SUSTAINABLE MARITIME INDUSTRIES, INC. (HQS)

Here is a stock that has tons of cash (actually selling for less than cash), has increasing revenues and solid prospects going forward.  However, if you read the boards (and I do for fun…sometimes), HQS are the biggest scam artists on the planet.  Management is inept and they have presided over the emasculation of the company and the steep decline in the stock price.  I think the boards are most angry about the decline in the stock price, though.

I figure the truth lies somewhere in between.

Sustainable Maritime Industries, Inc. (HQS) is a fish farmer and exporter.  Actually…the describe themselves as a “integrated aquaculture and aquatic product processing company”.  The company has its main operations on the “environmentally pristine”  (whatever that means) island province of Hainan, in China’s South Sea.  They specialize in the export of tilapia in different forms to the US, Japan, Korea, Mexico. The tilapia products sold by the company are mainly in the following forms: Whole Round Frozen, Gutted and Scaled (G&S), boneless-skinless tilapia fillet (CO treated) or (non-CO treated).

The company touts its operations as “functional, sustainable, biomass products focused on Tilapia aquaculture through vertically integrated operations”.   The company  claims to practice cooperative farming of sustainable aquaculture using all-natural enriched feeds. The Company produces and sells wholesale feed products as well as retail focused nutraceutical and health products, including its “Omojo” branded health products through direct and franchise sales in China. Additionally, the Company produces and sells Lillian’s Healthy Gourmet Meals and other fish products in the United States. The Company conducts fish processing, production and sales from its main office in China.

Balance Sheet

Cash – $43.8 MM

A/R – $51.7MM

A/P – $6.5MM

Quick (acid test) Ratio – 14:1  Very strong

Clearly, the company has a strong balance sheet and it will get stronger with the news of a successful capital raise in the third Q of 2010.  The net to the company was in excess of $11MM and will make a strong balance sheet even stronger.  I am concerned about the size of the A/R balances (just as a percentage of total assets), but with audited financials hopefully those numbers represent future cash as they are collected.

Income Statement

This is where I have some concern.  The company is on a run rate for 2010 that is lower than 2009.  However. the 6-month results through June 30th are ahead of the previous years.  There has been some decline in margins, but nothing lethal.  I wonder if there isn’t some seasonality with their business that could account for the decreased run rate year over year.

Thru 2nd Q 2010        Thru 2ndQ 2009             FY 2009

Total Revenues                         $35.0MM                     $26.9MM                    $72.0MM

Gross Profit                               $10.9MM                       $11.1MM                    $30.2MM

Operating Income                     $4.0MM                       $3.8MM                      $11.1MM

Net Income                                 $2.8MM                       $2.2MM                      $8.1MM

The Chart

The bearish gap is a direct response to the recent equity raise which was priced at $3.61 per unit with a half warrant attached at a $4.52 exercise price.   If you were to take the $3.61 exercise price and divide by the units (1.5), you would actually arrive at a net share value of $2.40.  I can do this because even though the half warrant is priced at $4.52, there is no guarantee that will be the actual exercise price.  In fact, I have found that warrants are easy to re-price if the shares don’t reach the trigger points quick enough.

The chart itself is showing some bullish pressure with a strengthening MACD and an improving stochastics.  Other indicators are telling me the selloff could be ending.

Bottom Line: This could be a great time to get in to HQS.  I am a firm believer that firms with strong balance sheets give themselves the “breathing room” to overcome dips like the one HQS is currently in.  I like the stock…..I think that it could make a strong recovery over the next few months.  They are increasing capacity and expanding distribution…two very good signs.

Here is what I am looking at for entry/exit points

Last Close:              $2.80

Buy Opinion:          $2.75 – $2.90

Short Term Sell:   $3.75

Long Term Sell:    $5.00

Good Luck and Great Trading,

Jeffrey Dean

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