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WARNING: LONG POST due to revisiting of old comments from Afralug

Not sure what happened to the old thread on Oceanus in which dydx and d.o.g. made excellent and insightful comments on the business. Maybe it was on Afralug? Whatever the case, I will reproduce them below.

Reason is because Oceanus has just announced a profit warning (see link):-$file/OGL_Annc_Profit_Warning_21_02_11.pdf?openelement

Posted by d.o.g. on June 1, 2010

Larger (heavier) abalones are worth more, so assigning the same value to abalones regardless of weight is not appropriate.

Also, the market value rises faster than linearly i.e. an abalone that weighs twice as much is worth more than twice as much in market value. So computing value by total weight doesn't work either.

Usually the abalones are sold at specific stages/weights, so it's more common to value them based on the quantity in each weight band, with a different per-weight value in each band.

The fundamental problem with abalone farming and indeed any long-lived agricultural business like timber, cattle or tobacco leaf production is that at any given time, there is a huge amount of capital at risk, while only a small part of the total value can be realized at any one time.

For abalone, it typically takes 5-7 years to reach full maturity and optimum market value. If the abalone are sold earlier, not only is the weight lower, the per-weight value received is also lower, so the IRR is lower. This has to be balanced against the negative cashflow throughout the growing period. As a result, the business owner must choose between cash flow and ultimate value.

The financial statements use fair value accounting which books estimated changes in market value as revenue. While this may comply with accounting rules, it is total nonsense from a cash flow perspective because none of the so-called fair value profits can actually be converted into cash. Only when the actual goods are sold and cash received will the company know what their real profits are.

The problem of negative cash flow is exacerbated when a company is growing, because more and more capital is tied up in the business. Thus, initial success can turn into eventual failure if the company is not able to obtain sufficient amounts of money at a reasonable cost to meet its working capital needs. More problematic is the poor market visibility: because each company only sees current market output, it believes the market is undersupplied, so it expands at a furious pace. Eventually all the new production hits the market at the same time, and prices crash.

There is a huge amount of pricing risk in abalone. Traditionally, demand has outstripped supply, resulting in very high per-weight prices. These prices have enticed many players to go into abalone aquaculture, to the extent that the market price of abalone has already begun to fall. Those who purchased abalone in Singapore during Chinese New Year should have noticed that prices were meaningfully lower this year versus last year.

Furthermore, market prices are spot prices reflecting current supply - they don't reflect the much larger future supply that is coming up. Oceanus is far from being the only abalone producer out there.

IMHO it would not be surprising if within the next 5-10 years, abalone becomes a commonly available food, available year-round at affordable prices. Good for consumers, not so good for producers.

For further reading, here's the 2008/2009 annual report of the Tasmanian Abalone Council:

In particular page 21 (Quota Holder Sub-Council Report) quotes Peter Cook, a keynote speaker at the 2009 International Abalone Symposium, as saying:

"Higher market prices of the past 10-15 years have been the engine powering farm expansions; however a “perfect storm” is currently driving market prices down 30% or more. A devastating combination of (1) a 400% increase in farm production in the past 9 years (much occurring in the last 3 years) and (2) the world economic downturn and (3) continual lack of development of “home markets” resulting in over 98% of the world’s farmed abalone marketed to Asia Pacific countries. Premium species are driving the Chinese market, with production and demand in China being a dominant factor but, unfortunately, not necessarily impacting overall world demand as many people expected”.

In other words:

1. Past abalone prices were very high;
2. Farms ramped up production; and
3. There is now oversupply.

This oversupply situation probably explains Oceanus' attempts to set up abalone restaurants and create a captive offtake channel. Unfortunately restaurants have their own issues as Oceanus is finding out.

And of course we have the other problem of biological assets - since abalones are living things, they can die from disease, stress, pollution etc. Insurance is often costly or simply unavailable. Even when insurance is available at a reasonable cost, and is actually claimed and paid, the company is reimbursed for its inventory losses, but not for market share losses. By the time it rebuilds production capacity years later, its old customers would have already turned to other suppliers.

Investors in Oceanus should think very hard about:
a. access to working capital;
b. abalone pricing; and
c. a "black swan" type event killing the abalone inventory.

That should inform their view as to its true value as a business, and its merits as an investment.

Posted by dydx on May 31, 2010

Oceanus has just announced that 4 parties have converted a total of 37.62m existing warrants into new Oceanus shares - all at a conversion price of $0.15/warrant - and the total outstanding issued shares has now reached a new record of 2,016.55m!.....

Based on the last done share price of $0.31, Oceanus now has a market cap of $625.1m. This is actually lower than when I wrote my last post on 29Jul08, at which point Oceanus had a higher market of $759m, based on the 1,765m outstanding issued shares and a share price was $0.43 then. So it does appear that all the business growth in the last 2 years and the secondary listing in TSE via 2 TDR issues so far, have not really enhanced total shareholders' value.

