Oceanus Group

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Another profit guidance, this time for 3Q 2011. Oceanus expects to report another loss, the second consecutive quarterly loss.


1) Change in fair value of biological assets
2) High production costs
3) Delay in implementation of necessary recommendations based on scientific analysis

Refer to http://info.sgx.com/webcoranncatth.nsf/V...3004C3982/$file/OGL_Profit_Quidance_Q3.pdf?openelement

(Not Vested)
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/

Business Times - 15 Nov 2011

Oceanus deep in the red; CEO to resign


OCEANUS Group plunged deep into the red for the third quarter, announcing yesterday a net loss of 725.1 million yuan (S$147 million), and the written commitment of its chief executive officer (CEO) Yu De Hua to resign.

In the previous corresponding period, the group posted earnings of 68.6 million yuan. Sales of the group's aquaculture products slipped 19 per cent to 71.5 million yuan.

Loss per share for the quarter was 35.71 fen, versus earnings per share of 3.46 fen in Q3 2010. No dividend was recommended for the period.

The bulk of the group's losses were attributable to changes in fair value as a result of a 26 per cent fall in the caged population of larger-sized abalone.

Oceanus had earlier warned that millions of abalones on its farms had died. This and lower abalone prices had resulted in a 918 million yuan loss for the group.

Finance costs for the quarter also multiplied nine times over, from 13.7 million yuan to 123.3 million yuan.

The China-based producer of Japanese abalone said that its Q3 2011 reported mortality was 42 million units, which was significantly higher than the 5.8 million reported in same quarter last year. However, it did not provide further details on the cause of the loss in abalones.

For the nine months ended Sept 30, Oceanus registered a net loss of 665.4 million yuan, compared to a net profit of 217.5 million yuan previously.

Its sales for the first nine months in 2011 decreased 18 per cent, from 297.9 million yuan to 242.9 million yuan.

In its announcement, Oceanus said that Mr Yu will remain as a member of the board and be designated as a non-executive director of the company. Chairman Ng Cher Yew will be designated as interim CEO. Mr Ng will serve as chairman and CEO concurrently, and will 'helm restructuring initiatives to improve liveability rates of the abalones grown, and address issues of production costs efficiencies.'

Mr Yu's resignation is also subject to the successful restructuring of the group's convertible bonds by the end of this year. The board will make further announcements as to when the change in management is effected.

Oceanus's share price slipped 0.1 cents lower yesterday to close at 8.5 cents per share.

Oceanus says CEO Yu De Hua will remain as a member of the board and be designated as a non-executive director of the company.
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
Mamma mia, what a disaster!
I wonder whether the dead abalones have any "scrap" value?
42 million units of dead abalone is a big pile, can form a mountain.
on another note, they could be just siphoning $ away with this write off? Imagine the auditors having to count the carcasses of 42mil stinky decomposing abalones! Big Grin
The company is probably insolvent now. With a short term debt of RMB409 million, cash of RMB 25million and questionable net asset(RMB621 mil of biological asset and RMB 911 mil of PPE), you need a dumb investor to put in money.

I suppose the investors who own the convertible bonds(expire soon..) will want to get back their money but in this case, they probably can go to the farm and scoop up the abalones as compensation Tongue
Oceanus closed at only $0.07 today (18Nov11, Friday). Mamma Mia!
Oceanus in the news again. It's quite surprising to me that the more successful and established companies with good business models and consistent FCF are NOT featured in the news; rather it is usually the "turbulent" firms which seek media attention. Tongue

The Straits Times
Nov 19, 2011
Superior abalone to help Oceanus get back in the swim

By Yasmine Yahya
OCEANUS Group has mapped out a strategy to grow the company over the next few years, as it seeks to recover from recent losses.

The firm, which farms and sells abalone, reported on Monday that it made a net loss of 725 million yuan (S$147million) in the third quarter, against a net profit of 68.6 million yuan a year earlier.

This was a result of the mysterious deaths of some 42 million abalones, the firm said.

The plan, therefore, is to use a more rigorous scientific method to breed abalone, said executive chairman Ng Cher Yew.

The company will also invest in good brood stock to improve the genetic quality of the abalone it farms, he said.

Oceanus is also planning to increase the efficiency of its farms, and start farming sea cucumbers next year in order to improve its cash flow.

'We have very clear upgrading plans to turn the company around. We're going to be more scientific, we'll do more planning and we're going to balance the long-term gains and short-term cash flow,' said Mr Ng in an interview with the media yesterday.

Oceanus hopes to turn its finances around by 2013.

In the meantime, the company has sent eight finance staff from Singapore to its four farms in China to take stock of the company's remaining abalone. This counting process is expected to take two to three weeks.

