Aquatic Foods, an Naibu waiting to happen

Tuesday, Oct 18 2016 by
29

Introduction

 

The past decade saw 80 listings originated from China and over this period 45 companies have left the market leaving shareholders empty.

Back then, China was the engine of economic growth for the world economic and was growing four times faster than the UK.

Therefore, it made sense to invest in China because it equates to higher stock returns.

 

The UK investors had learned their lessons and stayed away from Chinese AIM businesses, even if it has a significant cash balance and orbital growth prospects, these financial results can't be trusted any longer!

They have stayed away!

 

You don’t need to talk to the fishes to know Aquatic Foods smell fishy

Despite a lack of interest from the UK investors, the Chinese did not shy away from the UK stock market, especially the AIM market. One of these companies, in particular, is called Aquatic Foods, which is today’s assignment.

So, a twenty minutes skim at Aquatic Foods statements and annual reports tell me several worrying things.

These are:

 

1. Strange asset turnover numbers


Source: Aquatic Foods annual reports (Graph reconstructed by the writer.)

Aquatic Foods monstrous sales growth didn’t stop its asset turnover from declining at an alarming rate since 2012.  

On a separate measurement, Aquatic Foods grew sales by 354%. Therefore, measuring against Property, Plant, and Equipment (PPE) showed the opposite result it jumped by 400%, before declining slightly.

This led me to question how it was possible to triple sales, but not add additional capacity because the value of its PPE has stayed the same.  

Unless fish prices jumped by 300% or Aquatic Foods were operating at a 20% capacity, I can’t see how this could happen!

 

2. Dodgy dividend policies

If a business grew cash in the bank at a compounded rate of 46% per year in the last five years to £50m, but paid under a million pounds in dividends since its IPO, this raise a major red flag.

A bigger alarm is Aquatic Foods paying a much larger dividend three years before its IPO (See it for yourself):


Source: Aquatic Foods annual reports (Graph reconstructed by the writer.)

*2011-2013 dividends total £9m.

A normal growth business pays higher dividends in future years, not in past years!

Another contradiction is calculated using return on retained earnings (%), if the % is high, it should seek more investment to maximise return.

But, when returns are low, Aquatic Foods should return dividends to shareholders.

Item

2011

2012

2013

2014

2015

Return on retained earnings (%)

92.2

97.4

63.7

42.7

31.1


The funny thing is Aquatic Foods paid dividends during periods where they should re-invest, but cut down dividends payout when it can’t get superior returns from new investment.

 

 

3. Deposit rate + Finance income not matching

Aquatic Foods earn 1/10 of what it should make if it invested in a 1-year deposit rate account in China.


Source: Aquatic Foods annual reports (Graph reconstructed by the writer.)

 

Aquatic Foods’s cash balance earns less than 1% in interest in the past five years, while Chinese 1-year deposit rate is four times as large.

 

4. Working capital mismanagement

An assessment of Aquatic Foods working capital management reveals a somewhat surprising revelation.

Back in 2011, its working capital turnover was 6.12 meaning management is highly efficient, as it optimises their operations.

Over the years, its working capital turnover has declined to 1.85 meaning it either has too many receivables or inventories, but loaded with “excess” cash.

They should return the cash to shareholders. Instead, it is earning less than 1% from the bank.

 

5. Market Value

Aquatic raise £9.3m in the AIM Market. The IPO price is 70p/share = £79.3m. Today, its 12.5p/share = £14.15m, a fall of 80%!

This is a company with net earnings growth of 29%/year for 5 years. Its latest annual profit of £15m is greater than the market capitalisation!

On a free cash flow basis, it generated £21m in 2015.

 

Where is the logic

With a valuation this low and its earnings so high, its value should exceed £100m (easy), instead we got a business that is trading for “FREE” to market investors.

This is because liquidating the firm would realise £35m (after debt repaid) earning shareholder 2 and a half times its money back.

 

But, investors wary of other Chinese firms like Naibu and Camkids, both reported large cash positions suddenly went bust!

So, this is a company showing similar symptoms.

