China Marine Food

China Marine Food Group (CMFO.AMEX) claims to be getting rich quickly off of peckish Chinese consumers. According to its 2010 annual report, CMFO’s revenues on the sale, processing and distribution of seafood products – seafood-based snack foods, fresh “marine catch” (fish and shellfish), and algae-based beverages – more than doubled from 2009 to 2010, to reach US$122.7 million. Given that CMFO listed through a reverse-merger, the listing vehicle that has been much maligned during recent fraud scandals, this impressive triple-digit growth deserved double-checking.

According to company data, snack foods sold under the “Mingxiang” brand, which are made from products bought from independent fishermen and brokers, made up about 57% of its 2010 revenue. Sales of marine catch and of the company’s leading algae drink, Hi-Power, came in at around 20% each. The company markets Hi-Power as a health drink that is high in protein, low in calories and fat, improves digestion and reduces hyperglycemia and hypertension. 

Overstated earnings

Dried seafood is a popular snack in East Asia, sold in convenience stores and supermarkets, and algae-based drinks occupy a growing niche of Asian-style health drinks. However, research by China Economic Review Company Reports shows these products may not be as lucrative as CMFO has claimed. The information available suggests that CMFO, like too many of its small-cap listed Chinese peers, has overstated some of its sales channels and fabricated others outright.

Several of the companies that CMFO’s annual report lists as its major customers and suppliers deny a relationship with CMFO or the Mingxiang brand. The most notable is Dalian Jiyang Import and Export, which the annual report says generated 7.9% of CMFO’s sales in 2010. When contacted about the discrepancy, CMFO promised to arrange an interview with China Economic Review to explain how this occurred, but then never followed up.

There’s also something fishy about CMFO’s dealings with Xianghe Food Science and Technology, the company that originally developed its algae-drink formula. The founder of Xianghe, Qiu Shangjing, seems to have a talent for creating money.

Qiu bought the algae-drink formula from something called the Yellow Sea Fisheries Research Institute for US$8,776 in January 2009. He then incorporated Xianghe in July of that year with an equity contribution of US$43,979, and then injected a further US$689,504 in the company in October. By November 2009, CMFO had bought an 80% interest in Xianghe – which counted the algae formula among its main assets – for an astounding US$27.8 million.

Just who is this talented algae salesman that made millions in a few months? CMFO’s 2010 annual report describes him as an algae expert with more than 10 years of experience in the industry, and states there was no previous business relationship between Qiu and CMFO’s CEO, Liu Pengfei.

Our research, however, shows little trace of the mysterious Mr Qiu. Yellow Sea Fisheries was not willing to disclose any information on him, and reacted rudely to our request to interview him about his recent successes. A dean from the Ocean University of China, which has collaborated with Mingxiang on research and development, had met Qiu only once and did not know the Chinese characters of his name. Other industry experts had never heard of him. 

Furthermore, three of CMFO’s competitors attested that the company’s 2010 revenues from snack foods – US$70 million – were unachievable. While the allegations of competitors must be taken with a bowl of salt, they appear to be correct in this case.

CMFO’s annual report claims that its products are sold in Wal-Mart, Trust-Mart and Carrefour stores in Fujian province. However, telephone calls and a visit to Fujian revealed no CMFO products on the shelves of any of these major retailers. In response to our questions, a sales representative of Hi-Power explained the product is now only sold in small convenience stores, restaurants and hotels – which casts suspicion on the company’s claims that this product line generated US$26 million in 2009. 

Bottom feeding

CMFO’s share price is now edging towards the low end of its 52-week range, and the company’s book value is already below its share price – meaning that shareholders are not even willing to value the company at the price of its assets.

For most investors, the words “reverse merger” should be enough to make them stay away. But even those bottom-feeding bargain hunters who might consider buying the stock should leave this one alone. There are no signs that the stock price will be going anywhere but down.

Short-sellers have already cut the value of the company’s stock in half this year, so there’s not much room for shorting CMFO. However, shorts might have some mileage yet: Betting that the company de-lists seems like a low-risk wager, if someone takes the bet.