Latest results

Interim Results

Aquatic Foods Group Plc (AIM: AFG), a leading Chinese marine foods and seafood processor and producer supplying to export and local markets, today announces its unaudited results for the six months ended 30 June 2016.

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Financial Highlights

  • Revenue decreased by 5.6% to RMB 419 million (H1 2015: RMB 444 million) although volumes, particularly in the Company's principal fish products, have increased albeit against lower margins
  • Overall gross margin has stabilised at 24.5% during H1 2016 (Q2 2016 aggregate gross margin of 24.5% compared with 24.5% in Q1 2016) although still significantly lower than in the first half of 2015 (33.0%)
  • Aggregate gross profit decreased by 30.0% to RMB 103 million (H1 2015: RMB 147 million)
  • Profit before tax decreased by 51.3% to RMB 49 million (H1 2015: RMB 101 million)
  • Net profit after tax decreased by 51.6% to RMB 38 million (H1 2015: RMB 78 million)
  • Earnings per share of RMB 0.33 (H1 2015: RMB 0.70)
  • Cash as at 30 June 2016 was RMB 417 million (as at 30 June 2015: RMB 367 million)
  • Interim dividend of 0.2p a share (2015 interim dividend 0.7p) reflecting the more challenging trading environment
  • 51 regional distributors as at 30 June 2016 (H1 2015: 51)

Li Xianzhi, Chief Executive of Aquatic Foods, commented: "Despite the fall in profitability, AFG has performed credibly in what remains a challenging economic environment. Gross margin has stabilised, volumes continue to increase, and we have made continued progress in building new sales channels. As a result, AFG's business remains profitable and cash generative. The Directors have resolved to pay an interim dividend of 0.2p per share but will review the full year dividend in light of trading and market conditions at that time.

"The Directors expect the current challenging market conditions, reflected in cost inflation pressures combined with softening product pricing, to continue in the near term though the Board is pleased to note that gross margins achieved by the Company have stabilised. AFG's strategy in a competitive market and in the face of these pressures is to continue to focus on operational efficiency, developing new sales channels including supermarkets, increasing sales to our existing distribution network, expanding our distribution network and increasing our focus on export markets. AFG will also focus on advertising and promoting awareness of the "Zhenhaitang" brand standards. In particular, the Company is seeking to build on the success of its supply contract with Yihee International Corporation, the extension of which is expected to be considered during Q4.

"AFG adopts the highest standards for quality, safety and sustainability and is committed to producing high-end, pre-processed seafood products which provides confidence to both local PRC and overseas consumers alike. The Group's current extensive distribution network puts us in a very strong trading position and the Board is confident that, despite the current slowdown in the Chinese economy, the Group will continue to adapt and to expand its share in what is still a growing Chinese seafood and marine food market. The Group also remains committed in growing export sales and is confident that AFG will continue to leverage on its established position in the overseas market to further benefit from the high growth potential of the international seafood market.

"Whilst the Board is mindful of the potential challenges that lie ahead in the short term, the Board believes that these challenges also present potential growth and expansion opportunities for the Group. AFG's strong cash position allows the Group to take advantage of the challenging market environment to potentially grow and increase its presence within China through mergers and acquisitions as well as expanding through increasing process automation."

 

Chief Executive's Review

Operations in the first half of 2016 have been subdued, reflecting the continuation of the challenging business environment in the second half of 2015 caused by the slowdown of economic growth in China, the adverse impact from foreign exchange together with operating in a highly competitive market place. Against this volatile market backdrop, the Group experienced a decline in average selling prices across all product categories, and this has resulted in a decline in revenue by 5.6% to RMB 419 million (H1 2015: RMB 444 million). Cost of sales increased by 6.4%, in line with the increase in sale volume and general cost inflation which has also been impacted by foreign exchange.

