Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
PME > SEC Filings for PME > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for PINGTAN MARINE ENTERPRISE LTD.

Form 10-Q for PINGTAN MARINE ENTERPRISE LTD.


14-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

Overview

We are a marine enterprises group primarily engaging in ocean fishing through our wholly-owned PRC operating subsidiary or VIE, Fujian Provincial Pingtan County Ocean Fishing Group Co., Ltd., or Pingtan Fishing. We harvest a variety of fish species with many of our self-owned vessels operating within the Indian Exclusive Economic Zone and the Arafura Sea of Indonesia. We provide high quality seafood to a diverse group of customers including distributors, restaurant owners and exporters in the PRC.

In June 2013, we expanded our fleet from 40 to 86 through a purchase of 46 fishing trawlers for a total consideration of $410.1 million. The transaction is subject to the receipt of government approvals; however we began operating the vessels in the third quarter of 2013 and since then we have been entitled to their net profits. These vessels are fully licensed to fish in Indonesian waters. Each vessel carries crew of 10 to 15 persons. These vessels have resulted in additional carrying capacity of approximately 45,000 to 50,000 tons for us.

In September 2013, we further increased our fleet to 106 vessels with the addition of 20 newly-built fishing vessels, which were initially ordered in September 2012. These vessels have an expected run-in period of 3 - 6 months, during which each is placed into the sea for testing prior to full operation. These vessels are fully licensed to fish in Indian and Indonesian waters. At full operation, each vessel is capable of harvesting 900 to 1,000 tons of fish. We expect that the expansions of our fleet will greatly increase our fish harvest volume and revenue.

Subsequent to our fleet expansions, in September 2013, the Ministry of Agriculture of the People's Republic of China ("MOA") issued a notification that it would suspend accepting shipbuilding applications for tuna harvesting vessels, squid harvesting vessels, Pacific saury harvesting vessels, trawlers operating on international waters, seine on international waters, and trawlers operating on the Arafura Sea, Indonesia. We believe the announcement is a positive indicator for long-term stability and balance in China's fishing industry. We believe that this has helped to ensure our fishing productivity in international waters, while also serving as a major barrier to entry for competitors in our industry and strengthening our competitive position in the markets.

Currently we catch nearly 30 different species of fish including ribbon fish, Indian white shrimp, croaker fish, pomfret, Spanish mackerel, conger eel, squid and red snapper. All of our catch is shipped back to China. Our fishing vessels transport frozen catch to cold storage warehouse at nearby onshore fishing bases. We then arrange 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 Fujian Province.

We derive our revenue primarily from the sales of frozen seafood products. We sell our products directly to customers including distributors, restaurant owners and exporters, and most of our customers have long-term and trustworthy cooperative relationship with us. Our existing customers also introduce new customers to us from time to time. Our 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 ribbon fish, 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. We believe that our profitability and growth are depending on our ability to expand the customer base. With the expansions of operating capacity and expected increasing harvest volume in the coming years, we will continue to develop new customers from existing and new territories in China.

Discontinued operations

The China Dredging Group ("CDGC") business has been reported as a discontinued operation since the third quarter of 2013.

In July 2013, we received an offer from our Chairman and CEO, Mr. Xinrong Zhuo, to acquire the business and operating assets of our wholly-owned dredging subsidiary, CDGC and its PRC operating subsidiaries in exchange for (i) forgiveness of our current $155.2 million 4% promissory note due on June 19, 2015; (ii) the transfer of the 25-year exclusive operating rights for 20 new fishing vessels to us, with such rights appraised at $216.1 million by an independent, globally recognized appraiser, BMI Appraisals Limited; and (iii) forgiveness of the PME's current accounts due to China Dredging Group Co., Ltd. with amount $172.1 million.The value of the operating rights of $216.1 million will be amortized over the lease term of 25 years. These 20 fishing vessels received subsidies from China's central government budget in 2012, and a recent notification from the Government prohibits the sale or transfer of ownership for a period of 10 years for fishing vessels that have received such subsidies.

