Aquatic Foods Group Plc

("Aquatic Foods" or "AFG" or the "Group" or the "Company")

Trading update

Aquatic Foods Group Plc (AIM: AFG), a leading Chinese marine foods and seafood processor and producer supplying to export and local markets, is pleased to provide the following trading update for the quarter ended 31 March 2017.  

Financial Highlights

·     Unaudited Group's revenue and sales volume for quarter ended 31 March 2017 were RMB 216.0 million (c. £24.2 million) and 5.1 million tonnes respectively, which remained consistent with that of 1Q 2016 (1Q 2016: Revenue 214.8m, c. £24.1; Sales volume 5.1 million tonnes).

·     Unaudited cost of sales for quarter ended 31 March 2017 increased by RMB 5.6m, or 3.4%, to RMB 168.1m (c. £18.8 million) compared with the corresponding period last year (1Q16: RMB 162.5, c. £18.2 million). This was mainly driven by rising raw material cost, labour cost and packaging costs.

·     As a result of rising input cost, unaudited gross profit for quarter ended 31 March 2017 was down by RMB 4.4 million, or 8.4%, to RMB 47.9 million (c. £5.4 million) compared with the same period in 2016 (1Q 2016: RMB 52.3, c. £5.9 million).

·     Unaudited gross margin for the quarter was 22.2%. Gross margin fluctuated around the 24% level in 2016 but started to dip to below 23% in December 2017. In addition to rising cost factor, the decline in margin between December 2016 and February 2017 was also due to price reductions and promotions before and during Chinese New Year in order to drive sales.

·     The unaudited net profit margin for quarter ended 31 March 2017 is expected to be around 6%, subject to any foreign exchange adjustment (1Q 2016: approximately 10%). The unaudited net profit margin for the 2016 was around 10-11%.

·     Cash as at 31 March 2017 was approximately RMB 485 million, c£54 million (as at 31 December 2016: 377 million, c£42 million) in part reflecting favourable working capital movements.

Note: Financial information above is converted into Sterling Pounds for illustrative purposes, at 8.930, being the exchange rate approximating to that ruling at 17 May 2017.

Product categories

Fish

Sales of fish products accounted for approximately 66% of the Group's 3 months revenue (1Q 2016: 63%), or 81% of Group's sales volume (1Q 2016: 80%).

The revenue generated from fish products increased by approximately 4.8% compared with 1Q 2016, whereas volume increased by approximately 2.1%. There was a slight improvement in average unit price for fish products. However this was mainly due to change in sales mix, which also resulted in a higher cost of sales for fish products. The market environment remains competitive, pressure on selling price remains high and it was difficult to pass on increasing input costs to end customers.

As a result of the above, gross profit margin of fish products for the quarter decrease to 21% (3M 2016: 23%). 

 Sea Cucumbers

Sales of sea cucumber products increased by 5.1%, and volume increased by 1.3%, compared with 1Q 2016.

Gross margin fell to 28% (1Q 2016: 30%) as a result of augmented cost especially raw material input cost.

Cephalopods

Cephalopods (principally squid and cuttlefish) products had been experiencing solid growth over prior periods. However, for quarter ended 31 March 2017, sales of Cephalopods products declined by 4.5% in value and 2.2% in volume compared with 1Q 2016. Together with rising cost, these have resulted in significant declined in gross profit of approximately 26% for the quarter. Gross margin declined to 19% (1Q 2016: 25%).

Shrimp and Shellfish

Sales value decreased by approximately 14.4% whilst volume decreased by approximately 15.7% compared with 1Q 2106. Gross profit margins were down to approximately 23% (1Q 2016: 26%).

Others

These are primarily sales of gift boxes. Sales decreased by 24.5% and gross profit were down to 23% (1Q 2016: 25%).

Cash and working capital

The cash position of the Group remains solid.  The Group's cash balance at 31 March 2017 improved by approximately RMB 108 million from the year end to RMB 485 million, c.£54 million (31 December 2016: RMB 377 million, c£42 million). The majority of the cash is held in the PRC with approximately GBP2.7 million held predominantly in Hong Kong.  

In contrast to quarter ended 31 December 2016 where the working capital demand was high due to the Group paying down its creditors ahead of the year end, and at the same time taking on a higher debtors balance as a result of seasonal sales improvement in 4Q 2016, the working capital position for quarter ended 31 March 2017 has improved by approximately RMB 100 million, reversing the amount of working capital tied up in the previous quarter.

During the quarter ended 31 March 2017, trade and other receivables decreased by approximately RMB 59 million reflecting a good debt recovery post year end, and payment to creditors is back to the normal term resulting in trade and other payables increasing by approximately RMB 30 million.

The Group has faced continued difficulties in remitting funds from its operating entities in China to the UK on a timely and regular basis to meet the ongoing UK expenses due to more stringent cross border fund remittance control by the PRC State Administration of Foreign Exchange (SAFE).  The Group is continuing to work with relevant parties to resolve this issue.

Market environment, Outlook and Strategy

The Group's operating environment remains challenging and the Board expects these difficult conditions to continue in the near term. In order to maintain its market position in China and promote market awareness of "Zhenhaitang" brand, the Group has further increased its marketing and advertising efforts in 2017. The advertising cost in Q1 2016 was RMB9 million and this has increased to RMB 12 million in Q1 2017 in both cases this reflects the cash payment [in advance for a full year of advertising costs.

The Group is also actively looking for overseas business development opportunities as well as working to increase its sales to supermarkets in the PRC.

The Group continues to consider potential acquisition opportunities as well as the continued potential for organic expansion into a new site. In addition the Group continues to review growth and improvement opportunities in production capacity and efficiency through increasing process automation.

Li Xianzhi, Chief Executive Officer of Aquatic Foods Group Plc, commented: "The fall in gross and net margins reflects the pressure imposed by the macroeconomic conditions in China. However the Board is satisfied that the Company remains profitable despite these negative factors.  The Group continues to consider opportunities for investing its available cash resources to ensure that it can thrive and seek to build market share during the ongoing more challenging trading environment."

Market Abuse Regulation (MAR) Disclosure

Certain information contained in this announcement would have been deemed inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 until the release of this announcement.

- ENDS -

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Notes to Editors:

Aquatic Foods Group is a leading marine foods and seafood processor and supplier based in China.  The Group initially built its business through focusing on the export market (principally Japan under the "Kanwa Foods" brand), and subsequently established the "Zhenhaitang" brand in 2007 in mainland China to take advantage of the growing market driven by growing disposable income within the Chinese middle-classes and a more health conscious consumer base. 

The Group benefits from excellent food safety procedures developed over many years which have helped the Group to build a strong track record of supplying its products into overseas markets.  This track record has enhanced the perception of the quality and reliability of the Group's products in China and has allowed the Group to expand significantly into local markets as demand for seafood products has increased.  In a market that has seen regular public health scares relating to food safety, the Group considers that its adherence to these standards to be a key strength.  The Group has obtained the following key standards:

-    ISO 9001 Quality Management System certification

-    HACCP Food Safety System certification

-    BRC certification; and

-    Marine Stewardship Council certification

Aquatic Foods works with a network of distributors to effectively market its products in China.  The Group has continued to grow its distributor relationships and now distributes its products in 16 provinces, municipalities and autonomous regions in China through 50 regional distributors.  These distributors in turn sell the Group's products to sub-distributors and retailers, including supermarket chains and hypermarkets.

Further information can be viewed at www.aquatic-foods.com.