Description of the business

The Company is a Jersey holding company whose principal operating subsidiary, Yantai Kanwa is a leading marine foods and seafood processor and supplier based in the PRC, supplying to the export and local PRC markets respectively. Yantai Kanwa's subsidiary, Zhenhaitang, owns the Group's "Zhenhaitang" brand; a marine foods and seafood brand well known in Eastern provinces in the PRC. The Group also operates under the "Yantai Kanwa Food Co Limited" and "Kanwa Foodstuffs" names and the brand is known as Kanwa Foodstuffs, particularly in the Japanese market. The Group offers a wide range of quality marine foods and seafood. The Company's main products are processed frozen seafood, seaweed-based foods and marine snack foods.

Having initially built its business through focussing on the export market (principally Japan under the Yantai Kanwa Foods brand), the Group established the "Zhenhaitang" brand in 2007 in the PRC in order to take advantage of growing demand in China driven by growing disposable income within the PRC Middle-Classes and a more health conscious consumer base with a preference for healthier, natural food.

The Group has established an extensive distribution network. As at 30 June 2014, the Group marketed its products through 50 regional distributors covering 16 provinces, municipalities and autonomous regions in the PRC. These regional distributors in turn sell the Company's products to their sub-distributors and retailers. The Group is active in supporting its distributor base and in particular maintains a number of key relationships with key distributor customers in the PRC supporting their sales activities.

The Group enters into one year agreements with regional distributors as agents for the Group's brand. Annual sales target are set for each regional distributor in conjunction with the marketing department who track and monitor performance. Upon receipt of purchase orders, the Group arranges for delivery of the finished products available for sale in Yantai Kanwa's warehouse or plans production to meet the demand.

The Group will generally suggest retail prices to distributors but will not set price caps for them. However, the Group requests that retailers and supermarket chains do not sell the Group's products at prices lower than a prescribed minimum price. The Directors believe that this pricing practice is consistent with market practice for the wider PRC marine foods industry. The Existing Directors and Proposed Directors believe that this flexible pricing policy allows distributors to retain an acceptable profit margin and helps to incentivise growing sales as well as to build long term partnerships.

The following map shows areas where the Group currently has distribution relationships.

distribution relationships for the Group


During the year ended 31 December 2013 over 90 per cent. of the Group's sales were in the PRC.

With the growth in China's per capita wealth and resultant higher standard of living, demand has started to move towards processed and ready to eat products as opposed to the procurement of daily foods from traditional markets. Furthermore, many Chinese consumers are believed to be concerned about food hygiene and safety and look to recognised branded goods where there is a perception of enhanced food safety. To help to further service this demand during 2012, the Group made a strategic decision to focus production towards higher value goods with an improved average selling price.

According to Euromonitor International, the annual growth rate of high-income individuals in the PRC has grown significantly recently.  Between 2010 and 2012, the growth rate of high-income consumers in the PRC has increased from 20% to 28%.

The international seafood market has also continued to be a favourable market place for the Group to operate in.  The export market for PRC seafood processors witnessed fast growth between 2009 and 2013.  Total export for frozen whole fish and fish fillets and pieces products from the PRC has increased from 1.42 million tons to 1.98 million tons, representing a Compound Annual Growth Rate of 8.8%.

The Group benefits from excellent food safety procedures developed over many years which the Directors believe have helped the Group to build a strong track record of supplying its products into overseas markets. The Directors believe that this track record has enhanced the perception of the quality and reliability of the Group's products in the PRC and has allowed the Group to expand significantly into local markets as demand for seafood products has increased. The Group complies with, inter alia, the following key standards:

  • ISO 9001 Quality Management System certification;
  • HACCP1 Food Safety System certification;
  • BRC2 certification; and
  • MSC3

The Group currently has approximately 16,000 tons of annual seafood processing capacity for all varieties of seafood products (14,400 tons net utilizable capacity).

The Directors and Proposed Directors believe that Chinese consumers will increasingly adopt more convenience orientated consumption habits. The Group is therefore developing its product offering for ready to eat and processed products in order to access this expected demand. in response to changing consumer preferencesand demand, product innovation and expansion of the current range offered will help to secure a larger market share within the Group's markets of operation, both domestically and internationally.

The Group's operations are located in the Laishan Shengquan Economic Development Zone, Yantai City, Shandong Province, in the PRC, a region well known for its seafood industry with the largest fishing seaport in Shandong Province.

 

1 Hazard Analysis and Critical Control Points
2 British Retail Consortium
3 Marine Stewardship Council

 

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