Gross profit for H1 2016 was RMB 103 million and gross margin was 24.5% (H1 2015: RMB 147 million and 33% respectively). The fall in gross margin occurred in the second half of 2015 and has stabilised over the first half of 2016 at the current 24.5% level. Cost inflation remains an issue, especially raw materials, accessories and packaging materials and labour costs. Provided that the economic situation does not significantly worsen we expect that margins will not deteriorate further by a material amount, however we continue to monitor the situation closely.

As a result of this fall in gross profit, coupled with a modest increase in expenses, profit before tax and profit after tax fell to RMB 49 million (H1 2015: RMB 101 million) and RMB 38 million (H1 2015: RMB 78 million) respectively after taking into account foreign exchange losses of RMB 5 million, of which RMB 3 million related to an unrealized loss arising from translation of bank balances denominated in GBP.

AFG remains highly cash generative and the Group maintains a strong balance sheet with cash as at 30 June 2016 amounting to RMB 417 million (as at 31 Dec 2015: RMB 380 million). As the Group seeks to expand in the difficult operating environment, it is anticipated that the working capital requirement will increase due to enhanced credit terms and higher inventory levels.

As at 30 June 2016, AFG had 51 regional distributors (H1 2015: 51), covering 16 provinces, municipalities and autonomous regions in China. The Group works closely with its distributors to monitor performance and grow sales and remains committed to identifying and appointing new distributors to further expand its coverage in both urban and rural areas in China.

Currently, approximately 60% of fish processed originates from various overseas countries, including US, Canada, Norway, UK, and Ireland. The Group will continue to look for strategic alliances and partnerships to diversify the Company's supply chain.

Product categories

Revenue breakdown by
product category
Six months
30 June
2016
Unaudited
Six months
30 June
2015
Unaudited
Changes % Year ended
31 December
2015
Audited
Currency: RMB'000        
Fish 282,052 301,114 -6.3% 704,942
Sea Cucumbers 63,849 65,199 -2.1% 137,531
Cephalopods 28,449 26,923 5.7% 41,753
Shrimp & Shellfish 23,876 25,864 -7.7% 38,688
Others 20,762 24,853 -16.5% 55,833
Total 418,988 443,953 -5.6% 978,747
 
Sale volume breakdown
by product category
Six months
30 June
2016
Six months
30 June
2015
Changes % Year ended
31 December
2015
Thousand kilograms        
Fish 8,564 8,091 5.8% 19,062
Sea Cucumbers 22 23 -4.8% 49
Cephalopods 852 774 10.1% 1,116
Shrimp & Shellfish 640 646 -1.0% 993
Others 239 246 -2.6% 558
Total 10,317 9,780 5.5% 21,778
 
Gross Margin by Product Category Six months
30 June
2016
Unaudited
Six months
30 June
2015
Unaudited
Year ended
31 December
2015
Audited
 
       
Fish 23% 32% 27%  
Sea Cucumbers 30% 42% 36%  
Cephalopods 25% 31% 29%  
Shrimp & Shellfish 26% 31% 30%  
Others 25% 32% 27%  
Total 25% 33% 28%  

Fish

Sales of fish products accounted for approximately 67% of Group's revenue (H1 2015: 68%). The Group's top three fish products are mackerel, saury and cod. The revenue generated from fish products decreased by approximately 6% compared with H1 2015. This decrease was principally due to decrease in average unit selling price, which was in turn due to the slower consumer spending and increase competition in China.

Compared with H1 2015, sales volume of fish products, in kilograms, increased by approximately 6% and cost of sales increased by approximately 6%, which was in line with the increase in sales volume during the period under review. The average unit cost of fish products remained stable.

The lower average prices have resulted in a reduction in gross profit margin of fish products to 23% (H1 2015: 32%).

Sea Cucumbers

Sales of sea cucumber products decreased slightly by 2% compared with H1 2015. This has been impacted by the Chinese Government's anti-corruption policy, which has resulted in lower spending on corporate entertainment and banquets as well as high value gift practices in business. This has led to a fall in sales volume of sea cucumber products by approximately 5% compared with H1 2015.