Based on the Q1-FY10 results announcement released at 31Mar10, Oceanus had in its farms in PRC a total of 172.919m live abalones in different stages of growth. Based on the current market cap of $625.1m, I get a derived value of approx. $3.60 per abalone being attached by Mr Market now. Frankly, I am not sure whether this value or method of valuation makes any sense. But what I do know is that in a seafood restaurant near my house, I can get live small-size abalones served steamed with fresh garlick for something like $4.00 each.

I think it is also interesting to note that actually Oceanus now has much more outstanding issued shares - approx. 11.7x! - than the number of abalones in its farms in PRC!.....

Musicwhiz's Comments on Oceanus following dydx and d.o.g.

A splendid and detailed analysis from d.o.g. as usual, and illustrates the inherent risks and problems in abalone farming for Oceanus!

Let me give my own comments and take from my observation of the company for the past few quarters:-

1) The CEO of Oceanus has been constantly featured in magazines, news reports and even on TV show-casing his abalones and his business model. To me, this smacks of something wrong – why is the CEO of a company spending more time promoting his business rather than running it? In my personal experience, the best CEOs are the ones who lay low, keep to themselves and just work hard on growing the business. These are usually CEOs who under-promise but over-deliver; unlike some CEOs I’ve met who do exactly the opposite (i.e. over-promise and under-deliver)! To put it in one sentence – there was way too much hype surrounding this company; hence valuations would have been pushed up too high because of this hype (and inflated expectations).

2) D.o.g has adequately explained the fair value accounting problems, and I have always felt that companies with biological assets always tend to use Fair Value accounting which is technically correct but in practice, it means nothing at all. As an accountant, any gains arising from a revaluation of either assets or inventory should have been conservatively and prudently accounted for in Equity under “Capital Reserves”, and NOT brought to the Income Statement to be recognized as fluctuating gains and losses. This departs from the old concept of “lower of cost or NRV” which was the prevalent practice pre-2000 (before the Enron collapse and subsequent Sarbanes-Oxley Act). Now, companies have become over-zealous in “revaluing” their inventory and investments, to the extent of producing absurdities when it comes to interpreting this financial information. Companies such as Wilmar and Guangzhao IFB (suspended) also have this item in their income statement, and frankly so did China Milk as well. To me, the concept of fair value is just that – merely a concept. The practical implications of fair value are that you assume you can divest or sell the asset for that exact fixed price, which in the real world may be all but impossible as it may upset the supply/demand balance. A good example would be mark to market of share investments based on market prices; but when it comes to selling, if liquidity is not present, the huge cascade of sell orders will easily crash the price.

3) Regarding the huge working capital requirements of the business, one should note that this may be the reason for the Taiwan Depository Receipts (TDR) plan which Oceanus has rolled out a while back. The plan was to issue new shares as part of the TDR plan to raise more funds to grow more abalones. I think the dual-listing “fever” which has hit our shores can clearly show up which companies have a constant need to raise capital, and which can simply grow using internal cash flows.

4) A quick glance at Oceanus’ 1Q 2010 Balance Sheet ended March 31, 2010 also shows that fair value gains made up the bulk of their revenues at RMB 177 million. The Balance Sheet itself shows a drain in cash from RMB 561 million as at Dec 31, 2009 to RMB 298 million as at March 31, 2010, an outflow of close to RMB 263 million in just 3 months. Their current assets also consist of RMB 910 million of abalones, which as d.o.g. mentioned may or may not be able to realize their fair value due to downward price pressures and a potential future over-supply situation. Hence I would view the current asset balance with appropriate suspicion. In addition, a look at the cash flow statement will also show negative free cash flow for the Company.

Just my 2-cents worth. Not vested.
Oceanus share price has plunged by over 12% today in response to the above mentioned news. It is trading at $0.25 now.

(Not Vested)
I guess it takes some time for friendly warnings like the above to be fully appreciated, usually only when its too late. I hope nobody here gets caught out too badly if any at all.
(Reuters) - Kohlberg Kravis Roberts & Co is in talks to buy Singapore-listed abalone farmer Oceanus Group Ltd in a deal that may be worth around $500 million, three sources with direct knowledge of the matter told Reuters.

Oceanus trading halt issued.

(Not Vested)
(29-04-2011, 02:11 PM)Nick Wrote: [ -> ](Reuters) - Kohlberg Kravis Roberts & Co is in talks to buy Singapore-listed abalone farmer Oceanus Group Ltd in a deal that may be worth around $500 million, three sources with direct knowledge of the matter told Reuters.

Oceanus trading halt issued.

