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PME > SEC Filings for PME > Form 10-Q on 9-Aug-2013All Recent SEC Filings




Quarterly Report


References to the "Company," "us" or "we" refer to Pingtan Marine Enterprise Ltd. The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the condensed financial statements and the notes thereto contained elsewhere in this report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.

Special Note Regarding Forward-Looking Statements

All statements other than statements of historical fact included in this Form 10-Q including, without limitation, statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this Form 10-Q, words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to us or the Company's management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company's management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors detailed in our filings with the SEC. All subsequent written or oral forward-looking statements attributable to us or persons acting on the Company's behalf are qualified in their entirety by this paragraph.


We are a marine enterprises group, engaging in dredging services and ocean fishing through our two wholly-owned subsidiaries, China Dredging Group, or CDGC, and Merchant Supreme, and their respective PRC operating subsidiaries or VIEs, Pingtan Xingyi Port Service Co., Ltd. or Pingtan Xingyi, Fujian Xinggang Port Service Co., Ltd., or Fujian Service and Fujian Provincial Pingtan County Ocean Fishing Group Co., Ltd., or Pingtan Fishing. Pingtan Xingyi and Fujian Service provides specialized dredging services exclusively to the PRC marine infrastructure market and is, based on the number and capacity of the dredging vessels it operates, one of the leading independent (not state-owned) providers of such services in the PRC. Since its inception, it has functioned exclusively as a specialist subcontractor, performing dredging services for other companies licensed to function as general contractors. Pingtan Fishing primarily engages in ocean fishing with many of its self-owned vessels operating within the Indian Exclusive Economic Zone and the Arafura Sea of Indonesia. Pingtan Fishing is a growing fishing company and provider of high quality seafood in the PRC.

Although CDGC's services entail dredging site surveys, project planning, engineering, and project management, these activities are all performed in support of the operations of CDGC's dredging vessels. The number, type and capacity of those vessels determine the maximum level and scope of CDGC's operations. Fujian Service began operations with a single dredger and acquired four more dredgers during 2008 by purchase or lease. In June 2010, CDGC leased and deployed four additional dredgers, sometimes referred to herein as the 2010 leases, bringing CDGC's total fleet to nine. In January 2011, CDGC acquired one of the dredging vessels originally leased in 2008. From April to November 2011, CDGC entered into leases for three non-self-propelling cutter suction dredgers, one trailer suction hopper dredger and two grab dredgers, and terminated two lease agreements for one non-self-propelling cutter suction dredger and one trailer suction hopper dredger, respectively, bringing CDGC's total fleet to thirteen. In July 2012, CDGC did not renew two dredger lease agreements when the contracts expired, and terminated another dredger lease. In December 2012, CDGC terminated one dredger lease. CDGC determined that the four dredgers were not suitable for its upcoming projects, which it intended to complete with its remaining fleet. In June 2013, CDGC chose not to renew dredger lease agreements for three dredgers when the respective contracts expired. Contract value in CDGC's industry is generally directly related to the quantity of material dredged, typically expressed in terms of cubic meters. Pricing for each cubic meter, or unit, dredged can vary with project conditions and complexity, the distance that dredged material must be moved after it is excavated, and other factors.

CDGC owns and operates four non-self-propelling cutter-suction dredgers with capacity ranging from 2,000 to 3,500 cubic meters per hour. CDGC also leases and operates one non-self-propelling cutter-suction dredger with capacity of 3800 cubic meters per hour, and one trailer suction-hopper dredger whose capacity is 3,500 cubic meters per hour. CDGC believes this range of vessel types and sizes gives it the flexibility to bid on different types of projects and additional opportunities to increase its profit margins. Notwithstanding CDGC's diverse fleet and capability to handle various project types, CDGC's business has tended to focus increasingly on reclamation projects. For the six months ended June 30, 2013 and 2012, reclamation dredging projects represented approximately 74.6% and 68.4% of CDGC's total revenues, respectively. CDGC believes that its high concentration of reclamation projects will continue because its fleet is well suited to handle reclamation work and CDGC expects the growth of such projects in the PRC to continue to outpace capital or maintenance dredging.

Dredging projects awarded in the PRC are highly concentrated among a small number of general contractors, some of whom share a common parent company. Accordingly, as a sub-contractor, CDGC's customer concentration is high and CDGC has little ability to negotiate differentiated terms for contracts comprising the substantial majority of its revenue. To balance this, CDGC is striving to diversify its customer base to the extent practicable, but the opportunities to do so are limited. CDGC's concentration of revenue with CDGC's largest customer was 31.0%, 33.5% and 36.4%, respectively, in 2012, 2011 and 2010 and 30.5% for the six months ended June 30, 2013. CDGC expects its total revenues to remain heavily concentrated among a small group of customers for the foreseeable future.

