‘Galloping Scallops’ Raise Stock Exchange Suspicions

2018-02-07 11:47:35

The recent announcement of a huge, unexpected loss from one of China’s biggest seafood producers has raised eyebrows, with shareholders and netizens dubbing the story “Scallop Run 2.0” after a similar case from 2014 involving the same company.

On Monday, Dalian-based Zoneco Group announced a loss of 629 million yuan ($100 million), explaining that decreased rainfall, food shortages, and abnormal water temperatures had left its scallops “starving to death.”

“The reduction in rainfall led to less food for the scallops, which was exacerbated by the expansion of the breeding farm,” the company said in its notice. For three consecutive days, Zoneco’s share price has dropped the 10-percent daily maximum allowed in China, from 6.96 yuan on Monday to 5.63 yuan on Wednesday.

Zoneco had anticipated the loss in a previous notice issued on Jan. 30 — but an announcement in October 2017 had predicted a profit of around 100 million yuan. A research paper from Cinda Securities published on Jan. 9 had also claimed that production was going well at the 876-square-kilometer scallop farm.

The apparently sudden demise of so many mollusks has shareholders suspicious. Many commentators jokingly speculated that perhaps the scallops had “run away.”

On Tuesday, the Shenzhen Stock Exchange — where Zoneco is listed — asked the company to explain the mass scallop deaths of January 2018 when a spot-check in autumn 2017 had not revealed any risk of such a development. The company responded on the same day that it was reasonable for the risks to have gone undetected.

In an interview with financial media outlet National Business Daily, aquaculture workers and marine researchers in Changhai County, where Zoneco’s scallop farms are located, confirmed that there had been high ocean temperatures through the 2017 summer, but said that this had not been a sudden phenomenon.

On Jan. 31, a commentary published by state news agency Xinhua criticized Zoneco’s announcement as “dramatic” and urged stricter supervision over the stock market.

This is not the first time Zoneco has announced a catastrophic loss due to natural phenomena. In October 2014, it claimed an 812 million-yuan loss that netizens now refer to as “Scallop Run 1.0.” Cold temperatures in the northern Yellow Sea had killed more 704 square kilometers of scallops, the company said at the time.

The nature of seafood production makes the industry difficult to audit, and enables fraud, financial expert Ma Jinghao told The Beijing News in 2014, after Zoneco’s first crisis. “In auditing, it’s impossible to check things like fish, shrimp, and scallops accurately,” he said. “Auditors cannot dive underwater to count them, and it’s impossible to dry up the sea water.”

Amused to see another “scallop run,” financial analyst Hu Jinghai told Sixth Tone that the case shakes investor confidence, and popularizes awareness of the risks associated with marine aquaculture assets in the stock market.

“[The case] could affect sea farming enterprises’ access to the capital market,” Hu commented.

Editor: Qian Jinghua.

(Header image: Zoneco employees harvest scallops at an aquaculture farm in Dalian, Liaoning province, Aug. 9, 2012. Nan Gong/VCG)