 

 

Fun Facts logic

1. Cash grew from 57m RMB to 153m RMB in 2011-13, when it paid out 78m RMB in dividends in the period.

But cash balance increased from 193m RMB to 380m RMB in 2014-15 but manages to pay ONLY 7.6m RMB in dividends.

 

2. Aquatic manages to grow cash balance faster by not collecting from its receivables which have increased by 750% compared to net sales 354%.

Also, it pays its suppliers, as payables grew by 265%.

The only explanation is the 85m RMB raise during its IPO.

3. For a business that relies on processing plants to turn raw fish into frozen products, its CapEx appears non-existent, till it raise money from AIM investors and it decides to invest in capacity.

 

Verdict: Avoid the stock at all costs, because delisting is its next stop.

Disclosure

I wrote this article myself, and it expresses my opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Plus, I do not own the stock of the company mentioned, unless stated.


Disclaimer:  

By reading my articles and newsletters, you agree to use the research of Walbrockresearch.com at your risk. The purpose of this site is to educate and entertain readers. In no way, we are giving investment advice though the information provided is to my knowledge accurate at the time of the report. You should do your research, or seek advice from qualified professional investment advisors.

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Aquatic Foods Group Plc is a marine foods and seafood processor and producer, supplying its products to export and local markets. The Company also processes and trades other aquatic products, agricultural and meat products. It geographical segments include PRC and Outside PRC. Its product categories include Fish, Sea Cucumbers, Cephalopods, Shrimp & Shellfish, and Others. Its products are processed frozen seafood, seaweed-based foods and marine snack foods. It has over 50 regional distributors, covering approximately 16 provinces, municipalities and autonomous regions in China. Its subsidiaries include Yantai Kanwa Food Co., Ltd, which is engaged in processing and trading of aquatic products agricultural and meat products; Yantai Zhenhaitang Foodstuff Co., Ltd, which is engaged in trading and distributing of processed frozen aquatic products and pre-packaged food, and Hong Kong Hanhe Holding Company Limited and Aquatic Foods Group PLC, which are engaged in investment holding. more »

LSE Price
12.5p
Change
 
Mkt Cap (£m)
14.2
P/E (fwd)
1.0
Yield (fwd)
n/a



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52 Posts on this Thread show/hide all

EDWARD FORT 24th Nov '16 33 of 52

I can totally understand the widespread suspicion and cynicism when it comes to Chinese corporate governance. And if you feel the country is systemically corrupt, you definitely shouldn't invest in AFG. Personally I don't think that China is systemically corrupt and I think this company is the real deal. Let's see.

Funnily enough, one of the attractions about this investment, for me, is that IS in China. Given the very difficult situation for the UK at the moment, virtually everything with domestic UK exposure seems too risky to be investable. There also has to be a big risk attached to UK companies trading heavily with the EU, given the high chance of our expulsion from the Single Market in 2019.

The advantage of investing in China is that you have exposure to a society that is getting rapidly richer, not poorer. I like MPO (Macao Property Opportunities Trust) for the same reason.

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loudenr 24th Nov '16 34 of 52

In reply to EDWARD FORT, post #33

Edward

My only question to you is why take the risk? There are many other investments that can be made which are far safer.

Naibu and Camkids benefited from the IC tipping them which pushed the share price up. I used this as an opportunity to escape and I am glad I did. I agree with Mark, this has many similar hallmarks to both of those.

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EDWARD FORT 24th Nov '16 35 of 52

Louden

Because I feel the risk/reward here is good. The risk may be lower than conventional wisdom believes, and the reward may be higher.

I'm expecting this to rise 4 or 5 times within 2 years. The would take it back to the IPO level, which would still be very cheap.

I've met the NEDs and done a lot of work on this share. Of course it's not without risk, but with a PE of 1 what would you expect?

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Graham N 24th Nov '16 36 of 52
2

Edward, believe it or not I owned Naibu and Camkids once upon a time. Thankfully I came to my senses and sold out in good time. But it was a lesson learned.

