Wednesday, 26 August 2015

Is China Fishery mispriced?

Due to ongoing investigations by regulatory authorities and declining profits, share prices of China Fishery has suffered a heavy beating. As at today’s price of $0.051, China Fishery's market valuation is s$187.8 million (US$134 million). 

Given that China Fishery holds one of the largest proportion of Peru's anchovy permits (approximately 17% of the country's quota) and that Peru is one of the largest exporter of such fish, the question is asked if Mr. market is pricing China Fishery correctly?

China Fishery business

In recent times, China Fishery has shifted from its contract supply business in the North Atlantic to that of processing Peruvian Fish meal. China Fishery’s main segment is now involved in the catching of anchovy in Peru, processing it and subsequently selling it off as fish meal to fishing farms worldwide. There it is commonly used as fish feed to rear other fishes which are farmed (e.g. Salmon).

China Fishery’s transformation has been achieved through its aggressive acquisition of fish meal processing plants and companies in Peru. The largest and of highest profile was the acquisition of Copeinca in 2013. Copeinca was one of the largest holders of fishing permits in Peru. As a result of these acquisitions, China Fishery‘s Peruvian fish meal business became its largest contributor to revenue. However, these acquisitions resulted in China Fishery being geared to a net debt to equity ratio of 57.8%.

The company now holds a large proportion of permit rights. And with Peru highlighting it is unlikely to issue more permits, one can safely assume China Fishery’s Peruvian fish meal business will not be eroded.

Balance sheet analysis

Given the low valuation awarded by Mr. Market, the signal seems to be that China Fishery’s business is in trouble and the ongoing investigations will destroy the company. However given that Copenica, now a subsidiary of China Fishery, holds an amount of Peru's fishing rights, it got me wondering what is the value of Copeinca’s business?

Valuation of Copenica

Before being acquired by China Fishery, Copeinca reported the book value for its fish meal business. This can be found in China Fishery’s FY 13 annual report:

From Copeinca’s own account books, its reported net book value of its business stood at USD $363,559,000. If we were to strip off the reported goodwill ($139,095,000) and property, plant and equipment adjustments of $29,140,000 which China Fishery wrote off, the carrying amount value of its business is USD $195,324,000. Furthermore, we have to account that China Fishery recently redeemed Copeinca's senior notes and hence this should be removed from our calculations. With that, the value of Copeinca is estimated to be in the region of USD $455,000,000 or s$638 million.

Consolidating this into the bigger picture, assuming the rest of China Fishery’s business has a zero book value and only Copeinca is of value, the group is worth about s$600 million or 16.22 Singapore cents per share (based on 3.684 Billion shares).              

China Fishery’s Earnings

Besides analyzing China Fishery through the balance sheet, another aspect is via the company's earnings prospect.

From its recently released third quarter report, China Fishery’s 9 months' earnings have declined 64.4% to USD $18 Million. This was mainly due to Peru’s decision not to allow Fishing activity during 2014 Season B (Oct 14- Jan 15). Furthermore, its profitability was weighed down by its ballooning debt interest, a result of high debts. Lastly, its earnings per share have been declining over the past 5 years.
A turnaround next year?

In a bid to reduce its debts, China Fishery recently did a right offering at $0.173 cents per share. The proceeds was used to redeem Copeinca’s US$250 million 9% notes. With the redemption of these notes, China Fishery will save an annual interest expense of US $22.5 million. In addition, assuming China Fishery is able to conduct its usual fishing activities for both Fishing Season A and B, one can reasonably expect it to deliver a USD $60 million profit for FY 2016, similar to profit levels in FY 2014.

A profit of USD $60 million will translate to 1.6 USD cents earnings per share or 2.2 Singapore cents. China Fishery will then be priced at a prospective P/E of 2.3 times.  Do note I made the assumption Peru opens both of its fishing seasons; 2014’s Fishing Season B was closed due to weather effects on fishing stocks.

So is Mr. Market right?

Benjamin Graham describes the stock market as a business partner who appears daily to either sell his interest or buy ours. This is how Mr. Graham describes “Mr Market”:

“Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.”

In short, the market is characterized by mood swings where prices quoted can be way depressed or over exuberant. As investors, it is important to us to discern that the prices quoted on the stock market are separate from the value of the underlying business behind each stock counter. This underlying value has to be appraised by us and not through the mood swings of Mr. Market.

Hence as individuals in the stock market, it is up to us to assess if a mis-pricing of China Fishery has occurred. This assessment can be based on the future prospects of its business and potential effects of ongoing regulatory investigations.

<Vested China Fishery at 0.048>


  1. Questions: What's the impact of carrying almost US$1b in its book in pricing the permits that it has? Is this "real"? It seems intangible and questionable?

    1. Hi Lizardo,

      Lets start off with what the fishing permit is. It is the quota amount which the Peru government grants to the company to fish annually and is perpetual, as long as the legal requirements are complied. For China Fishery, it is entitled to 16.9% of Peru's fishing quota for Central and North of Peru and 14+% in the south. As these are real permits, I think there is some value. To me, these permits are like owning a freehold land with building.

      As for the value stated USD$ 1.22Billion stated in its balance sheet, majority of its arose as a result of its acquisition of copeinca. The value of it can be questioned as each of us will have different valuation methodology for it. For me, I took the fishing permits value which Copeinca reported before it was acquired. The value was only 214 Million value. It was China fishery who adjusted it upwards to 986 million, resulting in the 1.22Bil fishing rights we see.

      Hence in my analysis, I took the reported book value of Copeinca $214 million as a gauge to look at the margin of safety instead of China Fishery's perceived value of USD$986 million. Even then, the value of Copeinca using its old value still showed an adequate margin of safety.

    2. Thanks for the detailed analysis. But perhaps room for caution needed. If there are up-pricing like this, leaves doubt if there are other "hidden" figures elsewhere as well.

  2. Hi Investmoolah,

    Like you, I'm also vested in this stock. Given that the group has made the public announcement that they have appointed the provisional liquidators, what do you think should be the recommended steps for minority shareholders like us?

    1. This comment has been removed by the author.

    2. Hi James,

      In liquidation, it is for creditors to first lay claims on their assets, after which the rest go to shareholders. From its balance sheet, China Fishery is worthless if we consider its goodwill and fishing permits as of zero value. However to me, there is worth in its fishing permit for now. So if post suspension, the stock prices falls to below 4 cents, i may hold it still.

  3. Hi,

    Thanks for your valuable inputs.

    Post suspension, do you think that China Fishery will be immediately delisted or will continue to be traded on the mainboard? I'm wondering if there is any other SGX counter that had undergone the same scenario and leave to fight another day?

    1. IMO, it will continue to be traded on mainboard. I do not know of any company who had undergone liquidation and leave to fight