China Fishery Group – AGM Highlights and Snippets

I attended China Fishery’s AGM which was held on April 28, 2008 (4 p.m.) at Raffles Hotel Level 3 Function Room. Incidentally, Banyan Tree were also holding their AGM there and it was a little confusing at first because Banyan Tree had all their banners out in full force and I thought I had mistakenly stumbled into the AGM of another company.

The crowd trickled in slowly and by the time the AGM started, there were about 30+ people in the room and by then, it was announced by the hotel that there would be a “fire drill” and “sorry for the inconvenience caused”. It turned out that the fire drill was somewhat unconventional as it meant a power failure during the middle of the AGM, causing all lights to go out and the microphones to be unworkable. Nevertheless, this had the effect of amusing the shareholders and Management rather than distracting them, and I was pleasantly surprised that Management was able to make do with an uncomfortable situation and still carry on with the Meeting.

What was special about this AGM was the use of an official poll to tabulate results of votes, rather than the usual “show of hands” which is highly inaccurate. CFG are adhering to proper high standards of corporate governance by introducing this, even though it meant a 15 to 20 minute delay as the votes were being tallied and counted. In the meantime, Management was candid enough to invite questions from shareholders on the business and on the financials. After the meeting, I approached Mr. Dennis Chan (Finance Director) and Mr. Ng Koo Kwee (Executive Chairman) for a chat about CFG’s plans and prospects.

Chat with Mr. Dennis Chan:-

1) Upgrading of Supertrawlers – The three upgraded supertrawlers will be deployed to the South Pacific Ocean by 2H FY 2008 to increase the catch volume and also to tap relatively untouched waters. Mr. Chan mentioned that upgrading was done so that the supertrawlers would use less bunker fuel (hence saving costs as oil prices are climbing) and also increase the fish hold capacity of the vessel (thus increasing top line). Three more will be deployed to the South Pacific by 1H FY 2009, thus increasing the number of supertrawlers there to six. All the upgrades are funded by internal operating cash flows.

2) Expansion of Fleet – When asked about the company’s plans to grow its business, Mr. Chan did not rule out securing more VOA (Vessel Operating Agreements) and he said that if the price was right, of course CFG would like to increase their vessel fleet through a fifth or even sixth VOA. However, these VOA must come at a reasonable price as the cost of assets to be acquired in Peru had already risen nearly 100% due to the consolidation in the fishing and fishmeal industry there. He also said that CFG is unlikely to acquire more fishmeal plants from now on, and will be focusing more on acquiring more vessels to boost margins and revenue growth.

3) Interest Rate on Senior Notes – I mentioned that the interest rate on Senior Notes was 9.25%, which was actually very high. Mr. Chan said that Peru’s effective tax rate is about 37%, thus the effective interest rate which CFG was paying on these senior notes comes up to only about 6+%; thus this was still affordable and the fact that CFG has strong operating cash flows means that Management is not worried about not being able to pay down the debt gradually and the principle in 2013. In fact, a share buyback program was just approved at the EGM, but Mr. Chan said that it makes no sense to buy back your own shares using cash when cash can be better deployed to pay down debt. He does not rule out the possibility of slowing paying off the Notes when CFG has accumulated a sizeable cash balance. After all, he maintained, if not for the acquisitions of VOA and additional fishmeal plants, the company would be in a very strong positive cash flow position; and should remain so from FY 2009 onward.

Chat with Mr. Ng Joo Kwee:-

4) Fishmeal Prices – Mr. Ng expects fishmeal prices to trend upwards over time. He said that prices are now hovering around US$950 per tonne, but they hit a peak of about US$1,200 per ton some time last year. He thinks prices will stabilize and slowly climb as fishmeal is an important component of animal feed and the demand will always be there. He also advised shareholders to look for fishmeal resources on the Internet to keep track of fishmeal developments and prices. Fish oil is an essential component of fishmeal and I confirmed that CFG was also producing this product.

5) Steam-Dried versus Flame-Dried Fishmeal – Since it was announced that steam-dried fishmeal would fetch better prices and margins as compared to flame-dried fishmeal, I proceeded to ask Mr. Ng if any of the recent plant acquisitions would be converted to steam-dried variety so as to command higher ASP. Mr. Ng said that the manufacturing and production facilities required for steam-dried fishmeal were very different from those of the flame-dried variety; hence the same plant could not be used to produce both unless the equipment was overhauled. That said, he did assure that one of the plants was being converted from flame-dried to steam-dried.

6) Probable Contingent Liabilities – I also asked about whether CFG may be exposed to possible lawsuits and litigation for offenses such as damaging the environment or over-fishing. Mr. Ng laughed and assured that the impact would be non-existent at best; minimal at worst. He mentioned that each vessel was tagged with a GPRS-like device in order to track the locations of each vessel as it went trawling. This was to ensure that the vessels did not stray from the designated fishing zones, thus there was no danger of “accidentally” fishing in protected waters.

7) Regarding Expanding the Business – Mr. Ng mentioned that CFG would continue to look for suitable opportunities to expand the business by buying up smaller companies with fishing vessels. He said that the industry was very fragmented and only the larger players could afford to survive as they had the “holding power” to keep inventory of fish to wait for more favourable prices. The larger players were literally “gobbling up” the smaller companies and this meant that their competitors were also growing along with CFG. Thus, even though CFG was the sixth largest fishing company in terms of capacity, other competitors were also expanding.

8) Cash is King – Mr. Ng concluded our chat by emphasizing that it was better for CFG not to be overly aggressive in their acquisition due to the sub-prime crisis. He did not want to gear CFG excessively and mentioned that having enough cash was very important. CFG prefers to take a prudent approach to expanding over the next few years so as to slowly integrate their operations; instead of doing a fast-track expansion which may drain the company of cash and resources. This is something I would personally prefer as well – steady, consistent growth instead of quick and explosive growth only to fizzle out later.

Overall, the atmosphere was cordial and professional and the Chairman was friendly and stayed back to take questions from several shareholders. I certainly hope to see the company growing earnings steadily (10-20%) per annum while keeping up their dividend policy. Looking at the Ng family’s track record in building up PAH and PAIH, I have much less to worry about.