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PME > SEC Filings for PME > Form 10-K on 10-Mar-2014All Recent SEC Filings

Show all filings for PINGTAN MARINE ENTERPRISE LTD.

Form 10-K for PINGTAN MARINE ENTERPRISE LTD.


10-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

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-K 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-K, 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-owned or licensed 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 from a related party 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 from there operation. 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 trawlers, 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.

As of December 31, 2013, we owned 104 trawlers and 2 drifter vessels and have an operating license right to 20 drifter vessels. Our fleet has an average useful life of approximately 17 years. These vessels are fully licensed to fish in Indonesian or Indian waters. 114 of these vessels are operating in Arafura Sea in Indonesia, and the remaining 12 vessels are operating in the Bay of Bengal in India.

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 a cold storage warehouse at nearby onshore fishing bases. We then arrange periodic charted transportation ships to deliver frozen stocks to its eight 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 during Chinese New Year. We believe that our profitability and growth are dependent on our ability to expand the customer base. With the expansions of operating capacity and expected increases in harvest volume in the coming years, we will continue to develop new customers from existing and new territories in China.

Revenue by Territory

Our customers are from the following PRC territories:

                         For the Years Ended December 31,
                        2013           2012           2011

Guangdong Province           46 %           55 %           45 %
Fujian Province              26 %           27 %           39 %
Zhejiang Province            17 %           11 %            9 %
Shandong Province             4 %            4 %            4 %
Liaoning Province             2 %            2 %            2 %
Other areas                   5 %            1 %            1 %
Total                       100 %          100 %          100 %

Discontinued operations

In December 2013, we have completed the sale of the China Dredging Group ("CDGC") business, which has been reported as discontinued operations for 2013, to Hong Long, a related party owned by the wife of our Chairman and CEO, Mr. Xinrong Zhuo.

In July 2013, we received an offer from Mr. Zhuo to acquire the business and operating assets of our wholly-owned dredging subsidiary, CDGC and its PRC operating subsidiaries in exchange for (i) offset of our current $155.2 million 4% promissory note due to Hong Long matures on June 19, 2015; (ii) the assignment of the 25-year exclusive operating license rights for 20 new fishing vessels to us, with a fair market value of $216.1 million (iii) offset of PME's current accounts due to CDGC with amount $172.5 million. The value of the operating license rights of $216.1 million will be amortized over the license 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 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 our independent financial advisor on October 28, 2013, the Board would evaluate potential alternative proposals received during a 30 day period. After receiving no alternative proposals, on December 3, 2013, the Board, excluding Mr. Zhuo and Mr. Lin approved moving forward with the transaction and executed and closed the Share Purchase Agreement. The total consideration of the transaction is approximately $543.8 million with a gain on sale of $134.7 million which was recorded as an adjustment to our equity as it was sold to a related party under common control.

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 have impact our harvest volume.

Fluctuation on Fuel Prices: Our operations may be adversely affected by fluctuations in fuel prices. Changes in fuel prices 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 amortize the cost 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 and amortization, 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 82% of cost of sales for the year ended December 31, 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 and are not subject to any withholding tax in Hong Kong.

The Company'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.

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

Other 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 year-end rate as of December 31, 2013 for RMB into one U.S. dollar was 6.0537. Average rates for the years ended December 31, 2013, 2012 and 2011 were 6.1412, 6.3116 and 6.4640, 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 December 31, 2013 and 2012, the accumulated foreign currency translation gain was approximately $30.4 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 CONTINUING OPERATIONS

YEAR ENDED DECEMBER 31, 2013 COMPARED TO YEAR ENDED DECEMBER 31, 2012

Revenue

Revenue is derived from sales of aquatic products. Revenue in 2013 increased by 81.8% to $122.7 million from $67.5 million in 2012, primarily due to increase in sales volume as a result of the addition of 66 fishing vessels in June and September 2013, most of 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, pomfret, red fish and threadfin together accounted for about 82% of revenue for 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)

