Oceanus-Daiwa

What has changed?
• Oceanus Group (Oceanus) reported its 4Q08 results after the market close on 23
Feb 2009. 4Q08 net profits fell 86.4% YoY on 7% lower bio-asset revaluation
recognition.
Impact
• In our opinion, the results contain several items that hide the true strength of
Oceanus’ abalone farming operations. First, we believe Oceanus’ third-party
valuation company used unit-prices 10% below current market value, (whereas
previous prices were close to market value).
• Secondly, the company reported large non-cash tax items, including deferred
taxes and dividend withholding taxes. In our opinion, the deferred tax charge
can be ignored, because it is a non-cash accrual based on the FRS 41 revaluation
(in preparation for potential future cash taxes in 2009). The company has not
declared a dividend, but must accrue a withholding ‘tax’ on dividends that it
may declare in the future (otherwise no dividends can be expatriated out of
China).
• In terms of ‘real’ operational variances, the company also reported significantly
more abalone than we had anticipated, but also higher ‘other operating costs’.
In our view, these two factors essentially cancel each other out. At its
operational level, we believe that Oceanus is progressing nearly exactly as we
predicted.
• At this point, we are not changing our earnings forecasts, but we will provide an
update in due course.
Valuation
• We currently have a six-month DCF-derived target price of $0.535.
Catalysts and action
• We currently have a 1 (Buy) recommendation on Oceanus, which we like for its
fast and relatively secure earnings growth over the next three years and
inexpensive earnings ratios and robust cash flows.