China Fishery Group

From DBS Vickers:

China Fishery Group: HOLD (Downgrade from BUY) S$0.77; Bloomberg: CFG SP
Fishing in volatile waters;
Price Target : 12-Month S$ 0.72 (Prev S$ 1.15)
By: Andy SIM CFA +65 6398 7969
Heightened regulatory risks in Russia could undermine confidence of
Alaskan Pollock supply
North Pacific accounts for 54% of revenue
Counter is cheap and operations in North Pacific are not disrupted
but it could do without attention by Russian authorities
Regulatory risks concerns could cap share price; downgrade to HOLD,
TP: S$0.72

Heighten regulatory risks to create overhang. We see heighten regulatory
risks for CFG’s North Pacific operations. The Russian Federal Antimonopoly
Service (FAS) has highlighted concerns of foreign companies establishing
control over Russian fishery companies. The FAS has added that it intends
to implement measures to establish “law and order”. A Russian news website
(Food Monitor) recently reported that 10 Russian fishing companies have
been investigated and FAS plans to initiate proceedings on the companies
for violating the monopoly law.


Alaskan Pollock accounts for 54% of revenue. Alaskan Pollock specie sales
from its supply contracts, via third party suppliers, are a main revenue
and profit generator for CFG. It accounts for c.54% and c.64% of the
group’s revenue and EBIT, respectively, in FY11. We understand from CFG
that its operations under its current supply agreements do not infringe on
Russian laws and are undisrupted currently. However, in the event that the
Russian fishing companies are penalised, we believe this could have an
impact on supply of fishes to CFG. We estimate that a 10% drop in fish
volumes/ sales could have a c.9.5% impact on FY13F earnings, all things
being equal.

Upside could be capped on regulatory concerns. Downgrade to HOLD, TP
lowered to S$0.72. Whilst the counter is trading at a low valuation of
c.5.6x and there are no certainties on any changes in regulations at this
juncture, we believe regulatory concerns could cap share price performance,
at least in the near term. As such, we downgrade our recommendation to
HOLD, from BUY, and lowered our TP to S$0.72, pegged to 5x FY12F/13F
earnings, at -1.5x std deviation below average.

Today China Fishery has clarification announcement:

There have been allegations in certain media publications that the Group owns
fishing quotas or owns or operates fishing vessels in Russian waters in violation
of the applicable laws of the Russian Federation.

The Group confirms that it does not own any fishing quotas in Russian waters
nor owns or controls any Russian fishing companies that have such quotas nor
operates any fishing vessels in Russian waters. Based on legal advice, the Group
believes that the Group’s fish supply arrangements are in full compliance with all
relevant laws and regulations of the Russian Federation.

From Lim & Tan:

The board of directors (BOD) of China Fishery Group (CFG) said that there have been allegations in certain media publications that the group owns fishing quotas or owns or operates fishing vessels in Russian waters in violation of the applicable laws of the Russian Federation.

CFG confirms that it does not own any fishing quotas in Russian waters nor owns or controls any Russian fishing companies that have such quotas nor operates any fishing vessels in Russian waters. Based on legal advice, the CFG believes that their fish supply arrangements are in full compliance with all relevant laws and regulations of the Russian Federation.

The above is significant as CFG does most of their fishing in Russian Waters and would be significantly impacted if the allegations were to be true.

Fact is, CFG’s share price has been disappointing, having declined 39% from its Feb’12 high and 68% from its early 2011 high of $2.34.

Well known US based private equity firm Carlyle Group’s purchase of an 11.1% stake in the company in June ’10 at $1.85 a share only helped the stock temporarily reach its high of $2.34 in early 2010 before the stock went on a consistent decline to 75 cents currently which is its lowest since June ’09. The all time low of 48 cents was hit in Mar ’09.

CFG’s share price has been stuck in a narrow range of 75-82 cents since mid-July ’12 till current and 85-90 cents from May ’12-mid-July ’12.

