Oceanus Group - All geared up for growth

Preparing for exponential growth. Oceanus Group Ltd (Oceanus) is engaged in the breeding, processing and sale of abalones. It currentlytargets the domestic PRC market but plans to branch out to exports after its ongoing expansion plans gain traction. The group is in the expansion phase of its business life cycle, suggesting that while the business entails a fair amount of risk, returns could potentially be rewarding if its growth strategy is well executed. Oceanus' growth will be propelled by two key drivers - the expansion of its abalone population and the maturing age profile of the abalone population.

King of abalone producers. Oceanus is the largest land-based abalone producer with a population of 137.9m caged abalones and 24,000 tanks spread across 41 farms. It ranks among the lowest cost producers in the world with breeding costs amounting to RMB35/kati as compared to RMB60-70/kati for average PRC sea farmers, and RMB150-160 for Australian and South African farmers. In our view, Oceanus' strategic advantages lie in the group's economies of scale and its partnership with reputed industryplayers such as Ah Yat Abalone Group. The favourable breeding climate at its farms serves as a further boost to the group's competitiveness.

Aggressive expansion strategy. The group is embarking on aggressive expansion plans as part of its strategy to ward off competition from new entrants. These include acquiring land, building more tanks and breeding more abalones. The group plans to expand its capacity to 40,000 tanks from 24,000 by end FY09, and will increase its abalone population by 150m per year.

Growth opportunities abound. Additional growth areas will come from its downstream activities. Oceanus is evolving from upstream farming towards downstream activities such as processing and restaurants. We view this strategy positively as it not only enlarges the group's target market, but also reaps better profit margins. The group is in early stages of its downstream activities, and we expect these businesses to only contribute meaningfully to the group's earnings in the next two years.

Initiate with BUY. Oceanus offers growth amid a recessionary environment. We expect the growing numbers and maturity of its abalone population to drive the growth of the group's earnings and asset valuations. Key risks include execution risk and spread of diseases. As the essence of Oceanus' value lies in its biological assets, we value the group based on 2x blended FY09/10F NAV, deriving a fair value estimate of S$0.40. We initiate coverage on Oceanus with a BUY rating.

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