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Sunday, October 30, 2005

HQ Sustainable Maritime Industries (HQSM)


HQSM (yahoo, website) is involved in ocean fishing, fish farming, and fish processing. They have 4 ships. They also have a deep sea duty-free port (the only foreign joint venture in China to have one). They continually pass USFDA inspections. Sales and marketing covers the US, Canada, Japan, Korea, China, and Southeast Asia (offices in NYC, Montreal, Beijing, Shanghai, and Haikou). They participate in international seafood shows in Boston (I didn't see them on the list of exhibitors), LA (they're on the list), and Shanghai.

Chinese language website
(not linked by the English website). Some various seafood companies.

The Market

A NOAA presentation on The Aquaculture Revolution, very good stuff. It has a great chart showing Chinese dominance of the tilapia aquaculture market. And the next chart shows the amazing growth of the market itself. Very exciting stuff.
Many aquaculture species, such as catfish and tilapia, are grown almost entirely on vegetable-based feeds....
They warn that just because people aren't eating a particular fish today, doesn't mean they won't be eating it tomorrow. They give tilapia as one example of that.

Here's a presentation by Kevin Fitzsimmons; President, World Aquaculture Society; Professor, University of Arizona; Sec./Tres., American Tilapia Association. Consumption of talapia just continues to climb. At least $317 million of sales in 2004. It claims prices have been stable for several years (and will continue to be stable) but will not go up with inflation.

They have 10% of the market for Chinese tilapia fish sold in the US (the US is the largest market for tilapia). The market for tilapia in the US has grown from $20 million in 1992 to $173 million in 2002. China produces 47% of the world's tilapia. HQSM said that in 2004, demand for their product was 4 times greater than capacity. So they're trying to rapidly increase capacity. They're creating a fish feed plant to control quality of food to fish suppliers in Hainan and consolidate the relationships. Also developing "organic" products for certification and a price premium. They're doing mergers and acquisitions, claiming to choose carefully.
Our main marketing offices are currently in Beijing and Shanghai. More than half our products are exported to the U.S., Australia, South Korea, Japan and other Asian countries. Some of these exports are sold under the buyers' brand names. In addition, we have long-term business relationships in Canada, Germany, France, Belgium, and Spain. We regularly attend major International Food Shows in Boston, Los Angeles, Shanghai, Beijing, Singapore and Brussels. I believe we are the only PRC based integrated producers present at these shows. We also work with such leading U.S. distributors as Beaver Street Fisheries (they carry tilapia), Slade Gorton (tilapia), Paragon Seafood Company tilapia, Crocker & Winsor Seafoods (tilapia), Mareida Trading Co., and Tomich Brother Fish Co.
From Slade Gorton:
Tilapia has a long shelf life when fresh, as a result of tightly regulated harvesting, processing and shipping processes. Water quality and high-grade feed are the keys to raising premium tilapia. Tilapia act like sponges, taking on the flavor of the environment they are harvested in. As such, tilapia raised in cement tanks are generally better tasting than those raised in ponds which may take on a muddy or gritty flavor.
They're located Haikou, the chief city in the province of Hainan, which is an island in the extreme southern part of China (which forms part of the Gulf of Tonkin with Vietnam).

AmeriCulture is a fish farm for tilapia. They're not a public company, unfortunately.

FDA fish finder.

The Numbers
Looking at the 10-K (See 10-K posting for better details)
US Dollars
In the 8 months from May 1, 2004 to Dec 31, 2004 (audited US GAAP)...
Aquatic activities nearly stopped during 2004 due to renovations. The health and bio-product segment was acquired in August 2004. So these numbers are fairly meaningless.
Sales: $20.8 million
Gross margins: $5.1 million (24.7%)
Large advertising and G&A costs
Operational income: $758K (3.6%)
Net income is greatly distorted by a one-time other income
Removing the one-time income but keeping all taxes (which actually seems correct based on a sanity test), net income is $564K
Outstanding shares: 95,055,123 on Dec 31, 2003 (which is WAY more than the weighted ave given due to 70 million shares issued to raise $22.5 million dollars)
(there's something funky going on with a gigantic writedown of assets related to goodwill but not really showing up normally on the balance sheet)
Net income per share for last 8 months of 2004: 0.6 cents per share (i.e. a bit over half a cent)
This would correspond to little less than a cent per for a year.

The cash flow is also very odd due to the funky issue above. Without it, cash flow would look good, with a significant investment going on.

Let's jump ahead to Q2 of 2005, ending June 30, 2005.
100,261,523 shares outstanding on that date.
For three months:
Sales: $6.5 million
Gross margins: $2.8 million (43%) Warning: Jiahua Marine had 82% gross margins while "aquatic products" had only 18% gross margins (and gross loss during the same time in 2004).
Operational income: $1.3 million (17%) with no provision for doubtful accounts
Taxes are only $97K (special economic zone, which is not guaranteed in the future)
Net income: $1 million (1 cent per share) However, with a normal provision it would be closer to $750K, so earnings per share are probably something like 0.75 cent (three quarters of a cent). This is with a low tax rate. There's also $200K of other income.

But the cash flow is destroyed by increase in AR ($1.5 million!), decreases in AP ($626K). Operations burned $1.2 million in cash!

More financing by issue of stock: $619K
There's now just over 100 million shares.

  1. The seafood business is definitely low margin. Don't expect any operational leverage as it scales. Every dollar of revenue gain will probably only fetch 16 cents? Are there efficiencies to be gained? That's the real question to be answered when I do the detailed work. [answer: some, but not a lot]
  2. The fish market looks like it will definitely expand as the US and probably other countries continue eating more of this fish I had never heard of before (but then I hate seafood).
  3. They seem to be in a fairly dominant position in the market and that is very likely to continue.
  4. They seem to have big accounting issues.
  5. Based on $750K earnings per quarter and 100 million shares, I'd say it's worth about 50 cents.

Applied for American Stock Exhange. The company needs a 1:20 reverse split to qualify.
Price of stock now $.225
OS shares are now 127,996,703
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