Emergence of an abalone behemoth
Initiate coverage with BUY; Target price at S$0.520. Oceanus, the largest land-based abalone producer, is gunning to be the first vertically integrated abalone group. Its tie-up with renowned restaurant chain, HK-based Ah Yat Abalone Group, is particularly exciting. With plans for 170 stores by FY11, the JV may be able to rake in as much as RMB100m in earnings. If it were to list by then, it should be able to easily dwarf all restaurant groups in Singapore. Organically, its production business continues to thrive and we expect stronger sales in FY10.
Volume and cost leader can potentially drive market share gains. As the largest abalone producer, it has ~110m caged abalone ready for sale (excluding ~140m uncaged young abalone) and a staggering 12km2 of abalone farm stretching from Zhangzhou (Fujian) to Guangzhou (Guangdong). Given economies of scale, it is able to sell its abalone more cheaply compared to its competitors (RMB0.30/kati vs RMB0.60-0.70/kati). Oceanus can potentially consolidate the market by reducing its price, a move which we consider to be plausible.
170 restaurants to earn RMB100m by FY11. Oceanus entered into downstream abalone retail and processing business through a 70:30 JV with Ah Yat in favour of Oceanus in 2H08. The restaurants are targeted at the mass affluent rather than the rich. Currently, there are six operating outlets in Shanghai and Hong Kong with 16 more to come by the end of year (including one in Singapore which will open on 21 Sep 09). Management targets 170 restaurants and RMB100m earnings by FY11.
Attractive vis-à-vis peers. We expect Oceanus' PATMI to rise 46% and 25% for FY09F and FY10F respectively on the back of growing number of profitable retail outlets and the contribution from the processing business. Our target price of S$0.520 is based on a 30% discount to the peers' P/E relative to their respective indices (15.6x FY09 and12.2x FY10P/E).
Oceanus Research Initiation by DMG