China Fishery: High inventory of fishmeal in 4Q08 was sold in 1Q09

Management have updated us that they were able to sell off about 80% of their outstanding US$33m in inventory of fishmeal which was not sold at the end of 4Q08. This is a positive in our view as 1Q09 is usually low season for fishing. We believe that 1Q09 net profit will be relatively similar to 1Q08 of US$40.4m due to the sale of its outstanding inventory.

Since the beginning of 2009, crude oil prices have remained below US$60/barrel which is a benefit for China Fishery (as of 5 May 2009 oil price was US$54/barrel). Majority of the company’s cost incurred comes from transporting its fish caught and fishmeal to China. Therefore with oil prices remaining low in 1Q09 we expect to see better margins.

Management has also informed us that their 1,500/tonne freezing capacity vessel will be deployed at the end of May and is scheduled for operations between July to Aug 2009. With its South Pacific operations coming into full gear in 2H09, we believe that that this will help to boost revenue contributions. However, this will also mean that the company’s gearing may go up. The company expects their debt level to increase by 12% to US$33.6m. Though this will increase its gearing ratio, we are not too concerned as these loans are long term due within three years.

Share price has recently exceeded our target price of S$0.86. We will be revising our price target after next week’s 1Q09 results release.

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China Fishery: Decent results in FY08

China Fishery’s revenue grew 13% to US$459.4m in FY08 which was inline with our expectations. Its strong revenue growth was achieved through an increase in sales volume of Alaskan Pollock by 10.3% to 213,000 MT. ASP for Alaskan Pollock also increased by 7.5% to US$1,609/MT. Through its fishmeal operations in Peru, CFGL was able to acquire 5 addition fishing vessels and 1 fishmeal processing plant in FY08. This helped them increase its catch volume by 39.3% to 326,000 MT and increased production volume of fish oil by 25.6% to 131,260 MT.

Net profit grew slightly by 6.6% to US$94.3m due to high fuel costs. We had expected CFGL to achieve net profit of US$98.9m. High bunker fuel cost throughout the year led to the milk earnings growth. We believe that FY09 will be a different story for CFGL as fuel prices are at its lowest from its peak of US$147/bbl in July 2008. We forecast FY09 bunker cost of US$61.8m, 35% less than our FY08 estimate.

High gearing remains, but long term strategy in the South Pacific Ocean is a positive. As of 31 Dec 2008, CFGL has a cash position of US$15.3m as compared to US$18.3m in 2007. We remain concerned that CFGL has a high gearing ratio of 0.92x and a sizeable net debt of US$309.5m. Management has indicated to us that their high gearing is for its CAPEX plans in the South Pacific Ocean. The South Pacific Ocean has an abundant resource of Chilean Jack Mackerel which is used for fishmeal as well as human consumption in Africa. We believe that its trawling operations in the South Pacific Ocean will be revenue contributing in 2H09 and firmer growth is expected in FY10.

We maintain BUY with a target price of S$0.86. We have a price target of S$0.86 based on 3.8x FY09 P/E which is pegged to the FSTC FY09 P/E of 3.9x.

China Fishery Group: Fishing through the storm

China Fishery Group Ltd (CFGL) is currently benefiting from China’s growing demand for aquatic products. China accounts for 57% of CFGL’s revenue. According to the National Bureau of Statistics of China, aquatic products CPI rose 11.2% YoY in Nov 2008, suggesting that demand remains robust relative to supply. We believe that this trend could persist for a few more quarters.

Falling oil prices will benefit CFGL. Crude oil prices have fallen from a high of US$147/bbl in July 2008 to US$40/bbl as of Feb 2009. We are assuming FY09 average crude oil price of US$65/bbl, lower than FY08’s US$100/bbl. Consequently, we forecast FY09 bunker cost of US$61.8m, 35% less than our FY08 estimate. We forecast FY09 net profit growth of 18.7%, which we believe will excite investors.

High gearing, but strong operating cash flow. We are concerned that CFGL has a high gearing ratio of 0.93x and a sizeable US$245.8m long term loan. However, CFGL has strong operating cash flow (US$60.2m for 9M08) which is expected to persist and help its refinancing of US$80m short term loan. Its 9m08 interest coverage was an acceptable 4.5x. In addition, we believe that lower interest rates in FY09 will be positive.

We rate CFGL a BUY with a target price of S$0.86. We have a price target of S$0.86 based on 3.9x FY09 P/E which is pegged to the FSTC FY09 P/E of 3.9x.