Compared with H1 2015, average unit selling price increased modestly by approximately 3%, pressured by the rising cost, whilst average unit cost increased significantly by 24% mainly as a result of higher raw material input cost. This has resulted in a fall in gross margin to 30% (H1 2015: 42%).

Cephalopods

Sales of Cephalopods (principally squid and cuttlefish), though only a modest proportion of total group sales, were the only product category that has reported a revenue growth compared with H1 2015, driven by higher sales volume.

Sales of cephalopods products increased by approximately 6% in value and 10% in volume compared with H1 2015. Nevertheless, gross margin declined to 25% (H1 2015: 31%) due to lower average unit selling price and higher unit cost.

Shrimp and Shellfish

Sales value decreased by approximately 8% whilst volume decreased by approximately 1% compared with H1 2015, reflecting the general price pressure in the current market. As a result, gross profit margins were down to approximately 26%.

Others

These are primarily sales of gift boxes. Sales decreased by 16% and cost of sales decreased by 8%. Gross profit were down to 25% (H1 2015: 30%), reflecting the general price pressure in the market.

Strategy

The Board continues to evaluate options for expanding capacity through outsourcing, increasing process automation and expanding to an additional site or acquiring an existing factory from a third party. As previously noted, the Group is currently awaiting final regulatory approval for its expansion plans from the relevant regional authorities. Owing to the current market environment the Group has not been actively chasing this consent although it is expected that the Group will still seek to acquire additional processing and cold storage capacity.

Successful brand building remains key to AFG's continued business success. The Group's core brand "Zhenhaitang" has, in recent years, achieved wider recognition and awareness in the marine foods and seafood industry in the PRC. The Group plans to continue its focus on advertising and promotion and will carry out further cross-promotion for different product types. The Group will also continue to support its regional distributors to establish further "Zhenhaitang" branded retail stores where appropriate to do so.

Product development to expand and enhance product offerings is an important factor to expand market share. The Group plans to continue to invest in product development and innovation in order to stand out from competition and to meet changing consumer preferences.

While market growth in China has slowed, the Group is taking the opportunity to review internal processes and strategies in preparation for a time when the market returns to full strength. This includes monitoring the success of increased advertising as well as continuing to finalise expansion plans, including additional processing and cold storage capacity given the increase in processing volumes. With this in place, the Board believes that the Company will be in the strongest position possible to take advantage of a revived trading environment.

The Group believes that with its current cash resources and the positive trading cash flow, the Group will have sufficient funds internally to support the expected further growth of Aquatic Foods.

Outlook

The Group's operating environment remains challenging and the Board expects these challenging conditions to continue in the near term. However, whilst gross margin declined in the last 12 months, AFG is now seeing a stabilisation in gross margins at around 24% since April 2016.

Whilst the Board is mindful of the potential challenges that lie ahead in the short term, the Board believes that these challenges also present potential growth and expansion opportunities for the Group. AFG's strong cash position allows the Group to take advantage of this difficult time to grow and increase its presence within China by mergers and acquisitions as well as expanding through increasing process automation.

In the wider PRC market, demand has continued to move towards pre-processed and ready to eat products as opposed to the procurement of daily foods from traditional markets. These consumers are the major consumption group of natural seafood products as they pursue a healthier lifestyle. Such consumers are concerned about food hygiene and safety and look to recognised branded goods, where the brand values support enhanced food safety.

As a leading PRC marine foods and seafood processor, with a history in servicing demanding export markets, AFG is known for adopting the highest standards for quality, safety and sustainability, and the Board is optimistic that AFGs' growth will be supported by its continued commitment to produce high-end, pre-processed, seafood products.

As a result of increasing popularity of English and Scottish fish products and to satisfy this increasing demand, the Group has entered into the following new contracts with English and Scottish based suppliers:

  • a US $850,000 purchase contract with Peterhead based supplier Northbay Pelagic for the supply of 615 metric tonnes of Atlantic Mackerel per annum.
  • a contract with Scottish based supplier Lunar Freezing & Cold Storage for the supply of 575 metric tonnes of mackerel
  • a contract with Seychelles based supplier Flying Fish International for the supply of 162 metric tonnes of mackerel

As a result of these recent contracts, AFG has become one of the leading importers of fish from the UK amongst other Chinese companies and this is expected to continue to increase its credibility and profile in the industry in the UK.

