China Turns Graveyard From Goldmine Hurting Ship Makers: Freight

China Turns Graveyard From Goldmine Hurting Ship Makers: Freight

For shipbuilders such as STX Group, China was once a goldmine. Now it’s a graveyard.

China’s lower appetite for commodities undermined the group’s plan to sell its shipping line, wiping out a combined $435 million of investor wealth at the South Korea-based conglomerate’s three main companies this week. That also threatens the group’s ability to repay $1.2 billion of debt by the end of the year.

STX’s crisis comes after last decade’s boom prompted the group to set up a shipbuilding and offshore complex in Dalian, northeastern China. With Asia’s biggest economy slowing down and the European crisis adding to a plunge in cargo rates, China Cosco Holdings Co. (1919), the nation’s biggest mover of bulk commodities and containers, last week reported a loss for 2012, a third straight annual loss.

“China was the promised land, something STX Group saw as an opportunity to help it become much bigger,” said Park Moo Hyun, an analyst at E*Trade Securities Korea in Seoul, who doesn’t rate any of the group companies. “It’s turned into a nightmare, a big investment that is coming back to bite them.”

STX, a conglomerate that owned $23 billion in assets as of April last year, is trying to raise 2.5 trillion won ($2.2 billion) through asset sales. It will know this week whether creditors will accept a request for a voluntary debt rescheduling by its shipbuilding unit. The group has 1.37 trillion won of bonds due this year, it said.Worldwide Slowdown

Since the credit crisis, orders to build new ships have plunged. Contracts for new vessels halved to $84.7 billion last year, compared with $174.7 billion in 2008, according to Clarkson Plc, the world’s biggest shipbroker.

China Cosco reported a bigger-than-expected loss of 9.56 billion yuan ($1.5 billion) last year on a slump in dry-bulk rates. The company plans to sell its logistics unit. It may raise as much as 27 billion yuan selling assets to its parent, said two people with knowledge of the matter last month.

A downturn affects STX significantly as the group builds ships as well as engines and other components that go into it. All five of the group’s listed units lost money last year. STX Offshore & Shipbuilding Co. (067250), the world’s fourth-largest shipbuilder by order book, had its biggest loss in 2012 since 1998, when it started compiling data.

Creditor Watch

STX’s founder and Chairman Kang Duk Soo, 62, is no stranger to dealing with struggling companies. In 2001, he bought Daedong Shipbuilding Co., then just out of court protection and renamed to STX Offshore.

Creditor banks are expected to make a decision on STX Offshore’s request this week, according to state-run Korea Development Bank, the biggest lender to the group. STX will work closely with the creditor banks as well as sell additional assets to improve finances at the shipbuilding unit, the group said in an e-mailed response to questions.

Of the 2.5 trillion won it’s trying to raise through asset sales, the group has received 1.13 trillion won from selling its stakes in STX Energy Co. and STX OSV Holdings Ltd. (SOH) It also merged STX Metal Co. with STX Heavy Industries Co., the world’s third-biggest maker of marine engines, to improve finances.

Lender Boost

The group has about 11.3 trillion won in debt. Shipbuilders typically receive money from customers in several installments while a vessel is being built.

While STX seeks to reschedule STX Offshore’s debt, efforts to sell STX Pan Ocean may gain pace, according to Park Eun Kyung at Samsung Securities Co. in Seoul. That’s because earnings may improve in the second half as freight rates are expected to increase, she said.

Korea Development Bank has said that it may consider buying STX Pan Ocean shares if the sale attempt falters. The state- owned lender is the second-biggest shareholder of the commodities shipping company after STX Corp.

STX Group is also trying to sell a stake in the Dalian shipyard to Chinese investors, scrapping an earlier plan to sell shares in a Hong Kong or Singapore listing.

“This should help the group tide over the immediate, short-term problem,” said Um Kyung A, an analyst at Shinyoung Securities Co. in Seoul. “But it really needs the shipping industry to recover before it can pull itself out of its current situation.”

To contact the reporter on this story: Kyunghee Park in Singapore at

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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