Merchant Supreme is a fast growing fishery company that harvests a variety of fish species in the Exclusive Economic Zone in the Arafura Sea in Indonesia and in the Bay of Bengal in India. Merchant Supreme markets its products in China to a diverse group of customers including distributors, restaurant owners and exporters.

In June 2013, Merchant Supreme expanded its fleet from 40 to 86 through a purchase transaction of 46 fishing trawlers for a total consideration of $410.1 million. The transaction is subject to the receipt of government approvals; however Merchant Supreme began operating the vessels and was entitled to their net profits upon the signing of purchase agreement. The primary barrier to enter the ocean fishing industry has been obtaining the necessary licenses to operate these vessels because the number of such licenses is limited by government authorities so as to prevent overfishing. The newly acquired vessels are fully licensed to fish in Indonesian waters and a fishing license can be transferred to a new vessel when an old vessel retires. These vessels have an average age of 10.3 years and each vessel carries a crew of 10 to 15 persons. Merchant Supreme expects that the addition of these vessels and valuable licenses will greatly increase its fish harvest volume, with the addition of carrying capacity by approximately 45,000 to 50,000 tons (effectively doubling the existing capacity).

Currently Merchant Supreme catches nearly 30 different species of fish including hairtail, squid, Spanish mackerel, spotted maigre, Indian white shrimp, octopus, red snapper and silver pomfret. All of Merchant Supreme's catch is shipped back to China. Merchant Supreme's fishing vessels transport frozen catch to cold storage warehouses at nearby onshore fishing bases. Merchant Supreme then arranges periodic charted transportation ships to deliver frozen stocks to its three cold storage warehouses located in one of China's largest seafood trading centers, Mawei Seafood Market in the Fujian Province.

Merchant Supreme derives its revenue primarily from the sales of frozen seafood products. Merchant Supreme sells its products directly to customers including distributors, restaurant owners and exporters, and most of Merchant Supreme's customers have long-term and trustworthy cooperative relationship with Merchant Supreme. Merchant Supreme's existing customers also introduce new customers to Merchant Supreme from time to time. Merchant Supreme's operating results are subject to seasonal variations. Harvest volume is the highest in the fourth quarter of the year and harvest volumes in the second and third quarters are relatively low due to the spawn season of certain fish species, including ribbonfish, cuttlefish, butterfish, and calamari. Based on past experiences, demand for seafood products is the highest from December to January due to the Chinese New Year. Merchant Supreme believes that its profitability and growth are depending on its ability to expand its customer base. With the expansion of operating capacity and expected increasing harvest volume in the coming years, Merchant Supreme will continue to develop new customers from existing and new territories in China.

Significant Factors Affecting Our Results of Operations

CDGC believes that the following primary factors affect its revenues and operating margins:

Governmental policies and availability of sub-contract opportunities. CDGC's opportunities to bid on dredging subcontracts depends significantly upon the PRC government's public spending on port and navigable waterway projects and for land reclamation. The nature, extent and timing of these projects, however, is affected by the interplay of a variety of factors, including the PRC government's spending commitments to improve and maintain marine transportation infrastructure industry and the general conditions and prospects of the PRC economy. The pattern of the PRC government spending and economic activity has been robust and growing since the inception of Fujian Service, and CDGC believes the demand for dredging exceeds the immediate industry capacity, therefore CDGC expects the PRC government's public spending pattern will continue in the foreseeable future. These constrained conditions permit dredging contractors, and sub-contractors such as CDGC, to keep their fleet utilization at high levels and give them a limited degree of positive pricing power. CDGC expects this favorable dynamic to continue, and it is the basis of and is evidenced by the positive trend of unit prices that CDGC has experienced since 2008. CDGC owns or leases two trailer suction hopper dredgers, five non-self-propelling cutter suction dredgers, and two grab dredgers. Notwithstanding CDGC's current backlog, future revenue growth largely depends on the addition of new vessels to CDGC's fleet.

CDGC's dredging fleet capacity to undertake contracts. Since inception, CDGC has had more dredging work contracted than CDGC could immediately perform. CDGC owns or leases five non-self-propelling cutter suction dredgers and one trailer suction hopper dredgers. Notwithstanding CDGC's current backlog, future revenue growth largely depends on the addition of new vessels to CDGC's fleet.

