By Lee Gyu-sun
Dongwon Industries’ fishery business engages in fishing, seafood product processing and distribution and logistics, befitting its motto “from sea to the dining table.”
The firm’s fishery division generates 60 percent of the total sales. Skipjack tuna, the fishery division’s primary product, is mostly used to produce canned tuna. The retail division processes and sells tuna and marine products.
Exports account for approximately 40 percent of the company’s sales. In order to improve efficiency, Dongwon acquired the logistics business Loex in 2006 ― logistics and retail businesses both use frozen warehouses.
The fishery business accounts for 60 percent of Dongwon’s sales and 72 percent of its operating profit. Skipjack tuna sales account for 92 percent of the company’s seafood products that are sold on a dollar basis. Hence, tuna prices, foreign exchange rates and catch volume influence the earnings and share price of Dongwon.
Daewoo Securities expects that Dongwon’s growth will be driven by the following three factors:
1) A rise in tuna prices. While tuna supply is limited, demand has been steadily growing on high canned tuna demand from China, the Middle East, and Russia. 2) Expansion of fishing area. The company is expanding its fishing areas ― formerly just the western and central Pacific Ocean ― to include the Atlantic and Indian Oceans. This fishing area expansion should lead to a catch increase. 3) Catches of new types of fish. The company began operating two trawlers this year. Unlike purse seiners, trawlers are capable of catching horse mackerel, snapper, pollack, and krill.
In the third quarter, Dongwon’s revenues and operating profit are projected to decline 13.9 percent and 71.1 percent from a year ago, respectively.
Even though tuna prices hit a historic high at $2,050 per tonne in September, catches are projected to have plummeted 41 percent. Given that fixed costs account for a whopping 60 percent of tuna business costs, any revenue deterioration leads to a plunge in operating profit.
The net profit is forecast to plummet 96.9 percent from a year ago due to foreign-exchange-related losses of 7 billion won. Still, the company is relatively insensitive to foreign exchange rate fluctuations, as the company’s dollar-denominated revenues ― 60 percent of the total ― mostly offset its foreign exchange related losses from foreign currency debts when the won depreciates. A 100 won rise in the rate of the dollar against the won should lead to only a 0.9 percent drop in annual net profit.
The plunge in the third quarter catches seems attributable to: rapid tidal current changes around the western and central Pacific Ocean due to a drop in sea surface temperature; and a ban on the use of fish-aggregating devices between July and September.
However, since catches are likely to rebound to 80 to 90 percent of the normal monthly level in October, the company’s catches should gradually recover starting in late fourth quarter.
This catch recovery should lead to quick turnarounds in both Dongwon’s top and bottom line. In 2012, revenues and operating profit are projected to show respective year-on-year growth of 16.2 percent and 42.6 percent.
Lee Kyu-sun is the leader of the small cap team at Daewoo Securities.