the inconvenient truth behind the out-peformed dongwon industries
Post on 20-Mar-2016
Embed Size (px)
DESCRIPTIONGreenpeace 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.
The inconvenient truth behind the out-performed Dongwon Industries
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.
- 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
- 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:
Senior Business Advisor, Greenpeace International - Political and Business Unit
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
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
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
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
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
Reputational risks criminal proceedings in Senegal for cannery acquisition, illegal
fishing on Liberian coast, Korean Tax Service investigation.
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.
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
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