There is a lack of originality in the AFG story. If it's true that they are looking at a property purchase, this is a well-worn path taken by many similar companies whereby the cash on the balance sheet (presuming that it currently exists) gets off the balance sheet and is replaced by an asset the value or use of which you will be not be able to verify.

The company then only needs to come up with a reason to delist and you will have no recourse besides signing up for an uncertain recovery process.

I know it "looks cheap". I know it has "exposure" to the Chinese economy. This "exposure" attraction is something which stock promoters use to foist their stock onto amateur investors.

You are very likely to lose all the money which you invest in this, if you hold for long enough. The directors are not filling their boots because they are not idiots. I said that these shares should be viewed as lottery tickets because I don't think you should own more of this than you would be willing to invest in lottery tickets. Good luck.

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eiresorpio 24th Nov '16 37 of 52
3

Edward, as I hate to see people lose their money on stocks, I wonder what assurances have the NEDs given you. By that I mean how have they satisfied themselves that this stock is different to that of Camkids or Naibu? This for me would be the starting point.

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EDWARD FORT 25th Nov '16 38 of 52
20

eire

Your concern is touching! Save it for yourself and your lovely, safe shares in UK-focused companies. You may need it, given the way things are going! 

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VegPatch 25th Nov '16 39 of 52
1

I think that was a v fair question - is there an answer Edward ?

"I've met the NEDs and done a lot of work on this share. Of course it's not without risk, but with a PE of 1 what would you expect?"

obviously they couldnt tell you anything that isnt in the public domain, but surely that must have been one of the first questions you asked ?

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loudenr 25th Nov '16 40 of 52
3

In reply to EDWARD FORT, post #38

Edward

I really feel that is an unfair snipe and not something we want to see on these Boards (we want to avoid the sort of personal attacks that appear on ADVFN et al). People are just expressing to you their concerns as they genuinely do not want you to lose money.

My view is that this has many similar characteristics to Naibu and Camkids and I would be extremely nervous if I held. If you are going to continue to hold, I hope it works out but please do not be surprised if you lose your entire investment.

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EDWARD FORT 25th Nov '16 41 of 52

Veg

A NED cannot tell you more than is in the Public Domain, as I'm sure you know.

A NED investing a material amount of their own cash in a business they have recently visited in China is a strong signal of their confidence in the business.

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EDWARD FORT 25th Nov '16 42 of 52
1

Loud

Apologies for any offence caused. But this seems to me a very polite and sensible discussion.

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pka 25th Nov '16 43 of 52
2

"A NED investing a material amount of their own cash in a business they have recently visited in China is a strong signal of their confidence in the business."

Are you sure that the cash wasn't provided by the company?

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Orangetree 25th Nov '16 44 of 52

Personally, I see nothing wrong with putting 10% of my total stock portfolio in the speculative section and Aquatic Foods is that kind of stock because you never know what's going to happen.

I can see one unconventional way that Aquatic Foods can make money for shareholders (however unlikely) and is to facilitate capital flight from China.
What I mean is the rich Chinese looking to move money outside of China via trying to gain quick UK citizenship by making a significant investment towards a UK-listed company.



I know this is unlikely but could make a major impact on the share price.

Blog: Walbrock Research
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EDWARD FORT 25th Nov '16 45 of 52

In reply to pka, post #43

pka

You write "Are you sure that the cash wasn't provided by the company?"

Yes, I'm quite sure it wasn't! This NED has decided to spend £27k of his own money on the shares in the business, having visited the operations in China. That's a positive sign.

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rhomboid1 25th Nov '16 46 of 52

Edward

You seem very determined to see your investment through , good luck as it's a kind of binary , fraud lose all, not fraud make money. FWIW his share purchase as a non exec is pretty much his fee in the AR, are they linked , who knows..

Cheers

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EDWARD FORT 26th Nov '16 47 of 52
1

rhom

Yes, I think that's right. The NED has decided to invest his NED fees in the company's shares, presumably because he feels they are seriously undervalued. That's a positive sign. There was no obligation for him to do this.

As I've said in other posts, there is no evidence of any fraud at AFG whatsoever.

