Qian Hu Corporation Limited - NRA Capital Research 2017-01-16: Prospects Improve On New Business Initiatives

Qian Hu Corporation Limited - NRA Capital Research 2017-01-16: Prospects Improve On New Business Initiatives QIAN HU CORPORATION LIMITED SGX: BCV

Qian Hu Corporation Limited - Prospects Improve On New Business Initiatives

New businesses to drive growth in 2017

  • Qian Hu announced its 4Q16 results on 12 January. FY16 revenue grew by 3.2% to S$80.5m, mainly due to S$2.25m of growth from the accessories business.
  • FY16 PATMI rose to S$68k from S$19k in 2015. Profitability was actually boosted by tax credits of S$0.3m as corporate expenses of about S$2.2m led the group to report a pre-tax loss of S$10k.
  • What’s new is that Qian Hu took the opportunity to announce that it is entering into the edible fish business in PRC and the genetic breeding of albino dragon fish for the ornamental fish business.

What’s the big deal?

  • The edible fish market is significantly larger than that of ornamental fish, in terms of volume. In December, Qian Hu entered into a joint venture via 51% owned Qian Hu Aquaculture (Hainan) Co., Ltd with a registered capital of approximately S$1.2m. This JV co will operate a farm of land area 0.4 hectares with a tenure of 16.5 years on Hainan island. 
  • As a start, the farm will breed grouper fish targeted at the PRC market.

Building a differentiated business

  • Based on our interpretation, the idea is that Qian Hu’s proprietary filtration technology HYDROPURE and its fish nutrition know-how will allow it to breed fish with higher survival rates.
  • Meanwhile, its local partner will provide herbal medication expertise to grow fish without the use of antibiotics, thus differentiating itself from other fish farmers. We would expect contribution from early 2018. If successful, the model can be expanded to e.g. shrimps for the south east Asia market.

Genetic breeding of Albino Dragon fish

  • This is a five-year project that Qian Hu has been undertaking and the company has started the breeding of Albino Silver Arowana in late 2016.
  • Ornamental fish is a billion-dollar market of which Qian Hu has 5% market share. Rare fishes can sell fetch top dollar. In 2014, an albino dragon fish was sold for RMB0.88m (S$0.18m) at an exhibition in Shanghai. Therefore, the ability to breed unique varieties of Arowana will allow the company to increase the value of its products.

Improved top-line prospects

  • Qian Hu’s share price has increased from 9.9 cents on 9 January to 12.2 cents on 13 January and to a high of 18 cents today against FY16 EPS of 0.06 cents. Based on the last done price of 17 cents, it still trades at just 0.38x P/BV against a NAV per share of 44.48 cents.
  • Adding back depreciation and amortisation of S$1.85m, Qian Hu actually has a positive EBITDA of S$2.18m in FY16, translating to an EV/EBITDA multiple of 12.9x. Net operating cash flow in 2016 was a positive S$3.1m.
  • We find the recent events interesting for a company that has kept a lower profile in recent years, but refrain from providing a rating at this juncture.
  • Based on Qian Hu’s historical earnings, the company trades at 11.4x 10-year average earnings and 3x the earnings high of 2009.

Liu Jinshu NRA Capital Research | http://www.nracapital.com/ 2017-01-16
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