In our view, Oceanus should see rapid earnings growth and has good visibility onhow it will get there. In our opinion, the key variables to Oceanus’ earnings are: 1)the number of tanks the company operates, 2) the future price of abalone, 3)disease, and 4) Oceanus’ physical ability to distribute abalone into the market.Thus, we specifically addressed these key issues with Dr. Ng.

Oceanus guides for 20,000 and 40,000 tanks by the end of 2008 and 2009,respectively. It had 17,500 tanks as at 30 September 2008. We understand thatthere is sizeable undeveloped land on two newly acquired farms (one which wesaw personally in April 2008). We are confident that Oceanus will reach or slightlyexceed its guidance for FY08 and FY09 because of the relative simplicity of thetank designs and scalability once pumps and filters are built. Dr. Ng does not wantto expand too much beyond the 40,000 tank 2009 goal, as he wants to focus onsales and does not want to be exposed to too much inventory risk.

Management said that 3Q08 market prices for Japanese abalone in China werefairly steady compared with those for 1H08. Going into 4Q08 and January 2009,management expects a seasonal premium to develop for larger abalone (ie, morethan five years old). After the Lunar New Year in 2009, we expect abalone pricesto decline modestly, due to economic deceleration in China. We assume abaloneprices decline from FY08 to FY10.

Currently, Oceanus does not have insurance on its bio-stock. While we think thechance of disease affecting Oceanus’ entire bio-stock is very remote, we believethat would be one of the few events that could affect the company dramatically if left uninsured. Oceanus is investigating insurance coverage for its bio-assets. WhileOceanus has not signed a contract, the company will make an announcement if thissituation changes.

As at 30 September 2008, Oceanus had around 171.4m abalone. We expect thecompany to roughly double this figure by 2010. Assuming it sells roughly one-third of this population every year after 2010 (eg, about 125m abalone), we believeOceanus’ biggest strategic issue would be its ability to sell all those abalone. Thecompany has had a three-pronged approach to its sales channel: 1) live distribution,2) industrial distribution, and 3) retail distribution.

According to management, the company is turning away business because it doesnot have enough abalone to sell. However, we believe that Oceanus’ abaloneproduction will exceed latent demand in 2010, and we are sceptical that it can gainenough market share in order to sell its 100m-plus abalone per year into the liveanimal sales channel. At most, we estimate that Oceanus can sell 50m live abalone.We believe that Oceanus will have to rely on industrial and retail distribution,which we think taps a much bigger market opportunity.

On 8 August 2008, the company announced plans to create a joint venture calledOceanus Food Group (OFG) with Ah Yat Abalone Group, a Singapore-basedabalone restaurant group with some locations in China. It was our understandingthat this joint venture was supposed originally to be the investment vehicle thatoperated restaurants in China and licensed its intellectual property rights. Thepackaging operations were supposed to be operated through a joint venture withanother company. This 70/30 Oceanus/Ah Yat joint venture will do all four, ie,owning the rights to the Ah Yat brand, industrial packaging, retail canning andrestaurant operations. According to Dr. Ng, Ah Yat will inject its Ah Yat brandingrights immediately, build its industrial packaging operations in 1Q09, build its firstrestaurant in 1Q09 and open up canning operations around mid-2009. We expectthe packaging operations to be in Fujian near the farms