Will bubble burst for China’s listed seafood firms?

Published on
May 4, 2015

Wu Hougang, chairman of Zhangzidao, this spring promised to investors to work for CNY 1 per month until his company returns to revenue level “pre calamity.” He’s referring of course to the collapse in profit last year after what the firm said was a disastrous slump in its aquaculture output. Wu has also promised an improvement in transparency and “risk control capacity” at the firm.

The timing of the profits collapse at Zhangzidao (China’s largest listed seafood firm by market capitalization) came just before a bull run in China’s stock market — bad timing perhaps for Zhangzidao. Meanwhile, Wu’s peers have been busy raising cash on a booming Chinese stock market. Shandong Homey Aquatic Development Co. Ltd. announced that it has the regulators’ approval to issue CNY 400 million (USD 64.54 million; EUR 57.7 million) worth of commercial paper.

Shandong Oriental Ocean Sci-tech Co. Ltd. pulled off a private placement of shares to raise over CNY 1.3 billion (USD 221.00 million; EUR 187 million). Shanghai Kaichuang Marine International Co. Ltd. saw its share structure change recently when the Holley Group took advantage of positive trading conditions to sell almost a million shares, a 4.92 percent stake in the firm.

This is happening because China’s stock market has soared in recent months, in large part due to government efforts to get money flowing through the markets. Shares on the Shanghai board were this month trading at up to 220 times historic annual earnings in some cases and investors are piling in thanks to a feel-good propaganda campaign in the state-run press. Shanghai and Shenzhen are turning over USD 250 billion (EUR 224 billion) a day, compared to USD 45 billion (EUR 40.3 billion) on the New York exchange.

Historically, elevated expected returns and the lower risk attached to big state firms have made Chinese stocks a hit with global investors, who are allowed to purchase a limited amount of stock through special quota systems. But recent reforms have allowed investors in Hong Kong and Shanghai a “through train” to invest in each other’s stock exchanges, giving a new boost to smaller firms on the mainland Chinese board, which has often lacked the liquidity of Hong Kong due to the mainland currency (the yuan/renminbi) being non-convertible.

China’s brokerages in recent years have been upbeat on agricultural and fishery stocks — basing that optimism on government blueprints to modernise food-producing industries to better supply the growing nutritional demands of a wealthier population. Leading securities firms like Ji Lu and Guoxin have published analyses in recent months pointing to government policies and subsidies for the agriculture and fisheries sectors. Ongoing improvements to the county’s logistics networks, another government priority, has also been pointed to as favourable for listed firms in the sectors.

But even as Zhangzidao seeks to get the company back on track and into investors’ favor again, there is a big danger of a bubble which may hurt newly enthused investors who put money into Chinese seafood firms. A normal price to earnings (P/E) ratio on the Standard & Poors 500 index is 20. Look to the Oslo Seafood Index and you’ll see Leroy Seafood at 13.3 and High Liner Foods at 20. But in China the aquaculture and processing firm Oriental Ocean trades at a P/E ratio of 110, while Shandong Homey Aquatic Development Co Ltd trades at a stunning P/E of 310. Shrimp focused Zhanjiang Guolian Aquatic Products Co. Ltd. this week trades on the Shanghai exchange at a PE of 123.

These ratios look overly optimistic. China, where a large proportion of investors are first-time speculators drawn to the stock market by government publicity, has seen a bull run end badly before: Investors would do well to remember the crash in 2007 when the Shanghai composite index suffered a 70 percent fall following a similarly government-assisted bull run. The current bull run may help China’s seafood companies to raise new cash in the short term but there is no proof that it will increase their performance or earnings — or the confidence of long-term investors in the sector.

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