China Fishery

China Fishery: UOB Kay Hian downgrades to Sell with TP $0.62, citing that financing costs weighs on profitability. Separately DMG cuts TP to $1.00 from $1.20. Note that with regard to the fourth Long-term supply agreements, grp is negotiating for a prepayment option as opposed to the current daily payment per vessel of US$12,000. The upfront payment should result in a lower overall cost incurred. House estimate the prepayment option should range between US$200m and US$250m. The bulk of the cost should be financed by the new US$300m worth of senior notes issued. The US$300m senior notes at 9.75% compares against its previous issue of US$225m at 9.25% in 2006. The issue is expected to add US$29.3m interest expense per year, against previous FY12 and FY13 net profit estimates of US$126m and US$139m respectively. Net gearing will increase from 0.2x in 2013 previously to 0.5x after the issue. UOB Kay Hian note that the new supply arrangement diminishes grp’s position as an upstream player. Operational control and margin enhancement from operational efficiency will no longer be accrued to CFG. However, note that grp’s vessel operating costs for its North Pacific operations over the past five years have ranged between 40.7% and 45.9% of revenue, above the 40% stipulated in the LSA.