CDGC ability to manage its costs under fixed-price contracts. Substantially all of CDGC's revenue-generating contracts are fixed-price contracts under which CDGC is paid a specified price for CDGC's performance of the entire contract. Fixed-price contracts carry inherent risks, including risks of losses from underestimating costs of materials, operational difficulties and other changes that may occur during the contract period. As a result, CDGC's can only realize profits on these contracts if CDGC successfully estimates project costs and avoid cost overruns. To limit CDGC's exposures to fixed contract prices, CDGC strives to keep contract durations short (less than one year) and CDGC endeavors to rigorously manage each individual project. Short contract periods also limit CDGC's exposure to uncertainties in determining final contract values.

Provision of key supplies and operational support by customers. By contract CDGC's customers generally provide key operating supplies (most notably fuel) and support services (such as supply ships and tug services for repositioning non-self-propelling dredgers) for CDGC's operations. CDGC believes these arrangements are typical of dredging subcontractors in the PRC, but may not reflect the standard market practice of dredging service companies operating outside of the PRC. Consequently, it may be difficult to compare CDGC's results of operations with dredging service companies operating elsewhere or which do not enjoy similar arrangements. In CDGC's experience, the availability of customer-provided supplies and services has lowered CDGC's revenues, capital and working capital requirements, and reported costs relative to operations without customer-provided supplies and services. CDGC believes that such arrangements have also materially lowered CDGC's exposure under fixed-price contracts as CDGC does not bear the risk of fluctuations in price or errors in estimating the costs of such items. The historical pattern of customer-provided supplies and support may not continue into the future, though each contract included in CDGC's backlog provides for such arrangements.

CDGC's ability to operate its dredgers at or above nameplate rates and at high levels of utilization. CDGC strives to keep CDGC's dredgers in operation 24 hours per day, 7 days per week, the theoretical maximum, and to reduce downtime for maintenance and redeployment to new dredging sites. However, as a practical matter, CDGC believes that sustaining dredger operations in the range of 50 - 60% of the theoretical maximum constitutes full utilization of CDGC's dredger capacity, which CDGC estimates it has achieved since the inception of Fujian Service in 2008. In general, CDGC accomplishes full utilization by concentrating its business on projects clustered in a single region or geographic area and deploying multiple dredgers to such areas. As a result, CDGC works in fewer locations and on fewer individual projects than the number of dredgers in CDGC's fleet, thereby ensuring prompt provisioning of spare parts and reduced downtime for vessel repositioning. In addition, CDGC strives to operate and maintain CDGC's dredgers and related capital equipment so that they achieve or exceed the manufacturers' performance specifications. CDGC's success in implementing these operating strategies directly affects CDGC's effective capacity, dredging volumes and revenues. These strategies also allow CDGC to reduce unit costs and increase operating margins by spreading fixed costs over a large revenue base.

Merchant Supreme believes that the following primary factors affect its revenues and operating margins:

Governmental Policies: Fishing is a highly regulated industry and Merchant Supreme's operations require licenses and permits. Merchant Supreme's ability to obtain, sustain or renew such licenses and permits on acceptable terms is subject to changes in regulations and policies and is at the discretion of the applicable governments. Merchant Supreme's inability to obtain, or loss or denial of extensions, to any of its applicable licenses or permits could hamper Merchant Supreme's ability to generate revenues from its operations.

Resource & Environmental Factors: Merchant Supreme's fishing expeditions are based in India and Indonesia. Any earthquake, tsunami, adverse weather or oceanic conditions or other calamities in such areas may result in disruption to Merchant Supreme's operations and could adversely affect Merchant Supreme's sales. Adverse weather conditions such as storms, cyclones and typhoons or cataclysmic events may also decrease the volume of fish catches or may even hamper Merchant Supreme's operations. Merchant Supreme's fishing volumes may also be adversely affected by major climatic disruptions such as El Nino, which in the past has caused significant decreases in seafood catch worldwide. Besides weather patterns, other unpredictable factors, such as fish migration, may also impact Merchant Supreme's harvest volume.

Fluctuation in Fuel Prices: Merchant Supreme's operations may be adversely affected by fluctuations in fuel prices. Changes in fuel price may ultimately result in increases in the selling prices of Merchant Supreme's products, and may, in turn, adversely affect its sales volume, revenue and operating profit.

