China Marine is a Growing Fish in the Chinese Pond (CMFO)

By: Leo Sun, dated September 9th, 2010

China Marine Food Group (CMFO)

China Marine Food Group (CMFO: Charts, News, Offers), a small cap Chinese seafood-based snack foods processor, distributor and seller, reported an incredible 86.8% increase in revenue last quarter with 27.56 million USD, up from 14.76 million the previous quarter. Net income rose 83.1% to 6.82 million, up from 3.72 million, with a 36.1% increase in organic growth. Its net profit margin rose to 24.74%, up from 20.93%. Is this little company, which produces a vast line of seafood snacks such as dried squid and fish, as well as algae-based sports drinks, poised to become the Coca Cola (KO) of China?

Daily Chart

If you are not able to see the chart, your email client probably does not support javascript. To view it, please click here

Stock Analysis

Located in coastal Fujian province, China Marine Food Group is actually a holding company, and its business is conducted through its wholly owned subsidiary, Ocean Technology Company and its four subsidiaries: Shishi Rixiang Marine Food, Shishi Huabao Jixiang Water, Shishi Huabao Mingxiang Foods and Shishi Xianglin Trading. Shishi Huabao Mingxiang acquired an 80% interest in Shishi Xianghe Food Science and Technology, the makers of Hi-Power, an algae based sports drink, in January of this year for 28 million USD. In addition to its snacks and beverages division, it also sells frozen marine catch products to seven provinces of China with 2,900 sales points across the country, as well as overseas customers in South Korea and Taiwan.

While the company’s core products aren’t that marketable to the Western palate, in China these snacks are the equivalent of potato or tortilla chips in America. In addition, they are much healthier than their Western counterparts; since these products are dried like jerky and seasoned, there is less oil and saturated fat, and trans-fats are non-existent. These seafood based snacks are also well received throughout all of Asia.

The stock currently trades with a forward P/E of 4.8 and a PEG ratio of 0.18, which suggest significant upside, considering it has a 52-week range of 3.07 – 8.63. It’s clear that CMFO does not have the hyped up stock metrics of popular Chinese names like CTrip or Baidu. The management seems very eager to start advertising their earnings and stock price in America, as they went on a road show in July, visiting current and prospective investors in New York, Boston and New Jersey. CMFO was quick to advertise its high quality control standards with ISO9001, ISO14001, HACCP certifications, as well as an EU export registration, to assure unsure investors that this is not just another Chinese brand that will fall apart under closer regulatory scrutiny. In addition, it has received “The Famous Brand” and “Green Food” awards from the PRC government.

Some have speculated that CMFO is trying to catch the same wave as its speculative Chinese peers with P/Es that are far ahead of fundamentals, claiming that rather than spending time improving a growing business, the executives are doing world tours trying to pump up the stock price. “We added an additional 400 retail points to our network and experienced year over year growth in every sales territory for our core product line,” reported Pengfei Liu, CEO of China Marine, assuring investors of the company’s steady growth.

Naysayers have pointed out that China Marine recently issued nearly 30 million USD in new shares for “corporate purposes” (another word for stock-based takeovers) which diluted shares considerably, and was overly ambitious considering the company has 20 million in cash and no debt. The company’s operating expenses are a mere 1.6 million. The company’s aforementioned 28 million investment in Shishi Xianghe Food Science and Technology only acquired 2 million in hard assets, and 26 million was spent on “intangibles” – vaguely described items such as “goodwill” (2.5 million) and “Algae drink know-how” (26.5 million). In other words, CMFO paid a hefty premium for the beverage producer. This much hyped investment generated 1 million gross profit last quarter out of 10.56 million revenue (9.5% margin), but China Marine has stated that it expects 60% year-over-year growth from this purchase, and eventually normalized profit margins of 25%. Those are some big numbers which are close to those of market leader Coca Cola (KO: Charts, News, Offers), whose net margins are at 27%. The hype, the share dilution, and the vague and costly purchases should all be concerns for the average investor who is considering purchasing CMFO. In addition, the company published a prospectus last month for its sale of 12,013,568 common shares by certain shareholders.

China Marine is also planning to build cold storage facilities, with a storage capacity of 20,000 tons, near the fishing port, which would cost nearly 20 million, and is expected to start operations next year. This shows that even though many doubt that China Marine can walk the walk as well as talk the talk, the company is making headway and moving towards more efficient, higher volume production methods. CMFO, from a fundamental standpoint, looks like a sound investment; the variable is whether or not you trust the management’s broad, ambitious plans. However, this small fish may very well grow up quickly, as it has the world’s second largest economy as its feeding pond.

Other News About CMFO

China Marine Food Group Ltd Stock “Shone As Brightly As Diamonds” – A positive outlook for CMFO

China Marine Food Group Q2 net income up 83% – A look back at CMFO’s most recent earnings

Other Stocks in the News

Mark Hurd in Talks to Join Oracle – Will Mark Hurd become #2 at Oracle (ORCL: Charts, News, Offers)?

3Par: Pyrrhic Victory for HP or Strategic Defeat for Dell? – A look back at the HP (HPQ: Charts, News, Offers) and Dell (DELL: Charts, News, Offers) bidding war.