HQ Sustainable Maritime Industries (HQS): Fishing for profits

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The world’s oceans face the threat of being emptied of fish by 2048. That is the conclusion that an international team of scientists reached in the November 2006 issue of Science. In an attempt to not only reverse this trend, but also to meet the world’s growing demand for seafood, aquaculture — or fish farming — has become a bustling industry.

A shining example of a company swimming in this pond is HQ Sustainable Maritime Industries (NYSE: HQS), which in recent quarters has especially profited from the rising U.S. imports of tilapia, a fresh water fish that has fast become HQ’s cash crop. The company has steadily grown its market cap to $99 million and in the process has provided eye-catching returns for shareholders. The company’s stock price has surged 131% over the past 52 weeks.

HQ was established in 1997 and is now headquartered in Seattle, Wash. It has production plants in China and two primary wholly-owned operating subsidiaries: Hainan Quebec Ocean Fishing Co., which processes aquatic products such as tilapia, and Hainan Jihua Marine BioProducts, a producer of marine bio and health-care products marketed exclusively in China. The company’s shark cartilage capsules aim to maintain a healthy immune system in humans.

Two primary advantages that HQ has over its competitors are its geographical location and its business model. With operations in the South China Sea, the warm waters allow for the company to process tilapia year-round, whereas some of its competitors in northern regions of China are forced to halt their operations for part of the winter.

HQ’s vertically integrated business model provides for healthy profit margins. The company actively manages the fish farms with which it has production agreements. It also monitors the shipping of its products that are delivered to customers such as Wal-Mart Stores Inc. (NYSE: WMT) and The Grocery Outlet. Most of the other aquaculture companies that HQ competes against are engaged in only parts of the production and distribution process.

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