Competition, debt, rising costs pressure top Chinese firm’s results

Published on
May 6, 2015

Tighter competition and squeezed margins are being blamed for poor financial results at one of China’s leading processing and aquaculture firms. Yantai-based Oriental Ocean Sci Tech Co. saw its profits tumble 27 percent in 2014 to CNY 41.5 million (USD 6.64 million; EUR 5.81 million).

Revenue for the year at CNY 605 million (USD 96.8 million; EUR 84.7 million) was down 1.79 percent. “Fierce competition” among processors was the main cause of the profit drop, according to Shi Che, company chairman and general manager.

Last year’s results were also impacted by costs: The 36.6 percent increase in costs outpaced earnings from aquaculture last year, which grew 18.9 percent on the previous year. 

A slower Chinese economy means the firm has been unable to grow sales of its salmon, which the firm is breeding in tanks. The company, which also farms sea cucumbers, has struggled to open sales channels for its salmon, with questions persisting over the company strategy of supplying the salmon live in tanks to local supermarkets rather than pre-cut for sashimi.

Meanwhile, debt remains a big drag on profitability. Oriental Ocean issued CNY 1.3 billion in stock to pay down over CNY 900 million in bank loans. Yet despite the recent profit slump financial analysts continue to be optimistic about Oriental Ocean, with analyst Liu Xiaobo at Everbright Securities in Shanghai predicting profits will recover this year to CNY 90 million (USD 14.4 million; EUR 12.6 million) with that figure stretching to CNY 150 million (USD 24 million; EUR 21 million) in 2016.

Liu’s prediction is based on the company’s ability to use a booming stock market to pay down debt and plans to restructure the company away from low-margin processing. “Aquaculture is a cash-intensive industry and it requires constant investment into research and new products,” according to Liu.

Liu also points to a three-year lock down on shares held by the family of company chairman Shi Che (who has a 38 percent stake in the company) and predicts this will give investors confidence in the future of Oriental Ocean.

Oriental Ocean’s long-term strategy is to shift from its hitherto reliance on export-focused processing to aquaculture, producing high-margin species for domestic buyers. Having established itself as a processor, the firm has cast around for ways to benefit from rising consumption of pricey seafood among an increasingly wealthy local consumer base.

Also working in the company’s favor is a well-established network of self-owned stores around northern and central China, along with a logistics network of more than 100 refrigerated vehicles. This is significant given logistic costs account for 40 percent of the cost of production in China, (compared to 20 percent in the United States), according to China’s ministry of commerce.

Oriental Ocean specializes in cod, haddock and mackerel with the firm shipping fillets and frozen blocks at three seafood processing plants with total processing space of 70,000 square meters.

Contract processing has largely declined — cod and haddock goes mostly to the United States and EU but mackerel for the Japanese market keeps the firm’s two cold-chain bonded warehouses busy.

While the firm has benefitted from access to cash in the current Chinese stock market bull run, Oriental Ocean is also buffeted by the company’s subsidiary businesses, which like its salmon business also target the spending power of China’s middle class. Hotels, schools and a property management company and some of the other businesses under the company umbrella.    

Listed on the Shenzhen stock market, Oriental Ocean in 2012 was named among “the most valuable brands of Shandong,” an annual government honors list for local corporations.

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