(Not Vested)

So this values the company at what price and PER? It's so hard to get numbers for the number of issued shares; SGX website doesn't seem to have it.
at the last transacted price of .275, their market cap stands at 554mio. this represents a 15.5 PE and 1.63 PB. i pulled this info from

in any case, this business is not attractive, even with a 20% discount to price, for reasons already stated in this thread.
These funds are smart - buyout at close to current market valuation and then re-list it at premium valuations in Hong Kong; and cash out the profits.

Since sentiment is all round bullish, this seems like a viable strategy. Pity the hapless shareholders though - Oceanus has delivered negative returns since the middle of 2010!

I agree the business is not worth that much. It's just a case of the Fund "flipping" the shares, just like people flip properties!
Not many people are willing to believe that the business is not as attractive as it seems. Or perhaps it is a question of valuation?

Business Times - 30 Apr 2011

Oceanus shares surge on report of KKR takeover


A REPORT that Oceanus Group has become the takeover target of a global private equity firm sent its shares surging yesterday.

Oceanus shares hit an intraday high of 28 cents in heavy trading and were last traded at 27.5 cents, up 3.5 cents or 14.6 per cent, before an afternoon trading halt kicked in pending an announcement.

Trading of its Taiwan Depository Receipts (TDRs) in Taiwan was not halted and the TDRs fell 2 per cent on choppy trading to NT$7.23 (31 Singapore cents) at market close at 1.30pm.

Citing sources, Reuters said yesterday that Kohlberg Kravis Roberts & Co (KKR) was in talks to buy Oceanus in a deal that could be worth some US$500 million.

KKR has lined up financing of US$300-400 million from a group of banks, according to one of the sources.

Two of the sources quoted by Reuters said that this privatisation move could eventually see Oceanus list in Hong Kong to unlock value in the stock.

Oceanus declined to comment. As at yesterday, its market cap was about S$555 million.

Listed in Singapore since 2008, Oceanus has two main business segments based in China - aquaculture production and abalone processing and distribution. It also operates the Ah Yat Tian Xia chain of restaurants with outlets in China, Hong Kong, Taiwan and Singapore.

Last month, it reported weaker than expected results for 2010 ended Dec 31, with net profit attributable to equity-holders slumping 46 per cent to 188.5 million yuan.

As at Dec 31, Oceanus had 30,123 abalone breeding tanks and an abalone population of 178.4 million. Oceanus' biological assets were valued at 1.155 billion yuan as at end-2010. It has a 'sell' rating from OCBC Investment Research, which expects further impairment charges to be incurred from the ongoing restructuring of the restaurant segment. Notwithstanding the disappointing financial results, DMG & Partners Securities maintained its 'buy' call on the stock on the basis of valuation while Daiwa Securities kept its 'buy' call on the belief that fourth quarter results are an aberration.
Business Times - 09 Jul 2011

Oceanus proposes to invest in SIF Agrotech

Firms still in talks, have yet to enter into a binding pact



OCEANUS Group is looking to invest in water treatment and environmental engineering company SIF Agrotechnology Asia Pte Ltd.

But both the companies are still in the midst of negotiations and have yet to enter into a binding agreement on the investment, Oceanus cautioned shareholders.

The proposed investment, which is subject to finalisation of terms and conditions, is not expected to have a material impact on Oceanus' earnings per share or net tangible assets per share for the current financial year.

The aquaculture producer and abalone processor and distributor seeks to tap economies of scale by covering other areas of its operations in a bid to be a fully integrated value chain player in the seafood industry.

Oceanus currently has its own abalone farm, processing and packaging unit and a restaurant chain.

Last year, the company was also engaged in a joint venture with an Australian lobster aquaculture technology company to devise new ways for the commercial production of lobsters.

Stocks of Oceanus rose one cent to end trading at 23.5 cents yesterday.
I thought the just released negative Profit Guidance is rather interesting.....$file/OGL_Q2_profit_guidance.pdf?openelement

So Oceanus is now expected to report a loss in Q2, vs. a nice RMB121.9m NP in Q1 mainly contributed by a RMB246.3m gain arising from changes in fair value of its live abalone inventory.....$file/Oceanus_1QFinResults.pdf?openelement

So Oceanus has proven again that indeed seafood farming is an unpredictable and risky business.

Based on part of the story given in today's announcement, in anticipation of commercial-scale production of dried abalones from Q2 onwards, Oceanus had moved a portion of its live large-sized abalone inventory from its land-based farms to sea-based farms - presumably to fatten the abalones - before processing them into dried abalones. However, a delay in processing equipment delivery caused the large-sized abalones to be kept for longer than intended at sea, exposing them to overcrowding due to increased size resulting in high mortality. So an operational misstep had caused a portion of these supposedly highly-prized large-sized abalones to die prematurely at sea, and therefore a portion of Oceanus's live abalone inventory has been lost - or as good as disappeared!

So seafood farming is a tricky business too!
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