SINGAPORE (May 22): Oceanus Group, known for abalone farming, has a new business model. While prospects for rearing and selling the seafood delicacy to the emerging Chinese middle-class remain strong, Peter Koh, the CEO, believes he can do better without getting tied down with fixed costs and risks that farming entails.
Towards the end of last year, Oceanus rented out most of the space in its farms in China to three major operators for tenures ranging between two and three years. As per local business practice, they paid their rent in advance. The locals were surprised that Oceanus chose to get out just before the peak Chinese New Year season, when prices of abalone and other delicacies would rise. It turned out to be a fortuitous move.
Within a month, Covid-19 hit, and the demand for abalone did not manifest. Oceanus, financially, was able to stay relatively unscathed. “We became the talk of the town,” says Koh in an interview with The Edge Singapore.
The decision to stop abalone farming was a surprise. After all, it listed on the Singapore Exchange on the novelty of that business. However, it then ran into trouble when its abalones reportedly died and a huge writedown had to be taken. In 2015, Koh, who was then one of the company’s independent directors, took on the CEO job to salvage what he could.
More than five years on, the recapitalised Oceanus was finally at a stage to rebuild. Yet, it was at this juncture that Koh chose to scale back farming. He knows that many producers know how to farm but do not know how to sell; he observes how major agri-food companies do not necessarily own their own farms. Rather, they are the middlemen between producers and buyers. When their trading network grows, their influence grows too.
To this end, Koh is committing heavily to a distribution joint venture, Season Global Trading, where Oceanus holds a 50.1% stake and a distribution company, Season Hong, holds the remaining 49.9%. Season Hong has a history of some four decades, has more than 1,000 stock keep units in its distribution catalogue ranging from foodstuffs to alcohol, and generates around $200 million in annual turnover.
From its base in China, Season Hong has set its sights on new markets such as Kazakhstan and Southeast Asia. The two parties have already committed $4 million and will inject another $16 million. This will mark Oceanus’ most significant investment to date.
Oceanus, while relatively new to the distribution business, can bring a level of governance and system to the partnership with Season Hong, especially when it comes to dealing with parties outside China, says Koh.
The joint venture has gotten off to a swinging start. When the markets in China re-opened in April, Season Global Trading quickly collected $13.7 million in confirmed orders. Koh sees the momentum growing as several other Southeast Asian markets such as Thailand, where Season Hong already has a presence, open up following Covid-19 lockdowns. With the additional capital, Koh expects a significant ramp-up in turnover, although he was restrained from openly saying what the company’s projection is.
Koh acknowledges that distribution tends to generate very thin margins. When prices are good, producers can make handsome profits even though they incur fixed costs and bear more risks ranging from weather to labour. In contrast, a distribution company is not as exposed. Whatever it can resell, it can do so without losing money. “It is still a profit,” Koh reasons.
In recent years, as part of the rebuilding, Oceanus has established an increasingly diversified business profile. Besides distribution and farming, Oceanus even has subsidiary companies providing interactive digital media, video and marketing consultancy to the likes of National Gallery Singapore and National Heritage Board.
From Koh’s perspective, there is a method to this diversification. “I can’t rely on one product, one market,” he says, alluding to the disastrous years when Oceanus swung from being a popular growth stock to a company mired deep in the red because of its absolute reliance on abalone farming.
For 1QFY2020 ended March, Oceanus’ revenue increased by 21% y-o-y to RMB4.5 million ($896,280), while losses narrowed by 28% to RMB5.35 million. Nevertheless, the company, as at March 31, 2020, has a net asset position of RMB114.6 million, including a cash and equivalents balance of RMB81.5 million.
When Koh restructured the company, he convinced creditors to take new shares, along with new investors. As a result, Oceanus’ share base has exploded to nearly 24.3 billion shares. Until the company’s earnings growth can be on more solid ground, he is refraining from doing a share consolidation. For years, Oceanus’ share price has languished at near rock-bottom levels. On May 20, it closed at 0.2 cent, valuing the company at $48.6 million.
Nevertheless, with a recapitalised balance sheet, and taking an opportunistic view of the Covid-19 fallout, Koh has been sending word to professional advisers in restructuring and liquidation that they can send some recommendations his way. He is done with cleaning up; he is eager to grow. “The priority is giving value to shareholders,” says Koh.
