the inconvenient truth behind the out-peformed dongwon industries

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Greenpeace East Asia released a report titled "The Inconvenient Truth Behind the 'Out-performed' Dongwon Industries", in order to help investors understand the risks of investing in a fishing company that has high reliance on the tuna supply, and the sustainability of Pacific tuna fishery using Dongwon Industries Co. Ltd. as an example, with special highlights to their environment, social and governance (ESG) standards.

TRANSCRIPT

  • The inconvenient truth behind the out-performed Dongwon Industries

  • Preface:

    This report is released for public interests. It studies the problems existing in tuna fisheries, analyses

    the potential risks arising from fishing in the industrial scale, and figures out the consequent impact

    on fisheries and our environment. The subject company of this report has been used as an example

    to illustrate such problems and risks for the Korean tuna industry, and by extension, to the distant-

    water fishing fleets worldwide.

    Disclaimer:

    - The sources of all the data and information quoted in this report are from, and our understanding

    of, public materials that we consider reliable; Greenpeace does not guarantee its timeliness, accuracy

    and integrity.

    - The findings in this report are the results of the independent research, analysis and study

    conducted by Greenpeace East Asia on the basis of the information acquired within the time limit

    of such research, analysis and study.

    - The report is used only for the purposes of information sharing and reference, environmental

    protection and public interests. If you want to use or apply the information in the report, you may

    need do your own study and use your own judgement to make decision, and bear the arising risk

    from using or applying such information.

    For any enquiry on the report, please contact:

    Elsa Lee

    Senior Business Advisor, Greenpeace International - Political and Business Unit

    Email: elsa.lee@greenpeace.org

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  • Contents

    1. Executive Summary 2

    2. Introduction 4

    3. Future of the tuna fisheries 6

    4. Changing political landscape

    increased regulatory risks are imminent 10

    5. Environmental impacts 12

    6. Emergence of consumer concerns and

    market restrictions 14

    7. Bad management and lack of standards

    in overseas operations 17

    8. Conclusion 19

    References 20

    1

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  • Dongwon Industries Company Limiteds (006040 KS) recent history shows signs of a bubble. Its

    share price has almost doubled over one year, driven by aggressive growth plans and supported

    by risky acquisitions and a five-fold increase in capital expenditure.

    These aggressive growth plans are built on the assumption of unlimited stocks from a single natural

    resource, Pacific tuna, on which Dongwon Industries is heavily reliant for its revenue. Fast decreasing

    tuna stocks due to overfishing, and recent fishery management rules that aim to conserve the

    stocks, are combining to make tuna prices high and volatile, lead to clear supply and financial risks

    in both short and long term for the company (Section 3).

    The companys profitability has deteriorated during the last few months, e.g. its EBITDA margin fell

    from 23% to 15% between Q1 2012 and Q1 2013. Its debt structure is not ideal, with around KRW

    257B (approx. USD 230M) in short term debt expiring in 2014.1

    1. Executive Summary

    HungKu Kim / Greenpeace

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  • The financial fundamentals of Dongwon Industries show it is a high growth company. However,

    investors should be mindful of whether the company has sufficiently disclosed and adequately

    adapted its business plans for the forthcoming tighter regulatory environment, both within South

    Korea and internationally (Section 4).

    With the company aiming to expand into US and European markets, investors should also take

    note of the increasing consumer demand for sustainable seafood products, in particular canned

    tuna. This demand poses market risks for Dongwon Industries, and its associate Dongwon F&B, if

    the companies cannot adapt to the sustainability standards (Section 6). As recently as April 2013,

    Dongwon Industries has also been under pressure from the media and authorities regarding its

    appalling business ethics in its African operations (Section 7).

    As a household name in South Korea, is Dongwon Industries able to prove that it can operate

    internationally, and adapt its business plan to a foreseeably fast changing natural-regulatory-

    consumer environment? For shareholders and investors, would the company be able to manage

    the major risk of stranded fishing and processing assets if the external business environment turns

    against it?

