Abalone farming ? the largest land-based farmer: With concerted efforts to acquire abalone farms, Oceanus's farm size has grown rapidly to 20,500 tanks as of December 2008 and thus emerged as the world largest land-based abalone farmer.

Restaurant chain - the sky is the limit: The management has a conservative internal target of 10 restaurants in FY09, and 100 restaurants by FY11. To them, the target of first 100 food restaurants is just a milestone marking the beginning of its restaurant chain's journey. The current task for them is to systemize the food chain operation. Its first restaurant in Shanghai is estimated to sell about 5,000 abalones a month, 60,000 a year.

Abalone processing - compelling advantages: Oceanus's processing business offers some compelling advantages. Generally, a processed abalone commands a premium over a live one. On top of that, its selling price is relatively stable, unlike live abalone whereby its price is much more volatile. A processed abalone is shielded from risk arising from disease or natural disaster which is faced by live abalone. Last but not least, a processed abalone can be stored for a longer period which can be readily delivered to meet demands.

Initiate coverage with compelling BUY; target price S$0.44: We find it compelling to recommend BUY as the risk-reward ratio is in the favor of Oceanus. Notwithstanding that uncertainty remains in the downstream business, we believe the risk is low given that (1) encouraging progress shown so far, (2) even if the downstream business does not take off successfully, its abalone farming business is expected to remain profitable. Oceanus is substantially undervalued based on our relative valuation. Based on FY09E book value and sales figure (instead of gain in fair value) and equally weighted P/B and P/S multiples, we derive our target price of $0.44.