The Group will continue to look for strategic alliances and partnerships in the UK as well as other parts of the world to diversify its supply chain.

As an established and modern marine foods supplier and retailer, the Board is confident that, despite current slowdown of the Chinese economy, the Group will continue to adapt and to expand its market share in what is still a growing Chinese seafood and marine food market. The Group also remains committed in growing export sales and is confident that AFG will continue to leverage on its established position in the overseas market to benefit further from the high growth potential of the international seafood market.

Appointment and Resignation of Directors

On 9 August 2016, Aquatic Foods appointed Ms Po Ling Low as Finance Director to fill the vacancy following the departure of Mr Sean Lim on 3 February 2016. Ms Low is a qualified accountant with over 18 years' experience across the UK and Asia. Ms Low has worked in the PRC in the last 8 years and was the finance director of a Chinese company which had previously been listed on AIM before moving to a Hong Kong main board listing in 2010. Pursuant to her appointment, Ms. Low has been granted a total of 500,000 warrants over Ordinary Shares and the details of these warrants shares can be found on AFG's RNS announcement dated 9 August 2016. The Board is confident that Ms Low's appointment as Finance Director will be invaluable to the Company as AFG continues to improve its operational efficiency and expand in both the local Chinese and international markets.

Dividends

The Board has adopted a dividend policy that fundamentally takes into account the Group's profitability and growth after the requirement to finance the development and expansion of business.

Given the positive cash flow of the Group and profitability during the first half of the year, the Board is pleased to announce that the Group intends to retain an interim dividend however this has been reduced to 0.2 pence per share reflecting the more challenging trading environment in which the Company is operating. While the Company retains a strong balance sheet and cash position, the Board has considered future costs relating to the planned expansion as well as the desire to retain a significant cash buffer to provide future business flexibility.

The interim dividend will be payable around 1 November 2016 to shareholders on the register at the close of business on Friday, 7 October 2016. The shares will go ex-dividend on 6 October 2016. The Board intends to review the level of full year dividend in light of the trading results for the year and market conditions at that time.

 

Li Xianzhi
Chief Executive Officer
27 September 2016

 

Condensed Consolidated Statements of Comprehensive Income

    Six months
30 June
2016
Unaudited
  Six months
30 June
2015
Unaudited
  Note RMB'000   RMB'000
Revenue   418,988   443,953
Cost of sales   (316,363)   (297,264)
Gross profit   102,625   146,689
         
Other income   4,755   5,086
Selling and distribution expenses   (43,592)   (40,290)
Administrative expenses   (7,969)   (9,186)
Other operating expenses   (5,338)   (81)
Operating profit   50,481   102,218
         
Finance income   505   477
Finance costs   (1,574)   (1,219)
Profit on ordinary activities before taxation   49,412   101,476
         
Income tax expense 4 (11,756)   (23,728)
Profit after taxation   37,656   77,748
Other comprehensive income        
Items that will or may be reclassified to profit or loss:        
Exchange differences arising on translation of foreign operation   594   2,778
Total comprehensive income attributable to
owners of the parent
  38,250   80,526
         
Earnings per share (EPS):        
Basic and diluted 5 0.33   0.70

 

Condensed Consolidated Statements of Financial Position
As at 30 June 2016

    As at
30 June
  As at
30 June
  As at
31 December
    2016
Unaudited
  2015
Unaudited
  2015
Audited
  Note RMB'000   RMB'000   RMB'000
Non-current assets            
Property, plant and equipment 6 27,925   21,238   29,321
Land use rights 7 1,853   1,898   1,876
    29,778   23,136   31,197
             
             
Current assets            
Inventories 8 46,939   36,827    55,627
Trade receivables   247,372   226,053   306,694
Other receivables, deposit and prepayment 9 228   186   4,620
Cash and bank balances   417,083   366,630   380,419
    711,622   629,696   747,360
             
