China Fishery is a global leading integrated industrial fishing company with access to some of the 

world’s most important fishing grounds in the Pacific Ocean and Atlantic Ocean. It also operates a 

fleet of purse seine fishing vessels with a 10% market share of the total allowable catch in Peru and 

owns several strategically located fishmeal processing plants along the coast of Peru. This makes it a

prime beneficiary of the ever-growing global demand for fish especially since between 50-60% of its 

revenue is from the high growth Chinese market. 

Besides operating its own fleet of fishing trawlers and catcher vessels, it also signed 4 long-term 

Vessel Operating Agreements (VOAs) with a group of Russian fishing vessel owners whereby China 

Fishery would lease 23 super trawlers from these Russian owners and also bear all vessel operating 

costs such as bunker, crew wages, maintenance and insurance costs. After deducting these costs, 

operating margins still come up to a mouth-watering 50-60%. 

China Fishery also owns a floating factory, christened the “Lafayette”, that is equipped to process 

and freeze 1,500 tonnes of fish per day and has total storage capacity of 14,000 tonnes. This was 

converted from a Panamax vessel that was previously used to transport crude oil at a total cost of 

US$100 million in 2009. The Lafayette can operate at sea all year round and provide fish processing 

and storage support to its fleet of catcher vessels and supertrawlers in the South Pacific. By being www.lumierecapital.com 

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able to unload their catch directly to the Lafayette out at sea, these vessels can resume fishing 

almost immediately, thus greatly enhancing efficiency. 

The company’s track record over the past few years demonstrates its resilient and high-growth 

business model. Revenue grew at a compounded annual rate of 35% from US$156 million in FY2006 

to US$685 million in FY2011, while profits also compounded at 17% per annum from US$48 million 

in FY2006 to US$104 million in FY2011. Even during the 2008 Global Financial Crisis, revenue and 

earnings continued to increase, albeit at a slower rate. Management also has a consistent policy of 

paying out 30% of its earnings as dividends to shareholders. These desirable qualities have attracted 

the likes of institutional investors such as the Carlyle Group, who invested US$150 million for an 11%

stake in the company in 2010. 

We took a position in China Fishery in late 2011 at 5.5x earnings, 1x NTA and 5% dividend yield. This 

opportunity arose after its shares declined over 60% from the peak in January 2011 due to the 

general market sell-down. After we made our investment, the business continued to grow nicely for 

the first-half of FY2012. However in July 2012, China Fishery announced that it was replacing its 4 

VOAs with Long-term Supply Agreements (LSAs) instead. Under the new LSAs, the same Russian 

vessel owners would commit to supply all their catch to China Fishery and the vessel owners would 

also be responsible for all operating costs. In return, China Fishery would need to pay a total of 

US$438 million upfront to the vessel owners for the 4 LSAs, thus increasing its already high debt 

burden. 

We grew uncomfortable with the thought of China Fishery paying such a huge amount upfront as 

the weak rule of law in Russia meant that if any legal disputes broke out between the company and 

the vessel owners, we were not guaranteed a fair resolution. In the worst-case scenario, the 

company could be saddled with the huge debt with no supply of fish to show for. The situation was 

further compounded when it announced its first-ever quarterly loss in 4Q FY2012 citing lower than 

expected catch volumes in the North Atlantic and South Pacific. It puzzled us how such a fishing giant

could fail to catch enough fish to at least make a marginal profit. Management also revealed that 

their total allowable catch in Peru for the November 2012 – January 2013 season would be 

dramatically slashed by 70% due to the high level of juvenile fish in the water. Since the Peruvian 

fishmeal business makes up around a third of its revenues, the negative impact would be significant. 

What we initially assessed as a simple, understandable and recession-proof business had in 6 

months turned into an unanalyzable combination of moving parts, plagued with regulatory, legal, 

financial and business risk. With a potentially binary outcome, we were no longer holding onto an 

investment that gave us the extremely favourable risk-to-reward payoffs that we typically look for in 

our companies. As such, we closed out our position in China Fishery at a 30% loss after holding it for

a year. 

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Financing of the New Offer

 

The acquisition will be financed by external bank financing from Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A

. (trading asRabobank International), Hong Kong Branch and DBS Bank (Hong Kong)Limited and internal resources of CFGL.