SHRIMP INDUSTRY

INDUSTRY OUTLOOK: NEUTRAL

TRIS Rating holds a neutral outlook for the shrimp industry. Farmed shrimp production in Thailand recovered moderately in 2017 from the outbreak of early mortality syndrome (EMS) in 2012. Shrimp exports from Thailand in 2018 are expected to increase due to more available supply. However, competition in the shrimp industry is intense and fragmented due to price and volume volatility. Moreover, stringent regulations and exchange rate fluctuation will put pressure on the performance of shrimp operators as well.

KEY FACTORS

• Improved farmed shrimp production in Thailand

Farmed shrimp production in Thailand had dropped since 2012 due to the wide spreading of the EMS. However, domestic production showed signs of recovery in 2016. Farmed shrimp production rose from 279,000 metric tons (MT) in 2014 to 311,000 MT in 2017. The improved farmed shrimp production was due to efficient farm management systems and healthier hatcheries. Production in Thailand is expected to rise to 345,000 million MT in 2018, up 4.5% from 2017.

In the past few years, global shrimp supply was tight due to the EMS and related diseases in major producing countries namely, India, China, Vietnam, and Thailand. Shrimp supply in 2018 is expected to decrease slightly as an increase in India’s supply will be offset by a decrease in supply in China and Vietnam.

• Increase in exports from Thailand

Before the wide spreading of the EMS, Thailand was the world’s largest shrimp exporter. After the drop in supply from Thailand, India became the world’s biggest shrimp exporter, followed by Ecuador. Thailand’s shrimp exports ranked the fourth globally in 2017.

Shrimp exports from Thailand have risen continuously since 2016 due to increasing supply. Thailand’s shrimp exports grew to 203,305 MT in 2017 from 159,729 MT in 2014. In the first two months of 2018, shrimp exports climbed to 23,672 MT, up by 3.66% year-on-year (y-o-y). Major markets for shrimp exports from Thailand are the United States (US), Japan, and Vietnam. The Office of Agricultural Economics (OAE) forecast that Thailand will export 220,000 MT in 2018, owing to strong demand and tightened supply in some major producing countries. However, some factors that may affect shrimp exports include lower production than expected and fierce competition in the market.

• Stringent regulations diminish sales growth and margin of Thai shrimp producers

Tariffs and non-tariff barriers have been imposed by several countries to protect their domestic aquaculture industry. For example, a yellow card has been issued to Thailand by the European Union (EU) for illegal, unreported, and unregulated (IUU) fishing since April 2015.

Owing to the fact that Thailand was upgraded from the Tier 3 to Tier 2 Watch List by the US for Trafficking of Persons (TIP) in July 2016, many global retailers are focusing on this issue and requiring traceability and transparency before purchasing products. Shrimp farmers need to use certified shrimp feed, which is more expensive and need to record production systematically. These raise the costs of shrimp production.

FINANCIAL HIGHLIGHTS

• Profit volatility

Generally, profits from aquaculture products are volatile due to price and volume fluctuations. Higher raw material costs and appreciation of the Thai baht puts pressure on operators’ profits. The operating margin before depreciation and amortization of most seafood operators rated by TRIS Rating underperformed in 2017. The operating profit margin of Seafresh Industry PLC (CFRESH), who engages only in the manufacture and export of frozen shrimp, decreased from 8.8% in 2016 to 6.9% in 2017. Similarly, the operating profit margin of Thai Union Group PLC (TU) slid from 7.1% in 2016 to 6.9% in 2017. The weaker performance of TU was mainly due to the volatility of raw materials, especially tuna prices. Frozen, chilled seafood and related businesses improved marginally due to strong domestic shrimp exports, despite weakness in the US market. The operating profit margin of Charoen Pokphand Foods PLC (CPF) dropped to 4.7% in 2017 from 8.6% the year earlier. Thai aquaculture dropped while overseas aquaculture improved. However, aquaculture revenue share was only 15% of CPF’s total revenue. Livestock revenue contributed 85% of total revenue. The operating margin of the livestock segment plunged with a down cycle in livestock prices.

• High leverage level but manageable

The leverage level of rated operators is varied. The debt to capitalization ratio of CFRESH weakened from 48.3% in 2016 to 55.4% in 2017. The high leverage was due to a higher inventory level. However, the leverage level of CFRESH is expected to improve gradually because capital spending will be limited; earnings before interest, tax, depreciation and amortization (EBITDA) are expected to improve. TU was able to maintain its debt to capitalization ratio at 58.4% despite the rise in raw material costs in 2017. The debt to capitalization ratio of CPF strengthened from 61.8% in 2016 to 57.5% in 2017 thanks to a capital increase.