China Rongsheng, the nation’s biggest shipyard outside state control, is seeking support from the government and its largest shareholder amid a plunge in orders and prices

China Rongsheng’s Call for Government Support Drives Down Shares

China Rongsheng Heavy Industries Group Holdings Ltd. (1101), the nation’s biggest shipyard outside state control, is seeking support from the government and its largest shareholder amid a plunge in orders and prices. The shares fell.

The shipbuilder had a net loss in the first half, it said in a filing on preliminary earnings to Hong Kong’s stock exchange today. Rongsheng, which reported its first annual loss since 2008 last year, dropped 9.4 percent to 96 Hong Kong cents as of 9:31 in Hong Kong trading.Rongsheng is undergoing “workforce restructuring,” and is “gradually downsizing production,” it said in today’s statement without elaborating. China, the world’s biggest shipbuilding nation, may see a third of its yards shut down in about five years amid a global vessel glut, according to the China Association of National Shipbuilding Industry.

“The capital shortfall at China Rongsheng looks pretty serious,” Ronald Wan, a committee member at the Hong Kong Securities and Investment Institute, said by telephone today. “The financial support it is going to get from the government or shareholders would only be enough to stop the situation from getting worse.”

Billionaire shareholder and co-founder Zhang Zhirong agreed to provide an interest-free 200 million yuan ($33 million) loan to the Shanghai-based yard, it said in the statement. Zhang owned a 28 percent stake as of Jan. 24, according to data compiled by Bloomberg.

Trading in Rongsheng resumed today in Hong Kong after a suspension yesterday following a Wall Street Journal report the company pared about 8,000 jobs.

Capacity Glut

Yards may face labor unrest after cutting jobs and diversifying into offshore equipment to offset the order slump, while contending with the nation’s worst credit crunch in at least a decade. Rongsheng fell the most in almost a year in Hong Kong trading on July 3 after saying some idled contract workers surrounded the entrance of its main factory.

“Because of the overall market, there’s no way out for the companies; so only the strongest will survive,” said Sarah Wang, a Shanghai-based analyst at Masterlink Securities Corp. “Life for China’s shipyards will be tougher this year as any form of credit crunch is critical.”

Waning Orders

The order book at China’s shipbuilders fell 23 percent at the end of May from a year earlier, according to data from the shipbuilders’ group. Yards have reduced down-payment requirements, with some slashing their rates to as little as 2.5 percent of contract value compared with 20 percent before 2010, according to UOB-Kay Hian Holdings Ltd.

The nation’s clampdown on excessive short-term borrowing sent the overnight repurchase rate to a record 13.91 percent last month, forcing at least 22 companies including China Development Bank Corp., a backer of the shipping industry, to cancel or delay bond sales. Economic growth in China has held below 8 percent for the past four quarters, the first time that has happened in at least 20 years.

“Currently financial institutions themselves may have tight liquidity, so they are reluctant to lend money to companies in this sector,” China Association’s Wang said. “If they can help some good companies, there would be no problems.”

“Rongsheng’s move reflects the bad market,” said Lawrence Li, an analyst at UOB-Kay Hian in Shanghai. “More small-to-medium sized shipyards, especially those that lack government support, may take the same actions or even close down.”

38,000 Workers

Rongsheng had as many as 38,000 workers including its own employees and contract staff at the peak of the industry boom a few years ago, UOB-Kay Hian’s Li said. Brazil and Greece accounted for more than half of Rongsheng’s 2012 revenue, according to data compiled by Bloomberg.

The company posted a loss of 572.6 million yuan ($93 million) last year, after three consecutive years of profits, according to data compiled by Bloomberg. It had short-term debt of 19.3 billion yuan as of the end of 2012, the data show.

The shipbuilder targets new ship and offshore orders worth more than $2.3 billion this year, Chairman Chen Qiang said in Hong Kong in March. The company pared about 3,000 employees last year as it aims to return to profit this year, he said at the time.

Rongsheng’s cash conversion cycle, a gauge of days required to convert resources into cash, more than doubled to 582 last year from 224 in 2011, the data show. Its shares have fallen 15 percent this year in Hong Kong, compared with a 9.7 percent decline for the benchmark Hang Seng Index.

Falling Prices

Ten of the 14 analysts tracked by Bloomberg recommend selling Rongsheng stock with the rest rating it hold. The company raised HK$14 billion ($1.8 billion) in its initial public offering in 2010.

Ship prices for a vessel that can carry as many as 13,500 boxes fell to $106 million in April, which was then the lowest since Clarkson Plc started compiling the figures in June 2008. Contracts for new vessels halved to $84.7 billion in 2012, compared with $174.7 billion in 2008, according to Clarkson.

About 464 shipyards in China won 18.7 million deadweight tons of orders worth $14.3 billion last year, the lowest since 2004, according to Clarkson. That compares with contracts for 14.6 million tons worth $29.6 billion received by 88 yards in South Korea, the world’s second-biggest shipbuilding nation.

China had 1,647 shipyards with annual sales of more than 5 million yuan at the end of December, according to the China Association. The sector contributed an industrial output of 790.3 billion yuan last year.

Shipbuilders are trying to offset the plunge in new vessel prices and orders by expanding their oil-rig business. Rongsheng announced in October its first order to make a tender barge while rival Yangzijiang Shipbuilding Holdings Ltd. got its first rig contract in December.

To contact the reporter on this story: Stephanie Tong in Hong Kong at stong17@bloomberg.net

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 (www.heroinnovator.com), 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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