Friday, October 12, 2007

China Fishery – Acquisition of Fishmeal Plant in Chimbote, Peru

On October 10, 2007, China Fishery (for which Pacific Andes now owns 63.9% of) announced the acquisition of their seventh (7th) fishmeal processing plant in Chimbote, Peru for US$15.3 million. The Group already has two other plants in Chimbote but this is the first plant which is capable of processing both steam-dried and flame-dried fishmeal within the same facility. This would prove beneficial in terms of efficiencies and economies of scale. The plant has a processing capability of 103 tonnes per hour, for which 60% is for steam-dried fishmeal and 40% is for flame-dried fishmeal.

Steam-dried fishmeal is considered a higher quality product than the flame-dried variant (this could be because of the way it is prepared ?); thus it can command a higher market price, which implies higher margins. The fact that the new plant is 60% dedicated to steam-dried fishmeal is comforting and shows that Management was looking out for this factor when considering the acquisition. According to the press release, producing steam-dried fishmeal is also more energy-efficient and thus will lead to better cost savings as well as environmental benefits. The acquisition will increase CFG’s fishmeal processing capability to 549 tonnes per hour, of which 220 tonnes will be exclusively for steam-dried fishmeal. Since these offer higher margins, I expect the Group to gradually shift production towards this higher margin product in order to boost earnings.

The plant also contains a cannery (for canning the fishmeal), an ice plant and 44,500 square metres of ocean-front land for future expansion. The last point is important as it allows the plant to be expanded and extended in future, in case the production volume for fishmeal needs to be ramped up. With this acquisition, the time taken for the fishmeal to be brought to the coast for unloading by trawlers and vessels can be reduced as CFG already has 6 fishmeal plants along the coast. This reduction in turnaround time means that the trawlers and fishing vessels can be put out to sea more quickly in order to improve their catch; and it will help to optimize the supply chain. Chimbote, being the largest fishing port in Peru, will help to aggregate and consolidate the Group’s resources and assist in achieving better economies of scale.

The Group is currently looking out for more plant acquisition opportunities and leasing opportunities in order to scale up their operations more effectively. Currently, CFG already owns over 5% of the total vessel capacity available to the industry. If the Group makes more meaningful acquisitions, it can serve to improve margins significantly, in addition to CFG’s current refurbishment of the super-trawlers to elongate them (so as to increase their hold capacity).

PAH is set to benefit directly from this acquisition as they now own 63.9% of CFG. The financial results for 1H FY 2008 should be out by mid-November 2007.

6 comments:

Anonymous said...

Hi abit out of line , I am from www.collinseow.com . wondering if you like to exchange links

musicwhiz said...

Hi there Collin Seow,

I have visited your blog and website and I must admit that I am confused as to why you would request to exchange links as your entire website is about technical analysis. There is not even a small bit of fundamental analysis or company analysis within the site which I navigated for a while; thus I do not see the point in linking together as there would be a "clash of idea".

You can say that being a value investor, I do not believe in the "value" of market timing and technical analysis. Sorry if it sounds blunt, but basically my blog is more leaning towards an appreciation of the business aspects of a company, and not merely its price movements.

Regards, Musicwhiz

fishman said...

Hi musicwhiz,

How do you know that "Steam-dried fishmeal is considered a higher quality product than the flame-dried variant"?

Reading this post I realise it's important to find evidence to support claims, especially from management. Becasue I notice some projections made were based on the above allegations!

By the way, very curious, fishmeal is for human consumption or fish-food? heh heh

Thanks for sharing and have a good week ahead!

cheers!
fishman (now I feel in danger!)

musicwhiz said...

Hi fishman,

Agree that there is no way of indepedently verifying if steam-dried fishmeal is more superior, but think of it this way - I would rather go for something which is steam-dried (i.e. absence of flame and hence carbon deposits) than something which is flame-dried. Even in cooking, they are always stressing that steam-cooked food is more healthy than flame-cooked. Thus, I made that assertion. Not unreasonable hor ? :)

Sometimes Management makes assertions cos they know the business much better than the layman. While it is true that we should try to independently verify everything, sometimes a certain amount of trust should be placed in Management, I feel.

Fishmeal is a component and raw material for other by-products in the fishing industry, I think. It is also used as a good protein source.

Have a good week too ! (Now I better read up more myself....haha)

Regards, musicwhiz

fishman said...

Hi musicwhiz,

Thanks for responding! Not trying to add work to you lah, just a bit skeptical here and there. Like how to know who and when to trust. Enron comes to mind! I guess we'll never know untill its too late!

cheers!
fishman

musicwhiz said...

Thanks too fishman for responding. Today's CIMB GK Goh report on PAH talks about steam-dried fishmeal being of higher quality than flame-dried fishmeal. I guess they probably asked Management ! Haha. Plus, it can sell for more as well. You can get the report (while stocks last) at remisiers.org.

Cheers ! Musicwhiz