                                                  For the Years Ended December 31,
                                         2013                                          2012
                                               Average    % of                               Average    % of
                       Revenue    Volume(KG)    price    Revenue     Revenue    Volume(KG)    price    Revenue
Ribbon fish           $  47,169   19,249,641      2.45      38.5 %   $ 29,163   15,229,701      1.91      43.2 %
Indian white shrimp      20,859    3,041,471      6.86      17.0 %      9,659    1,275,801      7.57      14.3 %
Croaker fish             15,242    6,817,575      2.24      12.4 %      8,306    4,740,661      1.75      12.3 %
Pomfret                  10,022    4,249,796      2.36       8.2 %      2,283    1,318,409      1.73       3.4 %
Red fish                  3,575      795,835      4.49       2.9 %        726      221,250      3.28       1.1 %
Threadfin                 3,379    1,025,272      3.30       2.8 %        596      205,560      2.90       0.9 %
Others                   22,422    7,991,721      2.81      18.2 %     16,728    6,223,249      2.69      24.8 %

Total                 $ 122,668   43,171,311      2.84     100.0 %   $ 67,461   29,214,631      2.31     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 years ended December 31, 2013 and
2012:

(Amounts in thousands, except for percentage)

                    For the Years Ended December 31        Prencentage
                       2013                  2012            Change
                             % of                 % of
                    US$     Revenue      US$     Revenue        %
Revenue         $ 122,668     100.0 % $ 67,461     100.0 %        81.8   %
Cost of sales      75,760      61.8 %   41,876      62.1 %        80.9   %
Gross profit    $  46,908      38.2 % $ 25,585      37.9 %        83.3   %



                                                         For the Years Ended December 31,
                                                   2013                                     2012
                                     US$      % of COS     % of Revenue       US$      % of COS     % of Revenue

Fuel cost                          $ 46,562       61.4 %           38.0 %   $ 28,113       67.1 %           41.7 %
Freight                               9,055       12.0 %            7.4 %      4,893       11.7 %            7.2 %
Labor cost                            6,475        8.5 %            5.3 %      3,072        7.3 %            4.6 %
Maintenance fee                       3,761        5.0 %            3.0 %      2,675        6.4 %            4.0 %
Spare parts                           3,759        5.0 %            3.0 %      1,189        2.8 %            1.8 %
Depreciation and amortization         3,649        4.8 %            3.0 %        441        1.1 %            0.6 %
License fee                           1,565        2.1 %            1.3 %      1,059        2.5 %            1.6 %
Service fee                             934        1.2 %            0.8 %        434        1.1 %            0.6 %
Total cost of sales                $ 75,760      100.0 %           61.8 %   $ 41,876      100.0 %           62.1 %

Cost of sales for the year ended December 31, 2013 was $75.8 million, representing an increase of 80.9% as compared to $41.9 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 slightly to 38.2% in the year ended December 31, 2013 from 37.9% in the same period of 2012, primarily due to increase in unit selling price and change in products mix. Gross profit for the year ended December 31, 2013 was $46.9 million, representing an increase of 83.3% as compared to $25.6 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 years ended December 31, 2013 and 2012:

(Amounts in thousands, except for percentage)

                                           For the Years Ended December 31,             Percentage
                                            2013                      2012                Change
                                                   % of                      % of
                                        US$      Revenue          US$      Revenue          %
Gross profit                        $   46,908       38.2 %   $   25,585       37.9 %         83.3 %
Operating Expenses:
Selling expenses                       (1,618)      (1.3) %        (648)      (1.0) %        149.8 %
General & administrative expenses
Legal and professional fees            (1,541)      (1.3) %      (2,741)      (4.0) %       (43.8) %
Salaries and staff welfare               (637)      (0.5) %        (179)      (0.3) %        255.4 %
Service fee                              (231)      (0.2) %            -          -              -
Others                                   (783)      (0.6) %           80        0.1 %     (1079.6) %
Total G&A expenses                     (3,192)      (2.6) %      (2,840)      (4.2) %         12.4 %
Total SG&A expenses                    (4,810)      (3.9) %      (3,488)      (5.2) %         37.9 %
Income from operations              $   42,098       34.3 %   $   22,097       32.7 %         90.5 %

