Debt worries for China shellfish firm as it seeks more investors

Published on
July 15, 2014

Plans by the Zhangzidao Group Co. to raise up to RMB 1.3 billion (USD 209 million, EUR 154 million) this summer in a private placement of shares are being made more challenging by a heavy debt burden worrying potential investors. One of China’s best-known seafood players and a key shellfish producer is dangerously over-leveraged, according to Chinese financial analysts.

Zhangzidao is currently running a debt to net assets ratio of 55.06 percent, higher than the rate of seven other listed seafood and fisheries companies listed on China’s stock exchanges. It’s also higher than an industry average of 40.9 percent, according to a lengthy analysis piece on the firm published by the Economic Information Daily newspaper published by the state-run Xinhua news agency.

Its market capitalization of RMB 10.54 billion (USD 1.7 million, EUR 1.3 billion) makes Zhangzidao one of China’s biggest seafood brands but the company will need to reduce its pile of interest-bearing debt as a proportion of its total net assets in order to lower the cost of servicing its debt, notes the unsigned article. This after Zhangzidao’s debt-to-net assets ratio rose to 54.7 percent in 2013, up from 48.04 percent in 2012 and 38.5 percent in 2011.

Zhangzidao raised a total RMB 3.3 billion (USD 532 million, EUR 392 million) from stock listings in 2006 and again in 2011 as well as bond issues. The firm depended on bank loans and short-term corporate bonds to fund the expansion of its scallop cultivation and processing capacity, with a 250,000 mu (15mu=one hectare): these projects, as yet incomplete are in doubt given the company’s debt load, according to a Beijing-based securities analyst who has worked on Zhangzidao’s previous listings.

“Can it take on any more debt? Will it require a roll over or bailout by local government? We’ll have to wait and see,” said the analyst.

Meanwhile, Zhangzidao’s price-to-earnings (share price divided by earnings per share) ratio of 108:50 suggests the Dalian based firm has a lot to do to live up to investors’ expectations. Gross profit margins at 22 percent is only slightly better than an industry average of 20 percent while a net sales margin of 4.57 percent is barely on par with industry averages of 4.60 percent.

Revenues at the firm have never hit the highs of the last quarter of 2011, when sales earnings soared 112 percent year on year. Zhangzidao saw profits slip 8 percent year on year in 2013, to RMB 96.9 million (USD 15.6 million, EUR 11.5 million). Revenues were largely flat at RMB 2.6 billion (USD 418.8 million, EUR 308.7 million) — an increase of 0.48 percent year on year. This compares to RMB 2.9 billion (USD 467 million, EUR 344 million) earned in revenues in 2011 with profit that year at RMB 621 million (USD 100 million, EUR 73.7 million).

Others are more optimistic: The purchase of Zhangzidao shares by company management is proof of confidence in the long-term health of the company, argues Jilu Securities analyst Xie Gang. He also believes that the presence of shareholders like the state-run Ping’an financial conglomerate and Aegon Industrial Fund Management Co. is further proof of investor confidence in the firm.

Zhangzidao has pledged to reduce debt through building sales through more channels such as online and business-to-business sales to food ingredients companies. Wu Hougang, company chairman and Sun Yingshi, president, have bet on the long-term demand for high-grade domestics and imported seafood in China and have spent big on building out a network of cold chain warehouses and trucks. The Dalian-based firm last week followed up with the signing of a strategic cooperation agreement with e-retailer Beijing Jingdong Century Trading Co. for online seafood sales.

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