China Fishery Group Limited - Why is the stock trading so far under water?

20/6/2013 – China Fishery Group Limited is an SGX mainboard-listed fishing, fishmeal and fish oil company, whose share price is so far below its book value that value investors might be tempted to take a second look.

It also generates free cashflow, has cash in the bank, pays a dividend and has a ranking in the Governance & Transparency Index.

What's not to like?

Price is what you pay, value is what you get

At the end of March, its net asset value was US$0.84 per share, compared with the last traded price of S$0.37, or US$0.29, having traded at more than three times this level two years ago.

So, in this case you're paying just 34 cents for every dollar's worth of value.

Profit is opinion, cash is fact

It generated around US$50 mln in cash from operations in the most recent quarter, up from US$15 mln in Q2 a year ago.

At the end of the second quarter it had more than US$25 mln in cash in the bank.

Better or worse than fixed deposit?

Last year it paid a dividend of 1.9 Singapore cents, giving the stock a yield of more than 5%.

Compare that to the interest you receive on your savings in the bank (although obviously you need to factor in the higher risk that comes with stocks, compared to bank deposits)!

Better invest in a company you can trust

It was ranked 317th in the Governance & Transparency Index with a score of 33 upon 100.

Question

1. Why is the stock trading so cheaply?

For a start, there are few free floating shares, which means public shareholders have access to very few shares.

Pacific Andes International Holdings owns 70.5% shares, investing in 2004 to eventually list China Fishery Group on the Singapore Exchange in 2006.

American asset management firm, The Carlyle Group, bought 11.1% (13.6% including warrants) in 2010.

That leaves less than 20% to the rest of the market.

Stocks with low free float generally do not perform as well as others because the so-called price discovery of the shares is not as efficient as more liquid shares.

Question

2. Will the Russians clamp down on China Fishery?

China Fishery's revenues could take a hit once Russia reigns in its fishing industry.

Alaskan Pollock, which is fished in the Russian North Pacific, accounted for more than 50% of FY11 earnings.

If Russia decides to tighten foreign fishing participation, China Fishery and the entire Pacific Andes Group will suffer.

Already, the Russian government ordered Pacific Andes to sell its Russian fishing assets by the Federal Anti-Monopoly Service.

China Fishery says it's acting in accordance with the law.

Question

3. Will there be no dividend increase until 2019?

China Fishery paid a dividend of 1.9 Singapore cents for FY2012.

But this was down from 4.5 cents in FY11 and 5 cents in FY10 (page 34 of the FY12 Annual Report).

Given that the conditions surrounding its US$300 mln Senior Note issue last July limits dividends, the payout to shareholders might not improve until 2019, when the Notes are fully redeemed.

The notes themselves have a coupon rate of 9.75% - a very substantial rate in the current environment.

With the debt-to-equity ratio at 64.7% in FY12, and little chance of an improving dividend, this could be another reason why the stock is trading so cheaply.

Question

4. Will it try again for Copeinca?

China Fishery's aim to become the world's biggest fishmeal and fish oil producer, through a takeover of Peru's second largest fishing company, Copeinca ASA, has failed.

When the offer closed at 9pm Central European Time on May 23, it had received acceptances for 36% of Copeinca's shares.

But with 50.7% shareholder Cermaq ASA not accepting the bid, it failed to reach the 50% hurdle, and so the offer fell through.

China Fishery Group currently owns nearly 10% of shares in Copeinca; recently acquired around March 13 from Ocean Harvest, previously Copeinca's second largest shareholder.

China Fishery says it's considering its options, but it must get the support of other shareholders, such as Marine Harvest ASA from Norway, worried bondholders, and the Dyer Coriat family, who together own just under 40% of Copeinca.

Furthermore, Cermaq ownership in Copeinca is backed by the Norwegian government, its biggest shareholder with 43.5% share ownership.

Worried bondholders say that Copeinca's debt levels would soar over 5x if China Fishery Group succeeds, so they are making their opposition heard.

Question

6. What can it do to improve its image, and that of the industry?

According to an article on The Center for Public Integrity discussing Peru's vanishing fish, the Peruvian fish market is amok with rampant cheating and lax controls, allowing 630,000 tonnes of Peruvian anchoveta to get 'lost' between 2009 and 2011.

In the findings, fish stock between the holds of Peruvian fishing boats and the factory scales were simply not counted.

This costs the Peruvian economy evaded taxes and excesses on fishing quotas, hurting both human and environmental economy.

This issue might not be specific to China Fishery, but it certainly doesn't help the image of the industry.

One issue which did arise for China Fishery originates from Namibia.

Question

7. Can it confirm it has fair labour practices?

The Chinese are known to pay high prices to use fishing quotas for their own ends and then try to recoup these expenses by pressing down expenses on labour.

Fishermen on Chinese ships have also attested to the appalling working conditions aboard ships of Chinese fishing companies who have paid for quotas.

Even if they pay attractively for these fishing quotas, it does not mean the fishermen working on the vessels of companies who have sold their quotas are going to get the same jobs.

They, for most of the time, are left jobless because their vessels need not fish.

Question

8. What can be done to prevent a repeat of the Namibian incident in May?

MV Leader, a fishing vessel belonging to the Andes Pacific Group, has been reported by The Namibian to be photographed dumping fish back into Namibian waters.

A fisheries inspector documented the act which contravenes the Marine Resources Act and the ministry has fined Pacific Andes, raising protests that the fines were far too lenient on infringers.

Dumping fish back into the sea is a way of maximising the value of fishing quotas by retaining the most profitable fish stock and disposing of the ones with the least value.

China Fishery wrote an open letter to shareholders that it was a technical issue of pipe overflow that caused some discharge of fish to happen.

It also says the fine was "not intended to be a punishment, but based on the value of fishmeal lost due to this situation".

China Fishery has also been reported to have paid N$24 mln to fishing rights holders in Namibia (where N$16 mln would have been the regular rate), for their fishing quota.

This again, not only puts native fishermen out of their jobs, it also impacts native stock supply and prices.

China Fishery says it employs 55 Namibians full time.

Question

9. How sustainable is the fishing industry?

The government in Lima announced in March that it is making miles of Peruvian coastal waters off-limits to the fishing industry.

This move is aimed to let the anchoveta population recover.

Disclaimer: We are not making any recommendation for you to buy this stock. We're just pointing out its key fundamental ratios, as famed value investors such as Warren Buffett do. It goes without saying that you should do your own research before you buy any financial product.


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