Total SG&A expenses increased by 37.9% to $4.8 million in the year ended December 31, 2013 from $3.5 million in the same period of 2012. The increase in SG&A expenses was primarily attributable to higher selling expenses including storage and transportation fees, and salaries and staff welfare as a result of our expanded scale of operations, as well as higher administrative costs associated with the company being a publicly listed company. As a percentage of revenue, SG&A expenses were 3.9% in the year ended December 31, 2013, compared to 5.2% in the same period of 2012.

Other Income and Expenses

Net other income in the year ended December 31, 2013 was $3.4 million, as compared to net other expenses of $0.8 million in the same period of 2012. Included in other income and expenses, there was government subsidy of $7.3 million and $2.4 million in the years ended December 31, 2013 and 2012, respectively. Excluding the impact of subsidy income, net other expenses increased by $0.8 million, mainly due to increase in interest expenses of $1.0 million.

Income Tax

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

Net Income from continuing operations

Net income from continuing operations for the year ended December 31, 2013 was $45.5 million, or 37.1% of revenue, compared to $21.3 million, or 31.6% of revenue, in the same period of 2012.

(Amounts in thousands, except for percentage)

                               For the Years Ended December 31,
                         2013                                    2012
         Revenue     Net income   Net margin     Revenue     Net income   Net margin

        $ 122,668   $     45,489          37.1 % $ 67,461   $     21,298          31.6 %

Foreign Currency Translation Gain

During the year ended December 31, 2013, the RMB rose against the US dollar, and we recognized a foreign currency translation gain of $8.2 million.

YEAR ENDED DECEMBER 31, 2012 COMPARED TO YEAR ENDED DECEMBER 31, 2011

Revenue

Revenue from continuing operations is derived from sales of aquatic products and fishing vessels rental. In the year ended December 31, 2011, revenue from sales of aquatic products and fishing vessels rental were $24.2 million and $1.4 million, respectively. Revenue in 2012 increased by 163.5% to $67.5 million from $25.6 million in 2011, primarily due to increase in sales of aquatic products, which accounted for 100% and 94.6% of the total revenue in the years ended December 31, 2012 and 2011, respectively.

In the year ended December 31, 2012, revenue derived from sales of aquatic products increased by 178.6% to $67.5 million from $24.2 million in the same period of 2011, primarily due to increase in sales volume as a result of the addition of 20 fishing vessels in 2012 and increased unit selling prices.

Our top 6 species of fish sold including ribbon fish, Indian white shrimp, croaker fish, squid, conger eel and pomfret together accounted for about 83% of revenue for 2012. 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)

                                             For the Years Ended December 31,
                                        2012                                           2011
                                              Average    % of                                Average    % of
                      Revenue    Volume(KG)    price    Revenue      Revenue    Volume(KG)    price    Revenue
Ribbon fish           $ 29,163   15,229,701      1.91      43.2 %   $  12,800    9,522,550      1.34        50 %
Indian white shrimp      9,659    1,275,801      7.57      14.3 %           9        1,400      6.43         -
Croaker fish             8,306    4,740,661      1.75      12.3 %       3,014    1,958,600      1.54      11.8 %
Squid                    3,436    1,192,555      2.88       5.1 %       1,532      558,000      2.75       6.0 %
Conger eel               2,928      830,115      3.53       4.3 %       1,287      493,500      2.61       5.0 %
Pomfret                  2,283    1,318,409      1.73       3.4 %         417      286,000      1.46       1.6 %
Others                  11,686    4,627,389      2.53      17.4 %       5,157    2,279,371      2.26      20.2 %
Total                 $ 67,461   29,214,631      2.31     100.0 %   $  24,216   15,099,421      1.60      94.6 %

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 years ended December 31, 2012 and
2011:

(Amounts in thousands, except for percentage)
. . .
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