Competition: Merchant Supreme engages in fishing business in the Arafura Sea in Indonesia and the Bay of Bengal in India. Competition within Merchant Supreme's dedicated fishing areas is not significant as the region is not overfished and regulated by the government, which limits the number of vessels that are allowed to fish in the territories. Competition in the Chinese market is high, as fish competes with other sources of protein. Merchant Supreme competes with other fishing companies which offer similar and varied products. There is significant demand for fish in the Chinese market. Merchant Supreme's catch appeals to a wide segment of consumers because of the low price points of its products. Merchant Supreme has been able to sell its catch at market prices and such market prices were quite stable during 2010 and 2011, but increased significantly during 2012.

Fishing Licenses: Each of Merchant Supreme's fishing vessels requires an approval from the Ministry of Agriculture of the People's Republic of China to carry out ocean fishing projects in foreign territories. These approvals are valid for a period of three to twelve months, and are awarded to Merchant Supreme at no cost. Merchant Supreme applies for the renewal of the approval prior to expiration to avoid interruptions of its fishing vessels' operations. Each of Merchant Supreme's fishing vessels which operate in Indonesian waters requires a fishing license granted by the authority in Indonesia. Indonesian fishing licenses remain effective for a period of twelve months and Merchant Supreme applies for renewal upon expiration. Merchant Supreme records the cost of Indonesian fishing licenses in prepaid expenses and amortizes over the effective period of the licenses.



CGDC's Revenue Recognition:

CDGC recognizes contract revenues under the percentage-of-completion method to determine the appropriate amount to be recognized in a given period. Depending on the nature of contracts, the stage of completion is measured by reference to
(a) the proportion of contract costs incurred for work performed to date to estimated total contract costs; (b) the amount of work certified by a site engineer; or (c) the completion of a physical proportion of the contract work. The difference between amounts billed and recognized as revenue is reflected in the balance sheet as either contract revenues in excess of billings or billings in excess of contract revenues. Provisions for estimated losses on contracts in progress are made in the period in which they are identified. In the event that contract revenue cannot be estimated reliably, contract revenue is recognized only to the extent of contract costs incurred that are likely to be recoverable.

Merchant Supreme's Revenue Recognition

Merchant Supreme recognizes sales in accordance with ASC 605, "Revenue Recognition." Merchant Supreme recognizes revenue from sales of frozen fish and other marine catches when persuasive evidence of an arrangement exists, delivery has occurred, the price to the customer is fixed or determinable, and collection of the resulting receivable is reasonably assured.

With respect to the sales to third party customers whose majority are sole proprietor regional wholesalers in China, Merchant Supreme recognizes revenue when customers pick up purchased goods at Merchant Supreme's cold storage warehouse, after payment is received by Merchant Supreme or credit sale is approved by Merchant Supreme for recurring customers with excellent payment histories.

Merchant Supreme does not offer promotional payments, customer coupons, rebates or other cash redemption offers to its customers. Merchant Supreme does not accept returns from customers. Deposits or advance payments from customers prior to delivery of goods are recorded as receipts in advance.

Cost of goods sold

Our cost of sales primarily consists of fuel costs, consumable parts and maintenance fees, leasing fees, and, to a lesser extent, direct labor costs and other overhead costs. Fuel costs generally accounted for the majority of our cost of sales.

Gross Profit

Our gross profit is affected primarily by changes in production cost. Fuel, maintenance fee, consumable parts, leasing fee, freight and staff wages together account for about 70% of cost of sales for the six months ended June 30, 2013. The fluctuation of fuel price, freight price and exchange rates may significantly affect the Company's cost level and gross profit.

Selling, general and administrative expenses

Our selling, general and administrative expenses include salaries, shipping expenses, and traveling expenses for our sales personnel, administrative staff costs and other benefits, depreciation of office equipment, professional service fees and other miscellaneous expenses related to our administrative corporate activities.

Our sales activities are conducted through direct selling by our internal sales staff. Because of the strong demand for our products and services, we do not have to aggressively market and distribute our products, thus our selling expenses have been relatively small as a percentage of our revenue.

We anticipate that our selling, general and administrative expenses will increase with the anticipated growth of our business and continued upgrades to our information technology infrastructure. We expect that our selling, general and administrative expenses will also increase as a result of compliance, investor-relations and other expenses associated with being a publicly listed company.

Other income and expense

Other income and expenses mainly include interest income from bank deposits, interest expenses of short term and long term borrowings, foreign exchange differences, and fair value adjustments on derivative.