Part of the reason is the continued low confidence in China related stocks and also its repeated delays in the start of the fishing season causing 3Q to June ’12 profit to decline 44% to US$21mln dragging down 9 months to June ’12 profit by 10% US$93mln.

Our upgrade to BUY in Feb ’12 when the stock was trading at $1.18 had proved premature and we are now downgrading to HOLD until management can deliver on their promised catch volumes.

This stock is once Crabcrab's favourite stock...

However, their recent "PROPOSED ISSUE OF FIXED RATE SENIOR NOTES BY CFG INVESTMENT S.A.C., AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CHINA FISHERY GROUP LIMITED" which bear an interest rate of 9.75% make crabcrab raise its eyebrow and suddently become very very very prudent with this Chinese company... hence completely offload the shares, at a loss.....

See below attachement:
http://info.sgx.com/webcorannc.nsf/Annou...endocument

Paying an unusual high interest rate in a bond issue (especially in a relatively low interest rate environment) usually indicate financial distress of a Company.... Good luck

No matter how I read d.o.g NYtimes article, I am not able to come to the conclusion that fish in Peru / Chile may disappear in 1 year time. Blame on my bad english.

Vested

LA times have a article on chinese migrating out of their country - especially the rich. How the world goes around come around.

Spore gov in particular heap lots into Chinese Co., chinese business (look at Capital Land - most of their investment in china booming??). The rich are running away. They claim china place to do business but dont want to stay.

If they raise all the money in the world IPO to do business, at the end the abscond with it to developed Country! Sillypore!

Whilst sgx, legal firms (well connected), PR firms (well connected) and Audit firm (well connected) make money from IPO guess who is paying it - haaaahhhhaa

Some perspective on overfishing (from a overfishing advocate web), only 25% of the fishes are overexploited or depleted based on UN Food and Agri Organization. So, we still have 75% to go on for couple of years or maybe even decade.
http://overfishing.org/pages/why_is_over...roblem.php

As for Jack Mackerels in Peru and Chile, it is true that the population has declined tremendously. The key issue to me is how China Fishery can plan to re-deploy its own trawlers for other type of fishing (maybe solve the flagging issue) or fish Jack Mackerels outsider of the exclusive economic zone which is not moderated. However, we have to be reminded that contributes to 25% revenue of China Fishery, even though it is material and significant, it is not the major focus or worry. There are also seems to be consolidation of the Peru/Chile fishing companies

Interesting article and statistics on Chinese Fishing Industry. http://www.rsis.edu.sg/publications/Work.../WP246.pdf

Justifies that demand for fish is growing as per population increases.

(24-09-2012, 10:32 PM)crabcrab Wrote: This stock is once Crabcrab's favourite stock...

However, their recent "PROPOSED ISSUE OF FIXED RATE SENIOR NOTES BY CFG INVESTMENT S.A.C., AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CHINA FISHERY GROUP LIMITED" which bear an interest rate of 9.75% make crabcrab raise its eyebrow and suddently become very very very prudent with this Chinese company... hence completely offload the shares, at a loss.....

See below attachement:
http://info.sgx.com/webcorannc.nsf/Annou...endocument

Paying an unusual high interest rate in a bond issue (especially in a relatively low interest rate environment) usually indicate financial distress of a Company.... Good luck

The reason why the bond was priced at such a high rate was explained by the ifrasia article posted by Nick where the comps ranged from 8-11%. So 9.75% is somewhere decent in the middle of bond valuation range.

In my view, the real risk is the latest russia investigation to cartel business of PAC and China Fishery. Typically, such cartel allegations will not be in favor of the alleged and I believe a hefty fine or penalty may be imposed. Perhaps, after the announcement of the penalty may be the best time to buy into China Fishery.
http://en.fas.gov.ru/news/news_32470.html

ridiculous financing... "9.75% is somewhere decent in the middle of valuation range."

Obviously the management will claim to grow at a rate above 9.75%, if it was that easy to generate an ROE above 10%, many competitors will be attracted into this fishing industry...

If you own a company that has to tap on 9% financing, you had better try to find a new (and silly) owner for your company