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gus 1065 29th Jun 48 of 52
4

Mmmmm .... has it just "happened"? RNS stating trading suspended due to failure to deliver timely accounts.

Gus.
--------

Aquatic Foods Group Plc



("Aquatic Foods" or "AFG" or the "Group" or the "Company")



Annual accounts and suspension of trading


Aquatic Foods Group Plc (AIM: AFG), a leading Chinese marine foods and seafood processor and producer supplying to export and local markets announces that the Company expects that it will not be in a position to publish its audited report and accounts for the year ended 31 December 2016 by 30 June 2017 in accordance with Rule 19 of the AIM Rules for Companies. As a result trading in the Company's shares shall therefore be suspended from trading on AIM pursuant to AIM Rule 40 pending publication of the accounts. The suspension will commence at 7.30 a.m. today.

Work to complete the Company's audit and accounts is substantially complete with audited results and cash balances expected to be in line with the Company's trading update for the year ended 31 December 2016 which was announced on 20 March 2017. While the Group maintains a strong cash balance, the Company has faced continued difficulties in remitting funds from its operating entities in China to the Jersey holding company resulting in the delay of payments to a number of parties whose assistance is required for the finalisation of the audited accounts. The Board is putting short term measures in place, through the provision of directors loans to the Jersey holding company, to ensure that these critical payments are made in order for the accounts to be released as soon as possible but it is expected that a number of parties including the Company's Directors and Nominated Adviser will still be owed fees by the Company.

The Company's Directors are seeking to establish a framework for ensuring that ongoing UK expenses can be met in a timely manner going forward notwithstanding more stringent cross border fund remittance control by the PRC State Administration of Foreign Exchange (SAFE) which the board understands to have been prevalent of late. Until the resolution of matters relating to the ongoing transfer of funds from the Group's operating subsidiaries to the Company, the Directors have determined not to declare further dividends and do not currently intend to declare a final dividend in respect of the year ended 31 December 2016.

The Company anticipates that its accounts will be published during July and will provide further updates as appropriate in relation to the UK payments situation and publication of the report and accounts.

Notwithstanding the suspension of trading in the ordinary shares, the Company will continue to make announcements as and when there are any developments that require announcement under the AIM Rules.

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Boros10 29th Jun 49 of 52
13

This is the first time I have read the article by OrangeTree on Aquatic Foods which was originally published in Oct 2016. It is pure excellence.

A pity that Corporate Brokers & PR firms never bothered to do some basic analysis on their Chinese client's results and were often prepared to remain advisers until the final denouncement despite mounting evidence of fraud. I know who you are and I won't be rushing to your doors to support any placings and IPOs you may be involved in.

The failure of AIM to respond appropriately to the widespread fraud which has been inflicted by Chinese companies on UK shareholders is also a disgrace.

I have to give credit though where it is due. The Non-executive directors at Naibu (who probably wished they had never got involved in Chinese IPOs) have made up for missing some obvious signs early into their appointment and are now taking action to try and recover the missing cash and are considering suing the professional advisers involved. Well done and good luck.

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gus 1065 30th Jun 50 of 52
2

Good luck to the NEDs trying to find the cash. I suspect it has long since been siphoned off to some obscure and untraceable bank account somewhere offshore in the Pacific. On your comment about naming and shaming the brokers etc., the company's website has a helpful (if two years out of date) list of the great and the good providing "professional" services.

http://www.aquaticfoods-ir.com/content/investor/advisers.asp

Gus.

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garbetklb 30th Jun 51 of 52
4

I never liked the look of the Chinese companies - but I did chip in my contribution by investing in Skil Ports.....

Would it be worthwhile to list the various AIM frauds & other disasters in one place - together with their various professional advisors? So there's more opportunity for people to identify them and, as Boros10 says, vote with our feet & make sure we don't support them.

As has been said repeatedly, the lack of action by AIM authorities is quite disgraceful.

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Bushranger 2nd Jul 52 of 52
2

In reply to EDWARD FORT, post #47

Now would be a good time to make an apology to those posters who turned out to be much wiser.

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