Oceanus Group’s (Oceanus) FY09 results fell short of expectations. Sales gained 13.6% to RMB362.2m. Gains from fair value changes, which is reported as the group’s top line, grew 25.7% to RMB651.4m. Core net profit improved by 4.7% to RMB343.2m, but fell short of our RMB397.2m projection. Value of biological assets almost doubled to RMB831.0m on higher abalone prices and a higher proportion of larger sized abalones, reflecting the group’s efforts to sow future growth. In our view, Oceanus has an ambitious but hazy growth strategy. It needs to deliver convincing earnings growth before we can be assured of its growth strategy. We maintain our HOLD rating and reduce our fair value estimate to S$0.365.

FY09 results below expectations. Oceanus Group’s FY09 results came in below expectations. Sales gained 13.6% to RMB362.2m. Gains from fair value changes, which is reported as the group’s top line, grew 25.7% to RMB651.4m. Core net profit improved by 4.7% to RMB343.2m on high operating costs, but fell short of our RMB397.2m projection. The lower-than-expected figures were in part due to weak abalone prices experienced during the first nine months of 2009, which was an indirect result of the economic recession. We understand that abalone prices have since recovered on the back of an industry supply shortage caused by high mortality due to a prolonged summer and severe snow in Northern PRC. According to management, overall abalone valuations recovered by 40% in Dec 09 vs. Dec 08. As expected, no dividends were declared.

Fruits of labour starting to show in asset values. While the group’s earnings fell short of expectations, we were comforted that its NAV, which forms the basis of our valuation, rose 58% to 78.56 RMB cents per share, reflecting the group’s success in growing its biological assets in preparation for future growth. Value of biological assets almost doubled to RMB831.0m from RMB445.0m a year ago thanks to improved abalone prices, coupled with a higher proportion of larger sized abalones (the value of an abalone increases with its size). We believe that its expansion efforts should pay off in future when the group monetizes its assets either by selling in the live market or by processing its abalones.

Ambitious but hazy strategy. Population of caged abalones fell to 119.8m from 138.6m a year ago as Oceanus sold its young abalones even though they had not reached optimal values. This came as a surprise as we had expected Oceanus to sell its abalones only when they reached their optimal values after three years. We believe that the urgency to monetize its biological assets could have been driven by tank shortage. The group had originally targeted to expand to 40,000 tanks by Dec 09, but due to rising land costs, it has only managed 25,055 tanks. In our view, Oceanus has an ambitious but hazy strategy. It needs to deliver convincing earnings growth before we can be assured of its growth strategy. We maintain our HOLD rating on the stock and lower our fair value estimate to S$0.365 (from S$0.41).