Robert Hsu, Asia Edge and CMFO

Who is Robert Hsu

According to InvestorPlace.com, Robert Hsu was born in Taiwan, speaks Mandarin fluently and reads and writes Chinese. But what really sets him apart from other investing experts is his rich history of investment success and his understanding of what's happening across Asia today. While employed with Goldman Sachs, Robert learned a great deal about international markets, equities, interest rates, currencies and commodities markets. Since then Robert has started his own money management firm, Absolute Return Capital Advisors.

What is Asia Edge

Asia Edge is one of Mr. Hsu's newsletters. You can subscribe to it and pay $2.995 per year instead of regular $3495.

What is CMFO

CMFO stand for China Marine Food Group Ltd. Their website is www.china-marine.cn and this company processes and distributes processed seafood snack-food products, and fresh and frozen marine catch to seven provinces in the PRC.

What Robert Hsu suggested about CMFO

On August 12th 2009 Mr. Hsu suggested his readers to buy CMFO at around $4.89. He wrote:

New Recommendation: China Marine Food Group

With approximately one-fifth of the world's population and a rapid economic growth, China is well positioned to become a huge consumer market. We've talked about the role of the Chinese consumer a number of times before, as its spending power will likely overtake the U.S. consumer. Unlike American consumers, the Chinese middle-class was largely unscathed by the current financial crisis and economic slowdown. As a result, the Chinese continue to spend this year, not only helping to drive Chinese economic growth, but also sales at many Chinese retail businesses. In fact, retail sales jumped 15.2% in July in China. One sector benefiting greatly from China's increase in domestic consumption is the food and beverage industry, as food spending is a high priority in China. That's because the Chinese are very proud of their culinary tradition. In fact, China's CPI is 32% weighted by food expenditure, the single greatest spending category. And one area in Chinese food spending that's becoming increasingly popular as consumers seek nutritious, tasty and hygienic convenient food alternatives is snack foods. As 1.3 billion Chinese consumers become increasingly affluent, their spending on snack foods is growing rapidly. In fact, the two wealthiest Taiwanese entrepreneurs in Mainland China both made their billions in the snack food industry. And probably one of the most popular snacks in China, is dried seafood, similar to beef jerky in America's Southwest. Currently, the overall market size of seafood-based snack foods in China is about $1.5 billion to $2.0 billion. Since dried fish and seafood products have a long history in China and will continue to play a major role in China's traditional food customs, our new recommendation this week is a newly listed leader in the dried seafood snack business. Founded in 1994, China Marine Food Group (AMEX: CMFO) is an industry leader with a 3% to 5% market share in the sector, and a strong track record of providing high-quality products and high customer satisfaction. Mainly, the company processes and sells seafood-based snack foods and fresh marine catch. To do this, CMFO is conveniently located in the Fujian Province, one of the largest coastal provinces in China, and its main production facility is near the largest fishing port in the region. In total, China Marine has three lines of business: its primary business of processed seafood jerky products, as well as frozen processed seafood and fresh marine catch. Its seafood jerky business contributes for more than 80% of their revenue and has a very nice profit margin of 33%. The company offers a variety of dried and processed seafood jerky products, including roasted prawns, barbequed squid, smoked eel, skinless squid slice and filefish fillet, mainly offered under its Mingxiang brand. These products are then sold throughout China at major supermarkets and retailers like Wal-Mart and Carrefour as well as small- to medium-sized domestic convenience stores and supermarket chains. The remaining sales numbers come from the other two lines of business -- frozen seafood products and fresh marine catch. With its strong relationships with local fisherman, CMFO has built up a reputation for reliability and quality -- especially since most of its seafood is harvested from deep sea, rather than farmed. With such a successful business model, China Marine has been able to leverage its brand, introduce new products and increase production -- all of which has helped establish it as a leading producer of seafood products in China. Currently, its main geographic markets are coastal provinces like Fujian, Zhejiang, Shandong, Guangdong and Shanghai, but management is working to expand its reach by developing new flavored products to market in interior cities like Chengdu, Chongqing and Changsha.

