Sea cucumber glut hurts Chinese producer’s financials
Weaker demand for high-end species has badly hit results for a big-name Chinese seafood processor and aquaculture player. Homey Aquatic Development Company’s profits fell a massive 82 percent to CNY 21 million (USD 3.3 million; EUR 2.94 million) last year, according to just-released company data for 2014.
Weak demand for sea cucumbers in particular hit Homey’s earnings, with a huge 80.6 percent fall in company earnings under the “seawater aquaculture” heading in the company’s annual report. Revenue came in at CNY 880 million (USD 140.8 million; EUR 123.20 million), down 9.1 percent. Revenue from frozen products processing (Homey processes fillets and shrimp) at CNY 290 million (USD 46.4 million; EUR 40.6 million) was down 9 percent while company earnings from “marine fishing” at CNY 160 million (USD 25.6 million; EUR 22.4 million) were down 24.6 percent last year compared to 2013.
The results were lower than expected, explain Liu Xiaobo, an analyst covering Homey at Everbright Securities. He points to a 23 percent fall in sea cucumber prices last year, largely due to government anti-corruption campaigns which have cut luxury official banqueting.
Like many larger Chinese seafood firms Homey is caught in a dilemma between a higher margin aquaculture business (average 30 percent profits) and a far less lucrative processing business which turned in a profit of 9 percent in profit margins. “Firms like Homey might want to move their focus to higher-margin businesses like sea cucumber but the volatility in the prices means they can’t give up processing as the income from this area of the business is slightly more dependable.”
Depreciation of the Japanese yen proved another big challenge for Homey in 2014 – this reduced the buying power of customers in Japan, a major market for producers in the region, noted the firm in its annual report for 2014.
Homey’s longer-term future is brighter, according to Everbright analyst Liu, because of the seafood industry trend to large so-called “dragon head” or regionally dominant enterprises that are consolidating into larger operations with higher food safety standards and better quality control than smaller peers which are gradually being pressured out of the sector by a more stringent food safety regime in China. Benefits of scale will mean profits at Homey will rise to CNY 120 million (USD 19.2 million; EUR 16.8 million) in 2015 and CNY 170 million (USD 27.2 million; EUR 23.8 million) in 2016, Liu predicts.
Debt however remains a big challenge for Homey: “financial costs” rose 49 percent year on year in the first three quarters of 2014, according to company results. This is because a rush of players into the sea cucumber business has resulted in a supply glut, which will challenge prices in the medium term, according to Lin Haoxiang, an analyst at UBS Securities. “Average sea cucumber prices will remain low and this is eroding profitability,” explains Lin.
Listed seafood firms have benefitted from a bull run on China’s stock markets recently, as well as positivity around the agricultural and fisheries segments due to frequently stated government commitment to raising and securing China’s growing demand for food.