New stock outlook | Fluctuations in raw material prices affect profitability, is Gao Long Ocean's "leaping over the dragon gate" still lacking?

With the improvement of people's health awareness, health products are becoming increasingly popular among consumers. Among the various health products available, fish oil rich in omega-3 fatty acids often occupies a prominent position. Research has shown that consuming fish oil has certain benefits for the cardiovascular system, eyes, and brain. Another "little-known fact" about the use of fish oil is that it can also be used in animal nutrition and plays an important role in the formulation of livestock and aquaculture feed. It is understood that as a valuable source of lipid nutrients, fish oil can provide essential nutrients for the health and development of livestock and fish. Fish oil is rich in value and has a wide range of uses, naturally giving rise to many commercial opportunities in the industry. It was noted that recently, GHL Marine Group Limited (hereinafter referred to as "GHL Marine") submitted its listing application to the Main Board of the Hong Kong Stock Exchange. According to the prospectus, GHL Marine was established in 2008, and the company's business includes refining feed-grade fish oil and food-grade fish oil. Based on the revenue for the full year of 2023, GHL Marine holds a market share of 24.8% in the Chinese feed-grade fish oil refining and concentration market and 3.2% in the food-grade fish oil refining and concentration market, ranking first and eighth respectively. Despite accumulating a high market influence after more than a decade of deep cultivation in the industry, GHL Marine seems to have many difficulties behind the surface glamour in terms of performance: for example, the selling prices of the company's main products are not stable, with the average selling prices of feed-grade fish oil products and food-grade fish oil products in the first half of 2024 showing varying degrees of decline; also, despite the company's growing scale in recent years, its profitability has suffered a sharp decline, with the company's net profit attributable to owners dropping to as low as HK$10.35 million in the first half of 2024... Increasing volume, decreasing prices Fish oil was recognized as a valuable feed ingredient as early as the 1960s, and by the 1970s, its use gradually expanded from industrial purposes to animal feed and human consumption. As a veteran player in the fish oil refining and concentration industry, GHL Marine's co-founders and controlling shareholders have been involved in several entities engaged in the production and distribution of aquatic feed products, fishmeal trade distribution, and fish oil refining and concentration since 1995. After its formal establishment in 2008, GHL Marine first engaged in the business of refining feed-grade fish oil and entered the field of food-grade fish oil refining and concentration in 2012. Looking at the overall performance, from the fiscal year 2021/22 to 2023/24, GHL Marine's revenue increased from HK$2.46 billion to HK$4.64 billion to HK$5.32 billion, steadily climbing. In the first half of 2024, GHL Marine's revenue was HK$2.45 billion, a year-on-year increase of 14.8%. Breaking down the revenue structure, GHL Marine's revenue mainly comes from feed-grade fish oil products and food-grade fish oil products. In the fiscal years 2021/22 to 2023/24, the revenue from the former accounted for 52.9%, 81.6%, and 80.2% of the total revenue, respectively. During the same period, the revenue from the latter accounted for 47.1%, 18.4%, and 19.8%, respectively. In the first half of 2024, GHL Marine's feed-grade fish oil products contributed revenue of HK$192 million, accounting for 78.5%; food-grade fish oil products contributed revenue of HK$52.47 million, accounting for 21.5%. Despite the steady increase in scale, it is worth noting that GHL Marine's core products are currently facing the dilemma of increasing volume and decreasing prices. Data shows that in the first half of 2024, the sales volume of the company's feed-grade fish oil products was 9,091 tons, a year-on-year increase of over 40%; the average selling price was HK$21,128 per ton, a significant drop from HK$24,447 per ton in the same period last year, which was even higher at HK$25,524 per ton in the fiscal year 2023/24. The average selling price of food-grade fish oil products also experienced a similar situation, with the average selling price in the first half of 2024 at HK$80,023 per ton, a 13% decrease from the previous year. Regarding the simultaneous steep decline in the average selling prices of the two main products, GHL Marine explained in its prospectus that the increase in fish oil production and the gradual disappearance of the El Nio phenomenon, combined with an increase in fishing quotas in Peru last year leading to an increase in fish catches, resulted in a decrease in the international off-shore price of fish oil. Significant fluctuations in raw material prices affecting profitability Looking at the overall value chain of fish oil, fish oil refining and concentration are positioned in the middle of the industry chain. In the case of GHL Marine, the company mainly refines and concentrates crude fish oil into feed-grade refined fish oil with various EPA and DHA contents, as well as food-grade refined and concentrated fish oil products. It is understood that GHL Marine imports crude fish oil from South America, starting with refining feed-grade fish oil, and as Chinese-origin fish oil becomes increasingly popular, the company gradually switches to using domestic feed-grade crude fish oil and sells Chinese-origin feed-grade fish oil; while in the field of food-grade fish oil products, the company mainly uses South American crude fish oil to produce related products. Analyzing GHL Marine's sales costs, raw material procurement is a significant component. Data shows that from fiscal year 2021/22 to 2023/24, raw material costs accounted for over 90% of the company's total sales costs. Among these, crude fish oil is the primary material used in the production of GHL Marine's products. As the main source of fish oil, changes in the offshore price of crude fish oil in Peru can reflect the dynamic changes in the global supply of crude fish oil. Over the past few years, influenced by various factors, the price of crude fish oil in Peru has shown significant fluctuations. Especially after 2024, due to the weakening of the El Nio phenomenon, as well as factors such as an increase in fishing quotas by the local government, the price of crude fish oil has continued to plummet. The fluctuations in the prices of upstream raw materials have a significant impact on GHL Marine's performance, as can be seen from the changes in the company's profit situation. From fiscal year 2021/22 to 2023/24, GHL Marine's gross profit margins were 18.1%, 24.3%, and 22.4%, showing a certain degree of volatility.In the first half of the year, the gross profit of Gao Long Marine Company was only 36.634 million Hong Kong dollars, with a corresponding gross profit margin of 15%, a decrease of 8.8 percentage points from the same period last year. Among them, the gross profit margin of feed-grade fish oil products was 16%, a decrease of 6.5 percentage points year-on-year; the gross profit margin of food-grade fish oil products was 11.4%, a decrease of 16.1 percentage points year-on-year.In addition, another point of risk that must be mentioned is the sharp increase in inventory of Gaolong Ocean in recent years. As of the end of the periods from the 2021/22 fiscal year to the 2023/24 fiscal year and as of September 30, 2024, the company's inventory was 92 million Hong Kong dollars, 127 million Hong Kong dollars, 286 million Hong Kong dollars, and 354 million Hong Kong dollars respectively; and from the 2021/22 fiscal year to the first half of 2024, the company's inventory turnover days were 202 days, 114 days, 183 days, and 282 days respectively. The continuous increase in inventory levels and inventory turnover days will inevitably increase the financial risk of Gaolong Ocean, posing unstable factors for the company's future development. Overall, it is not difficult to see that although Gaolong Ocean, which is determined to go public at this stage, has many highlights, a series of structural problems are also hard to ignore. Looking ahead, even if the company successfully lists on the Hong Kong Stock Exchange, the declining product prices, unstable profit indicators, and the increasing inventory and inventory turnover days are expected to give investors a negative impression of the company's investment value. Moving forward, GMTEight will continue to monitor how far Gaolong Ocean can go in the capital market.