Change in product mix. In terms of revenue breakdown, Frozen Fish SCM (Supply Chain Management) accounted for 60% of revenue versus 55% in the previous 1Q. There was a deliberate effort to move its product mix to lower priced fish offering higher margin. The PRC market remained its key market, and accounted for 74% of revenue or HK$1501m. This was followed by East Asia at 20% and Europe at 3%. Total debt increased marginally QoQ from HK$5273m to HK$5652m, giving net debt to equity of 0.9x.
Delaying use of quota in anticipation of better prices. Management mentioned that the push of its quota to the last quarter will be beneficial as prices should improve later on, which should be better for both its fish and fish roe prices. As such, management expects catch volume to be better towards the later part of the year. Capex is likely to remain manageable at US$20m for China Fishery Group for the rest of the year and at a modest US$1-2m for PAH. While oil prices have recovered from the year's low, management said that if oil stays at around US$70 per barrel, it will account for about 13-14% of its costs.
Maintain BUY. As the results were fairly in line with our expectations, we are maintaining our forecasts for FY10 and FY11 for now. We expect the vessel optimisation exercise to continue and yield better results later in the year. Current risks to our earnings include the possible impact from the El Nino effect, which could impact its fishmeal operation in Peru. At the same undemanding valuation peg of 6x blended earnings, our fair value estimate remains at 31 S cents. The stock has done well since our last report in Jul 2009, up 29%, but we are retaining our BUY rating as its valuations are not expensive and there is potential for future price upgrades.
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