The Board, excluding Mr. Zhuo and our Senior Officer, Mr. Bin Lin, retained Duff & Phelps LLC, as our independent financial advisor to provide a fairness opinion on the transaction proposed by Mr. Zhuo. Subsequent to the receipt of the fairness opinion from Duff & Phelps LLC on October 28, 2013, the Board, excluding Mr. Zhuo and Mr. Lin approved moving forward with the transaction. The Board will evaluate any potential alternative proposals received during the next 30 days and the transaction is expected to close during the fourth quarter of 2013. Under the existing terms of the proposed transaction, the consideration to be received by us is approximately $543.4 million with an expected gain on sales to be $140.3 million.

Significant Factors Affecting Our Results of Operations

Governmental Policies: Fishing is a highly regulated industry and our operations require licenses and permits. Our 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. Our inability to obtain, or loss or denial of extensions, to any of its applicable licenses or permits could hamper our ability to generate revenues from its operations.

Resource & Environmental Factors: Our 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 our operations and could adversely affect our 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 our operations. Our 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 our harvest volume.

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

Competition: We engage in fishing business in the Arafura Sea in Indonesia and the Bay of Bengal in India. Competition within our 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 market in China is high, as fish compete with other sources of protein. We compete with other fishing companies which offer similar and varied products. There is significant demand for fish in the Chinese market. Our catch appeals to a wide segment of consumers because of the low price points of our products. We have been able to sell our catch at market prices and such market prices were quite stable during 2010 and 2011, but increased significantly during 2012 and 2013.

Fishing Licenses: Each of our 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 us at no cost. We apply for the renewal of the approval prior to expiration to avoid interruptions of our fishing vessels' operations. Each of our fishing vessels operating 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 we apply for renewal upon expiration. We record cost of Indonesian fishing licenses in prepaid expenses and amortizes over the effective period of the licenses.

PRINCIPAL INCOME STATEMENT COMPONENTS

Revenue

We recognize 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 the majority of whom are sole proprietor regional wholesalers in China, we recognize revenue when customers receive purchased goods at our cold storage warehouse, after payment is received or credit sale is approved for recurring customers with excellent payment histories.

We do not offer promotional payments, customer coupons, rebates or other cash redemption offers to customers. We do not accept returns from customers. Deposits or advance payments from customers prior to delivery of goods are recorded as receipt in advance.

Cost of Sales

Our cost of sales primarily consists of fuel costs, freight, direct labor costs, depreciation, maintenance fees 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, freight and labor costs together account for about 80% of cost of sales for the nine months ended September 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 and staff welfare, professional service fees, traveling expenses for our sales personnel, insurance 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 Expenses

Other income and expenses mainly include interest income from bank deposits, interest expenses of short term and long term borrowings, foreign exchange differences and subsidy income.

Income Tax

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.

Merchant Supreme's VIE, Pingtan Fishing, is a qualified ocean fishing enterprise certified by the Ministry of Agriculture of the PRC. The qualification is renewed on April 1 each year. Pingtan Fishing is exempt 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.

Pingtan Fishing is not subject to foreign income taxes for its operations in India and Indonesia Exclusive Economic Zones.

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 September 30, 2013 for RMB into one U.S. dollar was
6.1200. Average rates for the nine months ended September 30, 2013 and 2012 were 6.1616 and 6.3215, 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 September 30, 2013 and December 31, 2012, the accumulated foreign currency translation gain was approximately $28.8 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.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2013 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2012

Revenue

Revenue is derived from sales of aquatic products. Revenue in the three months ended September 30, 2013 increased by 56.7% to $20.6 million from $13.2 million in the three months ended September 30, 2012, primarily due to increase in sales volume as a result of the acquisition of 46 new fishing vessels in June 2013, which began operating in the third quarter of the year, and increased unit selling prices.

Our top 6 species of fish sold including ribbon fish, Indian white shrimp, croaker fish, black pomfret, threadfin and red fish together accounted for about 75% of revenue for the three months ended September 30, 2013. The table below sets forth more detail regarding the revenue breakdown by different species of fish:

(Amounts in thousands, except for percentage and per unit data)

