“HQ Sustainable Maritime Industries, Inc. (HQS) shares sell at a discount to their Net Cash Asset Value (total cash less all liabilities) of 6.08 and their book value of 7.99. The current price to earnings ratio of 5.9 times is cheap, although the company does not pay a dividend. HQS trades 133,000 shares daily from a market capitalization of $73 million. The share price will likely increase to our Minimum Sell Price of 7.99 within three years. HQS, which trades on the American Stock Exchange, is high risk.
“HQ Sustainable Marine is a leader in the aquaculture industry in China. Aquaculture includes the farming of fish and aquatic plants in ocean and fresh water enclosures. HQ maintains operations in the island province of Hainan, in China’s South Sea. The company’s aquaculture is conducted in fresh and salt water areas that are pristine and free from pollutants such as mercury, crude oil and plastic trash. In addition to raising and harvesting fish, HQ processes and sells fish and fish products including tilapia, shrimp, squid and red snapper, as well as packaged all-natural seafood meals. The company commands 10% of the tilapia market in the U.S. HQS is led by an aggressive management team who hold a large stake in the company. The company is undertaking several capital-intensive projects that, if successful, could expand operations rapidly and lead to substantially higher profits during the next three to six years. Sales increased 23%, but EPS declined 22% during the 12-month period ended 9/30/10. During the next two to three years, we expect volatile earnings because of the anticipated costs of expansion. The company has built up cash reserves of 3.89 per share which are earmarked for future expansion projects. HQS has no long-term debt.”
J. Royden Ward, Cabot Benjamin Graham Value Letter, 12/10
