China Fishery - FY 2007 Analysis and Review (Part 2)

To continue the second part of my analysis and review, I will be touching on the Cash Flow Statement (CFS) and also discussing some strategies which CFG will be undertaking in order to boost their business and grab a larger market share. Some of the points discussed are worthy of debate as to their effectiveness, but the idea is to put them out on the table so that they can be objectively analyzed and commented on, so please feel free to criticize each point constructively.

Cash Flow Statement Analysis

Operating cash flows were healthy for FY 2007, with a net cash inflow of US$173.9 million. This is mainly due to the higher volume of business (which generates higher cash flows) and also a decrease in other receivables and prepayments, which caused a net cash inflow on the indirect method of preparing cash flow statements. The decrease in other receivables resulted in a net cash "increase" of US$51.8 million compared to a decrease of US$38.0 million for FY 2006. There was also an increase in trade payables which resulted in a net cash inflow of US$19.0 million compared to less than US$1 million inflow for FY 2006. This would indicate that CFG is getting better credit terms from its suppliers as the increase is significant (about 10% of net operating cash inflows). Readers should also take note of the adding back of interest expense (which is essentially a profit and loss item and is non-cash) of US$25.5 million and deduction of actual interest paid of US$20.8 million. There is thus a net cash inflow of about US$4.7 million as a result of the difference between accrual accounting and cash outflow recognition. The expense which was recognized in this period will probably be paid out in the following FY 2008, so US$25.5 million is a good gauge of FY 2008's probable cash outflows for interest expenses. Overall, interest expenses and income taxes have increased significantly which is not surprising considering the increased amount of bank loans taken by CFG and the expansion of their Peruvian operations which necessarily entails higher tax expenses.

Note that CFG has, for 2 consecutive financial years, incurred a strong net cash outflow when it comes to investing activities. This is due to their aggressive expansion into Peru and Peruvian fishing grounds which involves purchasing more vessels, fishmeal plants and a dock. Readers can check out the previous announcements from FY 2006 through till October 2007 for a summary of their acquisitions. The bulk of the spending was on purchase of PPE, fishing permits and prepayment of charter hire. Thus, CFG incurred a net cash outflow for FY 2007 of US$281.3 million, slightly higher than the outflow of US$208.1 million for FY 2006.

For financing activities, CFG has also issued in January 2007 (through a secondary offering) 29 million shares at S$3.98 (US$2.58) per share, raising gross proceeds of US$74.82 million. Net proceeds are thus reflected as US$72.9 million as some part of the proceeds would have to be paid to the placement agent. CFG also took on additional borrowings of US$23.3 million (note this is a NET figure) in order to bolster their expansion plans. All these activities resulted in a net cash inflow of US$68.7 million, which was lower than FY 2006's inflow of US$240.9 million. However, this was due to the issue of senior notes in FY 2006 of US$216 million due 2013. Hopefully, in time, CFG can slowly repay the loan and reduce their gearing so as to rely less on debt, as the current credit crunch could prove dangerous for highly leveraged companies.

In summary, it will be a positive sign to see higher cash inflows from operating activities in future to offset the repayment of bank loans and purchase of PPE. This should only kick in once CFG properly establishes a firm foothold in the fishmeal market in Peru and South America. I anticipate that Management's strategic plan should take at least 3 to 5 years to crystallize and realize its full potential.

Strategies and Future Plans

CFG has lofty plans for the future as their expansion goes underway, and they plan to become a dominant player in the global fishing industry in time to come. I do not have the exact statistics for their position within global fishing giants, but suffice to say they are in the Top 10 and are striving to improve their market share and also their margins. CFG currently have a fish hold capacity of 9,395 cubic metres and have increased their fishmeal processing capacity from 381 tons/hour to 545 tons/hour. This is 6.1% of the total processing capacity in Peru.

According to CIMB's report dated January 16, 2008, Russian authorities have announced an increase in the TAC (total allowable catch) for Alaskan Pollock to 1.46 million tonnes from 1.31 milion tonnes. This would imply that CFG is allowed to catch more and with their expanded fleet, they should be able to achieve this without too much additional effort. Russia's Federation Council has also approved an amendment to laws to double the term of renewable quota shares to 10 years from the current 5 years, and this provides more stability and long-term visibility for fishing companies for their strategies fo the long-term.

Fishmeal prices have also stabilized and CFG should see prices slowly trending upwards as commodity prices are steadily increasing across the board. Higher inflation of 11% in China will also push up selling prices and provide some support for the current US$950 per tonne price. In the long-term, prices should trend upwards slowly but steadily and CFG also has plans to acquire more fishmeal processing plants to allow their vessels to unload their cash more quickly and seamlessly.

Management at CFG are also on the lookout for more potentially earnings-accretive acquisitions of fishmeal plants and vessels; and are also searching for additional VOA which will increase their vessel fleet and allow them to catch more fish. In 2Q FY 2008, the Group will deploy 3 new upgraded and elongated super-trawlers to the South Pacific Ocean to increase catch volumes. This ocean is still relatively untapped by CFG and represents new fishing grounds for them.

The 4th VOA is also currently being re-structured from a daily rental hire to a prepaid charter hire which will weigh less on the Income Statement.

All these developments will come under scrutiny during the company's upcoming AGM in April 2008. I will be engaging the Management on these issues and hope to obtain satisfactory responses. At the same time, it will also be good to obtain the latest business update from the horse's mouth itself.