Strong Financials

Since China Marine's dried seafood products have grown in popularity throughout China, its business has been performing consistently in recent years. From 2004 to 2008, revenue grew from $7.3 million to $48.8 million, while net income soared from $1 million to $11.1 million. These growth rates are stellar -- actually, they're much faster than the overall growth rate of the whole Chinese retail sector. And then today, the company reported its second-quarter results. Revenue increased 13% year-over-year to $14.8 million, while net income rose 15% to $3.7 million, or 16 cents per share. Looking ahead, China Marine expects to report revenue of about $60 million and net income of $14.3 million for the full-year 2009. These numbers represent more than 25% growth year-over-year. The company was just listed on AMEX on Monday, and shares are currently trading around $5.With a market capitalization of $130 million, the stock is very attractive and trading at a P/E ratio of less than 10. For an industry leader with double-digit growth, the stock is dirt cheap. Mature snack food businesses in the U.S., such as PepsiCo, have much slower growth rate and trade at twice the valuation of CMFO. I want you to buy CMFO under $6.50. I'm targeting $8 by the year-end, which would give us a nice 60% gain from current prices.

What happened next

CMFO went above $8 between December 2009 and January 2010. Did Mr. Hsu sell and take profit? No, of course.

On January 6th he wrote:

China Marine Food Group (AMEX: CMFO) has completed its acquisition of Fujian-based Xianghe Food Science and Technology -- the manufacturer of "Hi-Power" algae-based soft drinks in China -- purchasing 80% of the registered capital stock of Xianghe for $27.8 million on January 1, 2010. With 2010 revenue estimates of more than $20 million and net profit margins anticipated at 20%, Xianghe will likely prove to be a great acquisition by CMFO. As I previously discussed, I expect that this deal will complement CMFO's existing product line nicely, as Hi-Power's target market is focused on health-conscious consumers in China's fast-growing $25 billion beverage market.

Additionally, China Marine has increased its previously stated guidance of $80 million in revenues and $18 million in net income to $100 million in revenues and $21.5 million in net income for the year ending December 31, 2010, based on the revenue and net income projections from Xianghe for 2010. Shares are currently trading about our $8 buy limit – raise the buy limit to $9. Buy CMFO below $9.

I really hope none of his $2.995/year subscribers followed his insane advice this time. After months of decline since then and only yesterday Mr. Hsu finally decided to sell CMFO at around $4.86, just after the end of the down trend. He wrote:

Sell China Marine Food Group

The saga of China Marine Food Group (NASDAQ: CMFO) has actually taken a turn for the better over the past week. As you know, I recommended that you hold on to the shares until we had a clearer picture of the recent flap over the company's acquisition of Shishi Xianghe Food Science and Technology, a manufacturer of the Hi-Power brand algae-based soft drinks.

Last week the company gave investors reasons to cheer when Chairman and CEO, Mr. Pengfei Liu announced that he had purchased 245,500 shares of CMFO in the open market. Liu is the company's largest shareholder, personally owning nearly 12 million shares. In addition, the company's second-largest shareholder, a U.S. investment firm called Jayhawk Capital, also purchased more shares last week. These moves helped restore a sense of confidence in the stock, and helped boost CMFO shares nearly 20% higher.

Now, while I'm not necessarily convinced that the company is actively engaged in fraud, I find it disconcerting that China Marine's management has still failed to sufficiently address the questions over whether the company's $28 million purchase of Xianghe was actually close to the real value of the company. Despite a press releases, a conference call and an upbeat presentation at a recent investment conference designed to clarify the situation, I remain unconvinced that the deal isn't still wrought with difficulties that could weigh on the shares going forward.

My due diligence on CMFO brings me to the conclusion that although its algae-based soft drinks could have a lot of potential upside for the company, the questions lingering over the high cost of the deal and the manner in which the company entered into negotiations with the founder of Xianghe are reason enough to recommend we exit CMFO.

The good news for our position in this stock is that we've seen renewed buying over the past week in the company, resulting in a near-30% recovery since the sell-off in late June. This is a big reason why I recommended holding CMFO through the investor conference in San Francisco on Monday. However, I'm not convinced that this upward momentum will continue.

Sell CMFO, and rotate that capital into today's new portfolio recommendation.

So, this expert money manager was able to turn a 70% gain into a break-even. All this for only $2.995/year.

Of course, for those who bought CMFO at over $8 (remember: he recommended to buy below $9) the result was a remarkable 42% loss.