(Sept 25): When Oceanus Group was listed in Singapore in 2002, it was an easy investment story to sell. S-chips were still hot and its business of farming abalone, a popular delicacy, could only grow as China prospered.
At one point, the company’s market value hit more than $2 billion.
Things went horribly wrong in 2011 when the company announced that 42 million abalones had died and had to be written off. Some other “subpar” stocks were written down, and the company sank into a pool of red ink.
It reported RMB1.2 billion in losses for FY2011 ended December, versus RMB188 million in earnings for FY2010.
And it has struggled since. At the end of last year, the company had a market capitalisation of just $87.6 million.
But CEO Peter Koh, formerly Oceanus’ independent director, has persuaded the company’s creditors to take shares as repayment for debts. And he is changing the way Oceanus farms and sells its abalones.
For 1HFY2017, Oceanus managed to report much reduced losses of RMB49.5 million ($10.1 million) — down 21% y-o-y from RMB62.8 million. Could the company be on the verge of a return to the black?
Thorough shake-up
In an interview with The Edge Singapore, Koh recalls the deep vitriol he experienced when he first took on the CEO role. “When I showed my name card, people went ptui,” he says.
He had to endure other difficulties as he axed arrangements made under the old management, including salaries for phantom workers and redundant expenses. This angered some parties and even led to threats from the local mafia. Workers, unpaid for months, rioted. Unpaid rentals for the Singapore office meant the company was on the verge of being locked out.
Koh persevered, hiring a new team and spending much of his first year in China. He lived on the farm premises and ate at the canteen — and made all staff do so as well. He wanted to build up confidence in his new management team, he says, that they were there not just to bark out orders but to work. “We also sent a signal to those guys we chased out that we were not afraid,” he says.
Once operations on the ground stabilised, Koh turned his attention to convincing creditors to give the company a second chance. He even offered personal guarantees to professional advisers and other service providers.
“I went around, I begged, I cried, I did everything. We said we were doing things, and that we were doing things differently and that we were doing things for the shareholders,” he says.
In the latest round of debt restructuring announced on July 26, Oceanus will issue more than 19 billion new shares at 0.395 cent each. This is a discount of 29% to the three-month volume weighted average price of 0.557 cent. The share issue will bring the total number of shares in Oceanus to 24.3 billion. It will also wipe $77 million in debt off the company’s books.
The company will receive $6 million in new capital from investors, including $900,000 from Koh himself. Koh, who is also one of the creditors, currently has a stake of 0.24%, following an Aug 14 purchase of 11 million shares at an average price of 0.9 cent each. Shares in Oceanus closed at 0.9 cent on Sept 19. If shareholders approve the deal at an EGM to be called, Koh’s stake will rise to 10.23%.
Shortening the cycle
With the company’s books cleaned up, Koh is focused on building a business model that makes sense.
Previously, Oceanus was involved in the entire life cycle of its abalones — from spawning to harvesting — which took a four- to five-year period.
The company operated a land-based farm, which means its abalones were bred in tanks that had to be filled with sea water. Costs were high because of energy use by water pumps.
Sea-based farms are more exposed to natural elements, Koh says, but are 40% cheaper.
Koh says Oceanus will now focus on being a hatchery, selling juveniles of less than a year old to sea-based farmers. This would allow Oceanus to convert its stock back to cash returns more quickly, thereby cutting risks.
To attract sea farmers to buy from Oceanus, Koh is paying a lot of attention to science and prioritising quality over quantity. To this end, the company has formed partnerships with researchers from institutes and universities.
While these schools will retain the intellectual property of their research, Oceanus will have the first right of refusal to exploit the fruits of their R&D efforts. “We don’t have to dig deep into our pockets and pay through our noses. That’s good enough,” says Koh.
The company’s accumulated expertise has even won it a consultancy project to advise another much larger Singapore-listed company on how to improve its aquaculture operations.
Diversifying revenue sources Koh is also pushing the company to move beyond abalones and diversify into other seafood such as fish and shrimps.
He points out that fish farming, seen as contributing to food security, receives strong support from the Singapore government in the form of incentives, grants and other forms of leverage. “We will consider, if land parcels are opened up,” he says.
As for shrimp farming, there is no similar level of support. However, shrimps tend to grow faster than fish with up to four cycles a year. This means shrimp farmers can make money quickly.
Oceanus has made inroads on the selling side too. On June 15, the company signed an exclusive agreement with a Chengdu-based entity called WSRC Holding. The latter is a state-owned enterprise that imports and distributes food in Chengdu and the surrounding regions.
According to Koh, Chengdu and Chongqing are vying to be the focal points of China’s central-western region, which can be seen as a jump-off locale for the national Belt and Road Initiative.
One way Chengdu wants to differentiate itself from the much larger Chongqing is to carve out a niche as a strong importer of foodstuff into the region, and Oceanus’ abalone is one component of the product range being assembled.
Koh sees the agreement with WSRC as a risk-free deal for the company. There are no capital requirements, as Oceanus merely needs to supply its products to WSRC, which will take care of distribution and retailing in Chengdu.
The agreement also calls for WSRC to commit to buying at least 500 cartons, or $500,000 worth, of abalone from Oceanus by June 2018. “If they don’t, we can move along and find someone else,” says Koh, adding that he is exploring similar arrangements in other parts of China such as Hainan and Guangdong.
Oceanus has moved into mid-stream processing as well. On July 28, it assumed 60% ownership of BNY Abalone World Factory Outlet, which operates an abalone processing plant in Australia’s Gold Coast and runs a duty-free shop. The stake was a contribution from one of Oceanus’ investors.
Koh says BNY holds a licence to process and export abalone to China. The company will be renamed Oceanus Australia Abalone World.
“In the coming few years, if we can have it our way, we will be doing the whole spectrum and not just one product or just one country.” He thinks Oceanus’ prospects are “a lot better” than they were two years ago. “The company is no longer in the ICU, but we are still weak, very weak.”
Nevertheless, he is confident Oceanus can cross a major hurdle at the end of this financial year: getting itself out of the Singapore Exchange’s Watch-list. He had rejected an offer to extend the deadline for getting off the list, as he sees no need to.
At its current share price, Oceanus’ market value can hit the $40 million threshold. And the company will finally turn profitable this year — however small the earnings will be. “That’s the conviction I have,” says Koh.