                                            Three months ended September 30,
                             2013                                          2012
                                        Average    % of                               Average    % of
                Revenue    Volume(KG)    price    Revenue     Revenue    Volume(KG)    price    Revenue
Ribbon fish     $  6,406    2,270,353      2.82      31.1 %   $  6,286    3,012,734      2.09      47.8 %
Indian white
shrimp             2,204      193,774     11.37      10.7 %      1,702      193,350      8.80      12.9 %
Croaker fish       2,154      929,572      2.32      10.5 %      1,085      573,874      1.89       8.2 %
Black pomfret      1,903      811,050      2.35       9.2 %        474      273,091      1.74       3.6 %
Threadfin          1,364      410,322      3.32       6.6 %        147       50,085      2.94       1.1 %
Red fish           1,230      232,800      5.28       6.0 %        206       38,400      5.36       1.6 %
Others             5,348    1,682,732      3.18      25.9 %      3,252    1,213,559      2.68      24.8 %
Total           $ 20,609    6,530,603      3.16     100.0 %   $ 13,152    5,355,093      2.46     100.0 %

Cost of Sales and Gross Margin

The following tables set forth our cost of sales and gross profit, both in
amounts and as a percentage of revenue for the three months ended September 30,
2013 and 2012:

(Amounts in thousands, except for percentage)


                                                                 Change in
                                                              three months
                                                                     ended
                                                                 September
                                                                  30, 2013
                                                               compared to
                                                              three months
                                                                     ended
                    Three months ended September 30,             September
                       2013                   2012                30, 2012
                            % of                   % of
                   US$     Revenue        US$     Revenue          %
Revenue         $ 20,609     100.0 %   $ 13,152     100.0 %           56.7 %
Cost of sales     12,447      60.4 %      9,693      73.7 %           28.4 %
Gross profit       8,162      39.6 %      3,459      26.3 %          136.0 %



                                                   Three months ended September 30,
                                         2013                                            2012
                         US$        % of COS        % of Revenue         US$        % of COS        % of Revenue

Fuel cost             $    7,422          59.6 %             36.0 %   $    6,226          64.2 %             47.3 %
Freight                    1,264          10.2 %              6.1 %          702           7.2 %              5.3 %
Labor cost                 1,100           8.8 %              5.3 %          522           5.4 %              4.0 %
Maintenance fee              908           7.3 %              4.4 %          581           6.0 %              4.4 %
Spare parts                  650           5.2 %              3.2 %          549           5.7 %              4.2 %
License fee                  326           2.6 %              1.6 %          163           1.7 %              1.2 %
Depreciation                 575           4.6 %              2.8 %          770           7.9 %              5.9 %
Service fee                  202           1.7 %              1.0 %          180           1.9 %              1.4 %
Total cost of sales   $   12,447         100.0 %             60.4 %   $    9,693         100.0 %             73.7 %

Cost of sales for the three months ended September 30, 2013 was $12.4 million, representing an increase of 28.4% as compared to $9.7 million in the same period of 2012. The increase was principally due to increase in fuel cost for our fishing vessels as a result of the fleet expansion. Freight, labor cost and maintenance fee also increased which was in line with the increase in revenue.

Gross margin increased to 39.6% in the three months ended September 30, 2013 from 26.3% in the same period of 2012, primarily due to increases in unit selling price and change in products mix. Gross profit for the three months ended September 30, 2013 was $8.2 million, representing an increase of 136.0% as compared to $3.5 million in the same period of 2012 as a result of business expansion.

Selling, General and Administrative Expenses

The following table sets forth selling, general and administrative (SG&A)
expenses, and income from operations both in amounts and as a percentage of
revenue for the three months ended September 30, 2013 and 2012:

(Amounts in thousands, except for percentage)

                                                                                        Change in three
                                                                                         months ended
                                                                                         September 30,
                                                                                       2013 compared to
                                                                                         three months
                                       Three months ended September 30,                 ended September
                                      2013                          2012                   30, 2012
                                             % of                         % of
                                US$         Revenue          US$         Revenue               %
Gross profit                $     8,162          39.6 %   $    3,459          26.3 %               136.0 %
Operating Expenses:
Selling expenses                  (362)         (1.8) %        (147)         (1.1) %               146.3 %
General & administrative
expenses
Legal and professional
fees                              (843)         (4.1) %        (232)         (1.8) %               263.4 %
Salaries and staff
welfare                           (164)         (0.7) %           68           0.5 %             (341.2) %
Service fee                       (115)         (0.6) %            -             -                 100.0 %
Others                             (56)         (0.3) %         (45)         (0.3) %                24.4 %
Total G&A expenses              (1,178)         (5.7) %        (209)         (1.6) %               463.6 %
Total SG&A expenses             (1,540)         (7.5) %        (356)         (2.7) %               332.6 %
Income from operations      $     6,622          32.1 %   $    3,103          23.6 %               113.4 %

