In recent years, omega-3-rich fish oil can be said to be a hot new star in the health products circuit in recent years. With the improvement of people's living standards, the level of attention paid to the health status of the “three highs” has also increased, and fish oil, a “trendy item” that can improve blood fat problems, has also been added to the luxury health supplement package.

Recently, Gaolong Marine Group, whose main business is fish oil processing, launched an IPO sprint to the Hong Kong Stock Exchange. According to the prospectus, this is a Fujian enterprise founded in 2008 that mainly focuses on refining and concentrating feed grade and food grade fish oil. And being located on China's coast and in a province with advantages in foreign trade, how did Gao Long Ocean Group expand and strengthen the fish oil “business”?

Relying on a large single product of fish oil to earn 0.5 billion a year, it falls into the “increase in revenue without increasing profit”

With the development of aquaculture, fish oil has been a valuable feed ingredient since the 1960s. Early research on the benefits of omega-3 fatty acids for the heart dates back to the 1970s. Since then, the use of fish oil has evolved from industrial use to animal feed and human consumption.

For Gaolong Marine Group, the company actually started as a feed-grade fish oil refining business. According to the Insight Consulting Report, in terms of sales revenue in 2023, Gaolong Ocean Group ranked first in China's feed-grade fish oil refining and concentration market, with a market share of 24.8%, ranking first; in terms of export value in 2023, the company also ranked first in China's feed-grade fish oil refining and concentration market, accounting for 9.8% of total fish oil exports.

The company only got involved in the food-grade fish oil business, which is well known to consumers in 2016. In terms of sales revenue in 2023, the company ranked 8th in the Chinese food-grade fish oil refining and concentration market, with a market share of 3.2%.

From a product perspective, Gaolong Marine Group's products can be roughly divided into two categories: feed-grade fish oil with a combined ratio of 25% EPA and DHA, which is used to supplement the nutritional content of animal feed, and food-grade fish oil with a combined ratio of 30% to 75% of EPA and DHA, which can be used to produce fish oil capsules and health products for human consumption or further processed into pharmaceutical-grade fish oil by group customers.

According to the prospectus, in fiscal year 2022, fiscal year 2023 and 2024 fiscal year ending March 31, the operating income of Golong Marine Group was 0.246 billion, 0.464 billion and HK$532 million, respectively, which can be described as having achieved leapfrog growth. In response, the company attributed its revenue growth to continuous efforts to expand overseas markets, optimize product supply, and raise the price of fish oil products.

It is easy to see from this that in the past three fiscal years, foreign trade exports have become an important sales channel for the company. In fiscal year 2022, the company's feed-grade fish oil sold to Chile was only HK$8.781 million, accounting for 3.6% of total revenue. Three years later, in the 2024 fiscal year, this sales revenue reached an astonishing HK$0.29 billion, and its share of total revenue also rose rapidly to 54.7%, driving the entire feed-grade fish oil business to account for 80% of total revenue.

Generally speaking, while revenue is growing well, it is common for a company's profits to rise as well. However, from the profit side, with the exception of the sharp increase in profits in fiscal year 2023, which was driven by a sharp increase in total revenue, profits in recent years have not been as smooth as expected. As of March 31, 2024, the profit attributable to owners of Koh Lung Marine was HK$60.06 million, while the profit due for the previous two years was HK$14.19 million and HK$69.63 million respectively. This was a decrease from the same period last year. Net interest rates were 5.8%, 15.0% and 11.3%, respectively, showing a fluctuating trend.

On the one hand, the process requirements for food-grade fish oil with higher EPA and DHA content are more strict. Therefore, the average selling price of feed-grade fish oil is lower than the average selling price of food-grade fish oil, and there is limited room for price increase. Meanwhile, rising raw material costs have further diluted the company's profit margins.

As a fish oil processor, Gaolong Marine Group undoubtedly accounts for the majority of raw materials in terms of cost. In the fiscal year 2021-2024, they accounted for 91.0%, 91.8%, and 92.8% of total sales costs, respectively. In fiscal year 2024, the company's sales costs increased 17.6% from HK$0.351 billion in the same period of the previous year to HK$0.413 billion, mainly due to an increase in raw material costs and a decrease in supply, leading to an increase in the price of food-grade trout oil purchased mainly from overseas; the offshore price of Peruvian hairfish oil from 2022 to 2023 had a pricing spillover effect, which indirectly led to an increase in the cost of procuring feedgrade trout oil from China.

On the other hand, public information shows that in June 2024, the price of food-grade fish oil fell from the highest level of more than 12,000 US dollars/ton to about 7,000 US dollars/ton, and the price of feed grade fish oil fell from 7,000-8,000 US dollars/ton to 5,500 US dollars/ton. The sharp drop in the price of refined fish oil products may further affect the company's profit side fluctuations.

Is the EPA circuit more promising to manage the increase in lipid demand?

On the eve of 618 this year, Tomson Beijian unveiled its first 96% high-purity EPA fish oil on Tmall. Elande's new high-purity EPA fish oil product, Avicii Fish Oil softgels, will also be launched soon.

It's easy to see that all major brands are speeding up the deployment of high-purity EPA fish oil tracks, and behind it is an emerging market fueled by consumer demand. According to a study, in 2030, the number of people with hypercholesterolemia in China will reach 0.117 billion, and by 2028, the number of people taking statins will exceed 30 million. EPA in fish oil is thought to help lower blood lipids.

The growing demand to manage blood fat has opened up a new market for the domestic fish oil industry. During Tmall 618 this year, fish oil sales increased 50% year over year. Consumer searches targeted “ingredient+purity”, and searches for high-purity EPA fish oil increased 95% year over year.

While demand in the downstream market continues to rise, Gaolong Marine Group has also noticed this development trend and plans to expand the establishment of GMP-compliant fish oil capsule production facilities on existing unused land in the Lianjiang production base. The construction area is about 2,000 square meters to produce fish oil capsule nutritional supplements.

However, for Gao Long Marine Group at this stage, lack of capital may be an important factor for it to “seek wealth” in Hong Kong. In fiscal year 2024, the company's inventory was approximately HK$0.286 billion, and trade and other receivables reached HK$70.842 million. At that time, the company's trade payables reached HK$0.126 billion, and its operating cash flow was -0.05 billion HK$0.05 billion, and cash at the end of the period was HK$9.541 million. It can be seen from this that the company's cash reserves were low due to the characteristics of inventory backlog and slow turnover. “Replenishing blood” became a solution targeted by Gao Long.

Taken together, against the backdrop of the continuous expansion of market demand in the industry, Gaolong Marine, as a leading fish oil refining company in China, has achieved a steady increase in revenue scale. However, when the company can stabilize its profit level will become the focus of market investors' attention, and as downstream demand grows, solving capital problems may make investors more confident about its future growth potential.