    Investors buying Dongwon Industries shares may face the following significant risks:

    Supply risks tuna stocks: long-term downward trend in tuna populations

    immediate: fish aggregating device (FAD) ban, constraints from the

    Parties to the Nauru Agreement (PNA) in H2 2013

    Price risks increasing volatility of raw material prices

    Financial risks assets stranded as cheap tuna supply ends and demand shifts to

    sustainable products

    Regulatory risks domestic: Korean government amendment of the Ocean Industry

    Development Act to make companies operating in distant water

    fishing more accountable

    international: WCPFC/PNA conservation measures

    Governance risks Liberian government investigation, leading to USD2M settlement for

    illegal fishing activities and perhaps other activities yet to come to

    light

    Reputational risks criminal proceedings in Senegal for cannery acquisition, illegal

    fishing on Liberian coast, Korean Tax Service investigation.

    3

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  • 2. Introduction

    The worlds ocean is reaching its limit in providing wild-caught seafood for human needs. According

    to FAO, 87.3% of the worlds assessed fish stocks are over- or fully-exploited, which means these

    stocks have reached or exceeded their maximum potential to produce a sustainable yield (Figure 1).2

    As one of the most globally traded seafoods, tuna is facing serious risks of stock depletion after a

    significant increase in production since the 1980s. Such a dramatic boom of tuna fishing business

    is based on the unfounded assumption that there are unlimited fish in the ocean. Section 3 explains

    the worrying signs for fisheries resources and the future resource risk that investors should be

    aware of when investing in the fishing business.

    70

    Percentage

    60

    50

    40

    30

    20

    10

    0

    1974 1979 1984 1989 1994 1999 2004 2009

    Fully exploitedNon-fully exploited Overexploited

    Figure 1. Global trends in marine fish stock status from 1974 to 2009. Source: FAO (2011) Review of world marine fisheries

    Alex Hofford / Greenpeace

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  • Aggressive business models built on a fast depleting resource and underlying risks

    Three companies/groups dominated the canned tuna sales in South Korean: Dongwon F&B (a subsidiary

    of Dongwon Enterprise) accounts for 69.8% of market share, selling mostly the catch of sister company,

    Dongwon Industries. Sajo Industries has the second largest share with 16.5%. The third largest brand,

    Ottogi, which sources tuna mainly from Silla Co. Ltd., takes 13.1% of the canned tuna market.

    However, there are significant risks for companies that are heavily dependent on tuna resources for

    their business model. Dongwon Industries and Dongwon F&B are particularly vulnerable.

    Dongwon Industries reported total revenue of KRW 1,544B (USD 1.37B) at end 2012, with the tuna fisheries

    and its distribution sectors contributing almost 90% of the revenue. The company follows a very aggressive

    expansion strategy, and has been investing heavily in recent years. After acquiring StarKist, a leading brand

    in the US market, for USD 363M in 20085 with a hefty loan, Dongwon Industries also acquired the largest

    cannery in Senegal with KRW 5.4B (approximately USD 4.8M) in 2012. It is planning to invest a further USD

    21M in upgrading the facility,6 and to expand into the US and European markets as domestic sales slow.

    The company ordered two purse seine fishing vessels in 2012, each estimated to cost around

    USD 22.3M. This was ahead of a restriction by the International Seafood Sustainability Foundation

    to limit fishing capacity in order to stop unsustainable and uneconomical build of more purse

    seine fishing capacity.7 Such heavy dependence on and investment into tuna assets could pose

    significant financial risk to the company in terms of stranded assets, and regulatory risk as the

    regulatory framework around tuna resources is tightened (see Section 4). As the market for high

    standard sustainable product becomes the norm in international markets, Dongwon exposes itself

    to the market risk of not providing sustainable product to fit with this growing demand (Section 6).

    Investors should also be mindful of the governance and management risks of Dongwon Industries.

    While the company may have performed well financially, i