The sea cucumber farmer Anyuan comes second on the Hong Kong list. But will investors eat it?

Key points to remember:

  • Profits for sea cucumber farmer Anyuan Marine are down as he makes his second Hong Kong listing attempt this year
  • Investors May Avoid Stock After Recent Scandal Involving Another Seafood Breeder Zoneco Group

By Jony Ho

They might be small, but the modest sea cucumber could still translate into big sums of money with the potential to grow a business worth billions. China’s leading sea cucumber breeder Anyuan Marine Breeding Co. Ltd. certainly hope that will be the case, following his Subscription request in Hong Kong on the last day of November. This was the second time Anyang has applied for Hong Kong listing this year, following a premiere in May that then expired without any movement.

Sometimes referred to as sea slugs, sea cucumbers are bottom creatures generally scorned by Western palettes, but considered a delicacy by many Chinese. The industry of catering to such creatures has always found a profitable business among these local diners, spawning a number of large companies worth billions of dollars and an industry with over 1,000 ranchers.

Although apparently niche, the market stands out for its growth potential. According to a forecast by market research firm China Insights Consultancy (CIC) cited in Anyuan’s IPO prospectus, the value of China’s sea cucumber aquaculture industry will increase from 20.8 billion yuan ($ 3.28 billion) in 2015 to 30 billion yuan in 2020, resulting in compound annual growth of about 7.6%.

Although it was affected in early 2020 when the global pandemic began, the Chinese restaurant market rebounded as the country brought its epidemic under control. Thus, the sea cucumber market is expected to resume growing at a compound annual rate of 7.2% over the next four years, to a value of 42.4 billion yuan in 2025.

No. 1 in China

Anyuan has three production bases in the coastal provinces of Shandong and Liaoning, covering about 101,900 cubic meters of water for breeding sea cucumbers. The company ranked first in sea cucumber farming in terms of water plan and sales, according to the CIC report. But its market share was only around 5.4%, reflecting the high degree of fragmentation in the industry.

Although Anyuan is the industry leader, it faces three major concerns for investors.

The first is financial volatility. Its prospectus shows that Anyang’s income is on an upward trajectory, from 167 million yuan in 2018 to 214 million yuan last year, and to 114 million yuan in the first half of this year. If it maintains this performance, its annual income will reach 228 million yuan this year, up from last year.

But its pre-tax profit has moved in the opposite direction, from 112 million yuan to 106 million yuan in the past three years, and is set to decline further this year with a profit of 49.77 million yuan in the last three years. first half of 2021. This shows that the company’s profitability has declined despite the growth in sales.

As a result, the group’s return on total assets fell from 27.7% to 17.1% over the past three and a half years, and its return on equity also fell from 31.1% to 20%. In short, the good old days of the business of selling sea cucumbers for big profits have fallen out of sight.

Unusually high temperatures in the summer of 2018 in Liaoning led to massive sea cucumber deaths, leading to price hikes of more than 50% that benefited farmers like Anyang. But when supplies returned to more normal levels, prices and profit margins plummeted.

In its prospectus, Anyang cited its inability to consistently price its products at expected profit margins due to reduced bargaining power or changes in market conditions as a risk factor that could adversely affect its business. The first half of this year is a good example, with the average price of juvenile sea cucumbers falling 33.8% year over year, mainly due to the larger number of smaller sea cucumbers in percentage terms. of the total.

Small clientele

Anyang also faces the challenge of relying on a small group of customers for a large part of its business. Between 2018 and 2020, its five largest customers represented 40.3%, 59.6% and 57% of its revenue, respectively. Although these customers have a relationship dating from one to eight years, Anyang stressed that there is no guarantee that they will continue to maintain the same level of cooperation. In addition, these customers may also demand more discounts due to their large purchases.

The third concern is the lengthening of the period for Anyang to collect her invoices, which she attributes mainly to the growth in sales to two strategic customers in Liaoning with longer payment cycles. The average number of days of the company’s trade receivables revenue nearly tripled, from just 41.4 days in 2018 to 113.9 days in 2020. At the same time, its trade receivables and other bad debts have increased. also increased from 35 million yuan to 100 million yuan, also compromising its finances.

Less apparent than these three concerns, market confidence could also be a concern. Does anyone there remember Zoneco Group Co. Ltd. (002069.SZ)? The grower of seafood, such as scallops and abalone, was a hit with investors when it was listed in Shenzhen and became known as the “premier seafood stock” in China. But enthusiasm has started to wane after repeatedly claiming losses over the past few years for a number of reasons, including accidents such as escapes, disappearances and mass deaths due to the abnormal temperatures of the water, reduced precipitation and even warmer-than-usual weather. .

Sensing something fishy, ​​the China Securities Regulatory Commission conducted its own investigation into the potential illegal disclosure and non-disclosure of material information. Zoneco was later warned and fined last year, with senior executives reputed to be involved in illegal activities subject to legal sanctions

Affected by the scandal, Zoneco’s stock fell from a high of 12.17 yuan in the past five years to just 2.08 yuan at the start of last year, losing nearly 83% of its market value. .

Of course, Anyuan is a completely separate business. But investors don’t always see it that way, which means it’s entirely possible they’ll dismiss another big seafood seller like Anyang.

Because its listing is in its early stages, Anyang has yet to give a share price, or even the number of shares it plans to issue and the expected market value. But we can get a potential assessment by looking at some of his peers.

Listed in Shanghai Shandong Homey Aquatic Fishing Co. Ltd. (600467.SH) is the closest to Anyuan in terms of activity. This company’s profit in the first three quarters of this year was about 58 million yuan, which would translate to an annual profit of about 77 million yuan. On this basis, Homey would have an expected price / earnings (P / E) ratio of approximately 51 times.

Among other aquaculture companies listed in China, Fujian Tianma Science and Technology Group Co. Ltd.(603668.SH) and Guangdong Haid Group Co. Ltd. (002311.SZ) have similar P / E ratios of 54 times and 52 times, respectively. Zoneco, CNFC Overseas Fisheries Co. Ltd. (000798.SZ) and Aquatic Products Co. Zhanjiang Guolian Ltd. (300094.SZ) all lose money and therefore have no P / E ratios.

Using its after-tax profit of 37.26 million yuan in the first half and assuming a stable performance in the second half, Anyuan would have a profit of about 74.5 million yuan this year. So, a P / E ratio of 50 times would give it a market value of about 3.8 billion yuan, or about 600 million dollars.

Its three negative factors and the broader recent weakness in Hong Kong stocks could mean Anyuan may be valued at a slight discount to its peers. But only time will determine how much a haircut whets investor appetites.

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