Income taxes

Under the current laws of the Cayman Islands and British Virgin Islands, we are not subject to any income or capital gains tax, and dividend payments we make are not subject to any withholding tax in the Cayman Islands or British Virgin Islands. Under the current laws of Hong Kong, we are not subject to any income or capital gains tax and dividend payments we make are not subject to any withholding tax in Hong Kong.

PRC entities are governed by the Income Tax Law of the PRC and are subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. However, Pingtan Fishing is a qualified ocean fishing enterprise as certified by the Ministry of Agriculture of the PRC. The qualification is renewed on April 1 each year. According to Cai Shui Zi (1997) No. 114 "Notice of Ministry of Finance and the State Administration of Taxation on Relevant Issues concerning Enterprise Income Tax on Domestic Enterprises Engaged in Fishery Business" issued by the Ministry of Finance of the PRC and State Administration of Taxation in 1997, Order of the State Council of the People's Republic of China No. 512 "Regulation on the Implementation of the Enterprise Income Tax Law of the People's Republic of China" issued by the State Council in 2007, Guo Shui Fa (2005) No. 129 "Measures for the Administration of Tax Deduction or Exemption (Trial Implementation)" issued by State Administration of Taxation in 2008, and State Administration of Taxation Announcement (2011) No. 48 "Notice of the State Administration of Taxation on Relevant Issues concerning the Implementation of Preferential Policies of Enterprise Income Tax on Agriculture, Forestry, Stockbreeding and Fishery Projects", Merchant Supreme's VIE, Pingtan Fishing is exempted from income tax derived from its ocean fishing operations in the periods it processes a valid Ocean Fishing Enterprise Qualification Certificate issued by the Ministry of Agriculture of the PRC.

Other Comprehensive Income

Pursuant to authoritative accounting guidance regarding comprehensive income, our comprehensive income consists of net income and foreign currency translation adjustments. We translate our assets and liabilities of foreign operations at the rate of exchange in effect on the balance sheet date. We translate income and expenses at the average rate of exchange prevailing during the period. The period-end rate as of June 30, 2013 for RMB into one U.S. dollar was 6.1374. Average rates for the six months ended June 30, 2013 and 2012 were 6.1811 and 6.3166, respectively. The related translation adjustments are reflected in "Accumulated other comprehensive income" in the equity section of our consolidated balance sheets. Foreign currency gains and losses resulting from transactions are included in earnings. As of June 30, 2013 and December 31, 2012, the accumulated foreign currency translation gain was approximately $28.0 million and $22.2 million, respectively.

Earnings per Ordinary Share

Earnings per ordinary share (basic and diluted) is based on the net income divided by the weighted average number of ordinary shares outstanding during each period. Ordinary share equivalents are not included in the calculation of diluted earnings per ordinary share if their effect would be anti-dilutive.




Revenues are derived from sales of aquatic products and contract revenue of our dredging services. Revenues in the three months ended June 30, 2013 increased by 2.8% to $71.9 million from $69.9 million in the three months ended June 30, 2012. In the second quarter of 2013, revenue from fishing increased by 106.8% to $21.4 million from $10.3 million in the same period of 2012, primarily due to an increase in sales volume as a result of the acquisition of 20 new fishing vessels in 2012, 10 of which were acquired in the second half of the year, and increased unit selling price. However, the increase in fishing revenue was offset by the decrease in revenue of our dredging services. For the three months ended June 30, 2013, revenue from dredging services decreased by 15.2% to $50.5 million from $59.6 million in the same period of 2012. This decrease was primarily due to decrease of dredging volume as we terminated the leasing agreements of three dredgers in July 2012 and one in December 2012 because these four dredgers did not fit our new Build-Transfer (BT) project, which has higher unit price. As a result, we only completed 23.3 million cubic meters of dredging volume in the second quarter of 2013, compared to 32.8 million cubic meters in the same period of 2012, representing a decrease of 28.9%.

The table below sets forth more detail regarding the revenue breakdown by specific category (the volume for dredging services is based on number of cubic meters and for fishing is based on number of kilograms):

                                                     Three months ended June 30,
                                        2013                                             2012
                                                       Average                                          Average
                      Revenue           Volume          price          Revenue           Volume          price

Dredging Services   $ 50,547,631       23,293,629     $     2.17     $ 59,594,550       32,751,127     $     1.82
Fishing               21,362,357        6,761,555           3.16       10,331,331        4,835,873           2.14
Total revenue       $ 71,909,988                                     $ 69,925,881

. . .

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