China Tracker - Details for HQ Sustainable Maritime (HQSM)

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 HQ Sustainable Maritime
 Analyst Coverage
2010-11-09Ladenburg ThalmannReiterationBuy$8.00

A Largely In-line Quarter. This morning, HQS reported 3Q10 sales of $28.2 million that increased by 27% Y/Y (up 37% Q/Q) and missed our estimate of $28.8 million mainly due to weaker-than-expected shrimp and ocean-caught fish sales. GAAP EPS of $0.40 exceeded our $0.25 estimate primarily due to the recovery of bad debt of $2.0 million that added $0.12 to EPS. On a normalized basis, EBITDA was $8.0 million in 3Q10 and above our projection of $5.8 million. Gross margin of 33.7% was slightly above our 33.5% projection. Operating margin of 27.7% was much higher than our 18.3% projection due to the impact of bad debt recovery and lower SG&A expenses. The company exited the September quarter with $52.1 million in trade receivables (vs. $51.7 million in 2Q10) and $64.5 million in cash and cash equivalents.

The Feed Business Continues to Ramp Up. During 3Q10, sales of aquaculture product segment declined by approximately 4% Y/Y (up 27% Q/Q) to $13.4 million and missed our projection of $15.5 million largest due to lower shrimp and ocean-caught fish sales. Sales of health and bio-product segment increased by 6% Y/Y (up 47% Q/Q) to $8.6 million and beat our estimate of $8.5 million. Sales of feed product segment totaled $6.2 million and were ahead of our $4.8 million projection. Gross margins for the aquaculture, health & bio-product, and feed segments were 18.5%, 70.6% and 15.6%, respectively. Gross margin for the feed segment rebounded from the 9.3% in 2Q10 as sales increased.

Raising Estimates on Improving Tilapia Pricing and Higher Feed Sales. We are raising our 4Q10 sales forecast from $29.0 million to $31.1 on account of improving tilapia pricing and higher feed sales. On a segment basis, we are projecting 4Q10 sales of $15.1 million, $9.2 million and $6.8 million for aquaculture, health and bio-product, and feed, respectively. Our 2011 estimates are also increased with revenue to $113.9 million from $101.1 million and EPS to $0.82 from $0.68.

Reiterating Buy Rating and Raising Price Target to $8.00 from $6.40. On the back of improving tilapia pricing and continued ramp up of the feed business, we are increasingly optimistic for the years to come as HQS expands its retail footprint by adding retail stores and exploring franchise opportunities for its health & bio-products. The planned Hong Kong IPO of the health & bio-product business appears on track for 2Q11 and could unlock significant value in our view. The stock still trades approximately at its cash value and we believe a much higher valuation is warranted as it remains a growing and profitable business. We are reiterating our Buy rating and raising our price target from $6.40 to $8.00, which is based on just 5x our 2011 EPS estimate of $0.82 plus $3.89 in net cash per share.

2010-08-24Ladenburg ThalmannReiterationBuy$6.40

We are lowering our 2010 revenue estimate to $92.8 million from $93.1 million while lowering our EPS estimate to $0.69 from $0.88. Our 2011 estimates are also lowered with revenue to $101.1 million from $103.8 million and EPS to $0.68 from $0.92. Despite continued execution risk and slower margin expansion for the feed segment, we are pleased with the continued ramp-up of feed sales and believe there is significant opportunity in front of HQS as it accelerates the higher-margin Marine Bio & Healthcare Product business with more Jiahua-branded stores in tier 1 cities and new franchise stores in smaller cities. We also believe the planned IPO of the Jiahua unit (health & bio-products) could unlock significant value (see our note published on July 1, 2010) and provide a catalyst for the stock. We are maintaining our Buy rating and 12-month price target of $6.40, which is based on just 4.4x our 2011 EPS estimate plus $3.41 in projected net cash per share in 3Q10.

2010-07-01Ladenburg ThalmannUpgradeBuy$6.40

We are maintaining our HQS price target of $6.40 which is based on a 2011 P/E of 6.9x (unchanged). At a 2011 P/E of only 5.4x versus 8.6x for the peer group, which we define as companies in similar businesses including aquaculture, food processing, nutraceuticals, and cosmetics, we believe that the current share price provides an attractive entry point. A proposed IPO of the company’s Nutraceutical business may unlock $58 million of value and provide a catalyst for the stock. We are, however, concerned with the potential impact a slowdown in the global economy may have on the demand for the company’s Aquaculture products, the effects of the RMB’s revaluation on margins, significant execution risk, and low earnings visibility. The company indicates that it continues to make progress collecting its receivables and expects 2Q10 performance on this front similar to 1Q10. These risks appear mitigated by current valuation and we are therefore raising our rating to Buy.

2010-05-12Ladenburg ThalmannReiterationNeutral$6.40

We are reducing our HQS price target from $7.00 to $6.40 which is based on a 2011 P/E of 6.9x (versus 7.4x previously) and reflects deterioration in core business growth, a weak margin profile, execution risk, and low earnings visibility.

2010-03-25Ladenburg ThalmannDowngradeNeutral$7.00

We are reducing our rating on HQS from Buy to Neutral and our price target from $10.50 to $7.00 which is based on a 2011 P/E of 7.4x. HQS reported unexpected 4Q09 results and our new target and recommendation reflect an uncertain outlook, execution risk, and communications issues.


READ: Score Cards Explained
DETAILS: Safety/Risk Model for HQSM
Current Price:  n/a
F10k Day (2004-04-22): -100.00%$23.00
2009 Close: -100.00%$7.04
2010 Close: -100.00%$4.77
2011 Close: -100.00%$0.02
High (2011-07-29): -100.00%$0.27
Low (2011-12-29): -100.00%$0.01
Market Capitalization: n/a
Total Shares: 16.55 mill
Float: n/a
Avg Volume: n/a
Last Quarter: 2010-06-30
Revenue (MRQ): 20.66 mill
Net Income (MRQ): 1.10 mill
Op. Cash Flow (MRQ): 5.86 mill
all financial data provided without warranty