parent firm and top shareholder China National Agriculture Development Corporation (CNADC), a state run holding company. Quan believes CNADC plans to list part of its other subsidiary, China Aquatic Products Co.: With boats in the Atlantic, Indian Ocean and the Pacific and output of 100,000 metric tons a year the, firm has ten times the pelagic capacity of China National Fisheries Corp., according to analyst Quan. Since 2008 they’ve added tuna long liners with more capacity for cold, fresh, frozen and ultra-low frozen products, pointed out Quan.

Some firms however are feeling the pressure of competition for China’s coastline — among them Shandong Oriental Ocean Sci-Tech Co. The firm is struggling to get access to new waters while “relatively slow” development of salmon and collagen has been disappointing, warned Everbright Securities analyst Liu Xiaobo.

Oriental Ocean’s problems may be related to a new found ambition in China’s government to get more money and jobs out of its oceans. The 2013 Statistical Bulletin of China’s Marine Economy shows a 6.7 percent increase in “maritime pharmaceuticals” output worth CNY 22.4 billion (USD 3.6 billion, EUR 2.7 billion). There’s also been an emphasis on tourism and energy exploration.

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