Oceanus is still investigating the cause of death of the 42 million abalones, Mr Ng said.

About 63 per cent of the company's older abalone stock - those three years and older - died in the third quarter, although the industry average mortality rate for such abalone is in the single digits, he noted.

To get the company back on track for growth, the first order of business will be to sell the abalone bred in 2007 and 2008, Mr Ng said.

The company will likely gain revenue of 150 million to 200 million yuan in the first half of next year from the sales, he said.

Part of this money will be reinvested in buying brood stock of high genetic quality. Simply put, these are female abalone of breeding age that will likely reproduce high-quality offspring.

The company will increase the density of its tanks, which currently house far fewer abalones than they can hold, Mr Ng said. Cutting down on the number of tanks will hopefully bring production costs down from the current 20 million yuan a month to about eight million yuan.

The excess tanks can be used to breed sea cucumbers and rented out to other farmers, he added.
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
The large declaration of losses may also be an accounting trick. In the next quarter, they will say that the losses were not as high as declared and will write back part of the losses. Suddenly, Oceanus will become a low PE stock.
Quote:About 63 per cent of the company's older abalone stock - those three years and older - died in the third quarter, although the industry average mortality rate for such abalone is in the single digits, he noted.

Such a high death rate is highly unusual. Some simple reasons: contamination, sabotage, bad weather, or plain bad luck.

Also, how did the company know that they lost 42m abalones? Did they count every dead abalone, or did they count what was left and subtracted that from the previous count? If so, was the previous count correct to begin with? If they counted the abalones left instead of the dead abalones, how do they know that no abalones were stolen?

How do they do their counts, anyway? The 2010 annual report says they had 30,123 tanks with 178.3m abalones at 31 Dec 2010. That's about 6,000 abalones per tank. Did they count every abalone? If not, how did they estimate the population? Who did the counting or estimation, and how robust was their method?

If we look at the reported abalone populations in the last 4 quarters we see:

>5.8cm 38m
<5.8cm 140m
Total 178m

>5.8cm 45m
<5.8cm 123m
Total 168m

>5.8cm 28m
<5.8cm 181m
Total 209m

>2.7cm 93m
2-2.7cm 75m
Total 168m

2 things come to mind:

1. In 2Q11 the large abalone population fell significantly. This was explained as sales of laggards (keeping superior stock) and increased mortality (overcrowding due to further growth in size).

Selling of laggards could be done by sorting based on size versus expected age. There will be some measurement errors but they can set the bar low enough to compensate e.g. 20% below expected size. But they sold over 1/3 of the large stock so it suggests they were not just culling the slow growers but also needed to generate cash.

Given how slowly adult abalones grow (~1 cm per YEAR) the overcrowding issue doesn't make sense. Either they were already overcrowded to begin with and would have died anyway, or they were not overcrowded to begin with and should not have become overcrowded within 3 months.

2. In 3Q11 the cut-off was set at 2.7cm versus 5.8cm in the previous 3 quarters

The simple answer is that there are very few (or zero) abalones remaining that are >5.8cm in size. In fact the total population of 168m is below the 181m of <5.8cm reported in 2Q11. In other words every abalone they now have is probably <5.8cm i.e. they either sold or lost all their large abalones.

The original RTO circular (when Oceanus was injected into TR Networks) indicates on page 110 that Juveniles "graduate" to Adult status at 15 months of age, when they are about 4-4.5cm long. Over the next 40 months they grow to 6.5-10.5cm in length. On the same page it states that survivability of Adults is 97% or more. Oceanus lost 63% of their older (>3 years) abalones, in other words they lost 63% of their adult stock when they should have lost less than 3%.

So what is in store for Oceanus?

First of all they need to figure out what went wrong. Was the stock lost from contamination, sabotage or theft? With 209m abalones in 30,000 tanks, the odds of pure bad luck are astronomical.

Second, can they recover? They have high (and rising) fixed costs in the form of electricity, labour and feed. At the same time they have loans coming due from banks and convertible loan investors.

At a glance it seems that they could probably restructure the convertible loan, since the investors have no expertise in operating the business and would not want to foreclose. So probably it means a higher coupon rate, increased dilution, or both. Once the convertible loan is restructured the bank loan is relatively easy to fix.

What does this mean for minority investors?

There is no good news at all. If they can't restructure the convertible loan it is game over since they have no cash flow (there are very few/zero saleable adult abalones left). If they do restructure the convertible loan the company will lose most of its cash flow to interest payments, or the stock will be severely diluted, or both. Either way there will be little left for minorities.

So it is a no-win situation. It is just a question of how much minority investors are going to lose.

As usual, YMMV.

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