Oceanus is engaged in the farming and sales of Abalones with its farms located in Fujian, China. The company is aggressively expanding its farming capacity as well as integrating downstream businesses. We initiate coverage with a HOLD recommendation, with TP at S$0.19, reflecting our concerns about its execution in terms of its aggressive expansion plans and its downstream moves at a time of economic uncertainty.

Tripling its farming capacity from 20,000 tanks in FY08 to 60,000 tanks by end FY10, Oceanus is aiming to expand and capture more market share of the abalone industry through its efficient mass cultivation methods.

The two crucial competitive edges of the company are i) the management’s rich experience in aquaculture farming, and ii) the unique and ideal location of the farms. The former ensures stable and efficient operation of the farms while the latter lowers its expense ratio.

Under FRS 41 accounting rules, Oceanus would be booking a substantial amount of unrealized gains during its growth years, as its biological assets increase along with its capacity expansion. Hence, we would prefer to look at cash earnings by replacing fair value gains with actual sales on the P&L side. Based on the adjusted profit forecasts for Oceanus, the Group would be currently trading at c. 4.4x FY09 and 2.8x FY10 earnings.

HOLD, TP S$0.19. Our target price for Oceanus is pegged to 4x blended FY09/FY10 adjusted earnings, in line with other F&B S-chip plays, which translates to S$0.19. We like Oceanus as a proxy to Chinese consumption and also its distinctive advantage in the mass-cultivation of abalone, but are concerned about its execution in terms of its aggressive expansion plans and its downstream moves at a time of economic uncertainty. Initiate coverage with a HOLD call. The stock has upside potential if the Group can address these concerns.