Total Assets   741,400   652,832   778,557
             
Current liabilities            
Trade payables   76,770   71,917   131,885
Other payables and accruals   24,020   26,085   35,847
Short term borrowings   36,511   37,042   42,040
Income tax payable   6,338   10,531   9,274
    143,639   145,575   219,046
             
Equity            
Stated capital 10 85,238   85,238   85,238
Reserves   512,523   422,019   474,273
    597,761   507,257   559,511
             
             
Total Equity and Liabilities   741,400   652,832   778,557

 

Condensed Consolidated Statements of Changes in Equity
For the six month period ended 30 June 2016 (Unaudited)

  Stated
Capital
Capital
reserve
Statutory
reserve
Merger
reserve
Translation
reserve
Retained
profits
Total
equity
  RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
               
Balance at 1 January 2015 - 31 11,193 7,394 546 322,329 341,493
Profit for the period - - - - - 77,748 77,748
  - - - - 2,778 - 2,778
Other comprehensive income:
  Foreign currency translation differences for foreign operations
Total comprehensive income
for the period
- - - - 2,778 77,748 80,526
Issuance of share capital 87,167 - - - - - 87,167
Share issue costs (1,929) - - - - - (1,929)
               
Balance at 30 June 2015 85,238 31 11,193 7,394 3,324 400,077 507,257
Profit for the period - - - - - 62,656 62,656
  - - - - (2,675) - (2,675)
Other comprehensive income:
  Foreign currency translation differences for foreign operations
Total comprehensive income
for the period
- - - - (2,675) 62,656 59,981
Dividend paid - - - - - (7,727) (7,727)
Transfer to statutory reserve - - 3,524 - - (3,524) -
Balance at 31 December 2015 85,238 31 14,717 7,394 649 451,482 559,511
               
Profit for the period - - - - - 37,656 37,656
  - - - - 594 - 594
Other comprehensive income:
  Foreign currency translation differences for foreign operations
Total comprehensive income
for the period
- - - - 594 37,656 38,250
Balance at 30 June 2016 85,238 31 14,717 7,394 1,243 489,138 597,761

 

Condensed Consolidated Statements of Cash Flows
For the six month period ended 30 June 2016

  Six months
30 June
  Six months
30 June
  2016
Unaudited
  2015
Unaudited
  RMB'000   RMB'000
       
Cash flow from operating activities      
Profit before taxation 49,412   101,476
Adjustment for:      
Amortisation of land use rights 23   22
Depreciation of property, plant and equipment 1,494   1,096
Interest expense 1,574   1,219
Unrealised loss on foreign exchange 2,944   -
Interest income (505)   (477)
       
Operating cash flows before movements in working capital 54,942   103,336
       
Decrease / (increase) in inventories 8,688   10,683
Decrease / (increase) in trade and other receivables 63,714   53,697
(Decrease) / increase in trade and other payables (66,942)   (49,325)
Cash generated from operating activities 60,402   118,391
       
Interest paid (1,574)   (1,219)
Income tax paid (14,692)   (28,491)
Net cash generated from operating activities 44,136   88,681
       
Cash flows (for)/from investing activities      
Acquisition of property, plant and equipment (98)   (20)
Interest received 505   477
Net cash used in/ generated from investing activities 407   457
       
Cash flows from/(for) financing activities      
Proceeds from issue of share capital -   87,167
Share issue costs -   (1,929)
Net drawdown of interest-bearing bank borrowings (5,529)   (4,428)
Net cash generated from/ (use in) financing activities (5,529)   80,810
       
Net increase in cash & cash equivalents 39,014   169,948
Effects of foreign exchange translation (2,350)   2,779
Cash and equivalent at beginning of year 380,419   187,576
Cash and equivalent at end of year 417,083   360,303

 

Notes

Notes to the Financial Results are available in the pdf download

 

Page last updated: 28 September 2016

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