A New Chance for China Marine Food

| About: China Marine (CMFO)

The near future will give new opportunities for U.S.-listed Chinese stocks to differentiate themselves from the masses in a positive way. Lately a lot has happened in the China space and short sellers have profited incredibly the last nine months. Thank God things are changing.

Short sellers are looking for a needle in a hay stack and misleading investors with bogus arguments and false facts. Of course, they are sometimes successful in uncovering a fraud. But to claim that almost every U.S.-listed (RTO) stock is a fraud is like saying every single sheep is white.

To me it is still unbelievable that some investigative reporters, tiny boutique firms or anonymous bloggers can have such a huge impact on financial markets. This trend has been going on for a while now and made possible by the internet and other social networks. These types of media are a fact in today’s market. However, they should be used to develop the market and not harm them.

One company that has been hit hard this last year by short sellers, actually went up nicely last Thursday with a gain of more than 28% to close at $4.95.

The company is called China Marine Food Company (NYSEMKT:CMFO).

The company produces and sells dried seafood snack foods, trades fresh marine catch and sells algae-based beverages. Seafood-based snack foods, which account for about 75% of Company revenues, are similar to beef jerky in the U.S. but are high in protein and low in fat. China Marine has 29 products which are sold under its "Mingxiang" brand through 19 exclusive distributors to 2,900 retail stores which include: Convenience stores, supermarket chains and hyper markets such as Wal-Mart and Carrefour. Hi-Power beverages are sold to more than 10,000 retail points including supermarkets, convenience stores, restaurants and hotels.

The company is strategically located in Fujian province, one of the largest coastal provinces in China and a vital navigation hub between the East China Sea and the South China Sea. Marine Food has received “The Famous Brand” and “Green Food” awards and is committed to marine harvesting versus aquaculture.

Dried fish products have had a long history in China and have played and will continue to play a major role. The relatively new "snack-type" variety of processed seafood products have gained strong acceptance from the current generation of consumers. Processed seafood products are becoming increasingly popular as consumers are shifting to a faster paced lifestyle and seeking convenient food alternatives that are nutritious, tasty and hygienic.

Most important, the seafood-based snack food industry is estimated to be a $1.5B market.

What has intrigued me the most in this company is its Hi-Power algae-based beverages. Hi-Power is marketed as a high-protein content drink, low in calories and fat, which provides the consumers with a combination of immune system benefits, improved digestion and reductions in hyperglycemia and hypertension. Hi-Power's target market focuses on health conscious consumers in China's fast-growing beverage market. At this moment the company has around 13.000 retail points, including restaurants and hotels.

Last Wednesday China Marine published its full year 2010 results.

Some highlights:

Revenue during the twelve months ended December 31, 2010 increased by 76.3% to $122.7 million compared to last year. Sales of seafood snack foods increased by 35.4% to $70.5 million. Sales of "Hi-Power" algae-based beverages were $26.0 million during the twelve months ended December 31, 2010, compared to $7.6 million in the same year ago period under "Hi-Power"s previous owner. Marine catch sales grew by $8.7 million, or 49.4% for the twelve month period.

Gross profit was $37.5 million, an increase of 95.8% from $19.1 million in 2009. Consolidated gross margins were 30.5%, a 300 basis point improvement over the year ago period. Gross margins for the processed seafood line, "Hi-Power" beverages and marine catch businesses were 34.5%, 41.0%, and 9.4%, respectively.

SG&A expenses for the twelve month period were $9.6 million compared to $2.9 million in the prior year's period. Increases were a result of sales and advertising costs associated with the new beverage business and new staff hires. Operating income for the twelve months of 2010 was $25.3 million, with operating margin of 20.7%, a 56.8% year-over-year increase from $16.2 million a year ago.

Year-to-date 2010 GAAP net income was $21.1 million, compared to $14.6 million in the prior year's corresponding period, a 45.1% increase. Excluding the non-cash charge of $2.4 million associated to the amortization costs of the "Hi-Power" acquisition, adjusted net income for the full year was $23.5 million and exceeded management expectations of $21.5 million in adjusted net income. GAAP earnings per weighted average diluted shares were $0.73 based on 29.0 million fully diluted shares, while adjusted non-GAAP earnings per share were $0.81 for the twelve month period ended December 31, 2010.

If the company can successfully expand its distribution network this year, its guidance for 2010 looks a little bit conservative.

Projections % Change


$150.0+ million + 22.3%

Adjusted Net Income:

$27.3 million + 16.1%

The growth story has been amazing and will continue.

That's why the price targets are much higher than the current stock price of $4.95: $9 (Rodman&Renshaw), $10 (Global Hunter), $11 (Brian Murray).

With the announcement of BDO China as its independent auditor, China Marine Food has largely put to rest investors' concerns over its financial integrity. Furthermore, CMFO has vaccinated itself from additional scrutiny by demonstrating the ability to quickly and effectively respond to such allegations.

The fight between longs and shorts in the U.S. China space is fading away and we will see much more nice price gains for other U.S.-listed China stocks in the coming weeks. So, finally, the mispricing of U.S.-listed China stocks can be reduced.

Disclosure: I am long CMFO.