Total SG&A expenses increased by 332.6% to $1.5 million in the three months ended September 30, 2013 from $0.4 million in the same period of 2012. The increase in SG&A expenses was primarily attributable to higher professional fees and administrative costs associated with the company being a publicly listed company, as well as our expanded scale of operations. As a percentage of revenue, SG&A expenses were 7.5% in the three months ended September 30, 2013, compared to 2.7% in the same period of 2012.

Other Income and Expenses

Net other expenses in the three months ended September 30, 2013 were $0.7 million, as compared to net other income of $2.7 million in the same period of 2012. Included in other income and expenses, there was government subsidy of $0.2 million and $3.8 million in the three months ended September 30, 2013 and 2012 respectively. Excluding the impact of subsidy income, net other expenses decreased by $0.2 million, mainly due to increase in gain on foreign exchange of $0.2 million.

Income Tax

We are exempted from income tax derived from our ocean fishing operations.

Net Income

Net income from continuing operations for the three months ended September 30, 2013 was $5.9 million, or 28.8% of revenue, compared to $5.8 million, or 44.0% of revenue, in the same period of 2012. Included in net income, there was government subsidy of $0.2 million and $3.8 million in the three months ended September 30, 2013 and 2012 respectively. Excluding the impact of subsidy income, the net income from operation for the three months ended September 30, 2013 increased by 190.0% to $5.8 million from $2.0 million in the same period of 2012. In October 2013, we were notified by the Fujian Provincial Government of the grant of subsidy of $6.5 million which would be expected to be received at the end of November or in December 2013.

(Amounts in thousands, except for percentage)

                               Three months ended September 30,
                        2013                                      2012
        Revenue     Net income    Net margin      Revenue     Net income    Net margin

        $ 20,609   $      5,939          28.8 %   $ 13,152   $      5,787          44.0 %

Foreign Currency Translation Gain

During the three months ended September 30, 2013, the RMB rose against the US dollar, and we recognized a foreign currency translation gain of $0.8 million.

NINE MONTHS ENDED SEPTEMBER 30, 2013 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2012

Revenue

Revenue is derived from sales of aquatic products. Revenue in the nine months ended September 30, 2013 increased by 57.9% to $61.6 million from $39.0 million in the nine months ended September 30, 2012, primarily due to increase in sales volume as a result of the acquisition of 46 new fishing vessels in June 2013, which began operating in the third quarter of the year, and increased unit selling price.

Our top 6 species of fish sold including ribbon fish, Indian white shrimp, croaker fish, black pomfret, threadfin and red fish together accounted for about 80% of revenue for the nine months ended September 30, 2013. The table below sets forth more detail regarding the revenue breakdown by different species of fish:

(Amounts in thousands, except for percentage and per unit data)

                                             Nine months ended September 30,
                                         2013                                         2012
                                               Average     % of                             Average    % of
                      Revenue    Volume(KG)     price     Revenue   Revenue    Volume(KG)    price    Revenue

Ribbon fish           $ 20,025    9,296,266   $    2.15      32.5 % $ 18,910    9,880,734      1.91      48.4 %
Indian white shrimp     10,409    1,282,892        8.11      16.9 %    3,932      475,349      8.27      10.1 %
Croaker fish             8,285    4,230,120        1.96      13.4 %    5,091    3,102,874      1.64      13.0 %
Black pomfret            5,732    2,474,892        2.32       9.3 %    1,186      746,085      1.59       3.1 %
Threadfin                2,326      722,850        3.22       3.8 %      599      240,275      2.49       1.5 %
Red fish                 2,298      479,550        4.79       3.7 %      406      135,900      2.99       1.1 %
Others                  12,566    4,333,350        2.90      20.4 %    8,916    3,559,625      2.50      22.8 %
Total                 $ 61,641   22,819,920        2.70     100.0 % $ 39,040   18,140,842      2.15     100.0 %

. . .

  Add PME to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for PME - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.