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Light at the end of the tunnel for Chinese shipyards?

Light at the end of the tunnel for Chinese shipyards?
Continuing losses at major Chinese yards have been so persistent that it is not really news anymore. However, what must be slightly more worrying are repeated going concern qualifications raised by auditors.

Looking through our archives, Seatrade Global ran a story on China Ocean Shipbuilding Industry Group’s (Cosig) 2013 results exactly a year ago which almost reads like a carbon copy of this year’s results report, except that the loss figures have gotten bigger and the going concern issue is more pressing.

There has been some improvement. While losses in 2014 have almost doubled to HKD633.2m ($81.7m) from HKD337.4m previously and revenue plunged 79% to HKD104.9m from HKD491.1m in the previous corresponding period, at least net liabilities have fallen slightly.

Net liabilities have fallen from HKD1.04bn to HKD778.3m as at end-2014 and current liabilities in excess of current assets has reduced from HKD1.51bn to HKD1.25bn in the same period.

However, the big outstanding debt HKD167.9m debt from a long-term customer appear to still be outstanding and continue to hang over Cosig’s books. Gross trade receivables came up to HKD168.3m net of accumulated impairment loss of HKD92.3m.

In the 2014 financial statement, the directors acknowledged once again this delinquent trade receivable due to deferred final payments on vessel contracts. While the auditors said they were unable to obtain sufficient appropriate audit evidence necessary to assess whether such receivables can be recovered in full or to determine the amount of impairment, the directors believed that they would be able to recover the net outstanding balances, and needed to make no further impairments.

Turning attention to another beleaguered Chinese shipbuilder, China Rongsheng Heavy Industries also faced a second year of going concern issues. While it has managed to reduce 2014 losses to RMB7.8bn ($1.3bn) from RMB8.7bn previously, it has come at a tremendous cost with revenue negative to the tune of RMB3.9bn in contrast to revenue of RMB1.34bn in 2013, due to the decrease of revenue from shipbuilding and other contracts and the reversal of revenue from cancellation of shipbuilding contracts as the group moved to restructure its shipbuilding business.

Rongsheng’s liabilities situation would appear to be even worse. As at 31 December 2014 current liabilities exceeded current assets by RMB20.7bn. Total borrowings and finance lease liabilities of the group were RMB22.6bn, of which RMB20.8bn is due within 12 months. Of this, RMB528.0m is overdue and has not been renewed or repaid subsequent to year-end.

Rongsheng management reassured however that “a series of plans and measures to mitigate liquidity pressure have been taken to improve the financial and liquidity positions of the group (and) the group has also been actively negotiating with the banks regarding the current and non-current borrowings”.

It should be noted that management has made similar statements at the past full-year results as well. To be fair this has proven reliable and the banks have been stayed thus far. The next critical stage in Rongsheng’s rehabilitation must be the divestment of the shipbuilding business and the restoration of credit.

This is proving to be quite an endeavour however. Rongsheng has announced it is in talks with a bigger player, believed to be a Chinese state-owned shipyard group, and has until the end of June to seal a deal but the state of its finances and operations may prove an impediment.

According to local reports, as far back as last May, provincial officials tried to help by sponsoring a meeting between Rongsheng and state-owned China State Shipbuilding Corp (CSSC) aimed at securing a possible bailout for Rongsheng.

Talks ended without an agreement, with CSSC sources quoted as saying the complexity of Rongsheng's asset structure and heavy debt worked against CSSC against pursuing a tie-up. Factors included an estimated RMB5bn in costs to restart full production in addition to the massive debt load.

Looking to the future, Rongsheng has its sights firmly set on getting out of the shipbuilding business and focusing on its new energy business. “We sorted and optimised our order book by reducing the number of vessels under construction and cancelling some shipbuilding orders. In the period, we negotiated proactively with ship owners and reached agreement with them on certain orders on hand, resulting in the cancellation, revision and variation of a number of shipbuilding contracts,” the company said.

It added: “We believe that this action will reduce our burden on working capital and effectively reduce the credit risk of our order book.” Provided the divestment plan manages to be well-executed, Rongsheng should emerge from the dark days into a relatively brighter future.

Cosig is also looking to diversify into the energy business but is maintaining its stronghold in shipbuilding and relying on consolidation and other government aid measures to weather the storm.

“We expect that the newbuilding prices stay low in the coming year as over capacity remains a problem in the industry,” it acknowledged, but also noted that the PRC government has introduced more beneficial national policies.

“The group believes that implementation of these policies will lead to a healthier operating environment and will benefit the industry as a whole over the long term despite today’s instability in the market. With the government’s supporting policies in place, the Group remains cautiously optimistic in the long term development of the industry,” Cosig concluded.

Cosig has also been taking steps to explore the possibility of developing operations in the more profitable LNG-related business in the PRC. This includes a preliminary plan for an LNG project is to develop the industry chain along the Yangtze River basin, for liquefied natural gas (LNG) used in vessels, in particular the development of storage and transport, and movable refuelling system of new energy with a focus on LNG, thereby transforming the middle reaches of Yangtze River as a production hub for LNG storage, ships and related facilities, in addition, providing logistics services industry to establish a logistics centre for energy by integrating the industry chain for LNG used in vessels along the Yangtze River basin and the construction of new-energy vessels.

Cosig noted that these strategic LNG-related business plans are with the cooperation of JiuJiang government.

Troubled China shipbuilders are working hard to rehabilitate themselves. While some have restructured, in the case of Guangzhou Shipyard International and its parent CSSC, others such as Cosig and Rongsheng are making extraordinary efforts to diversify to remain viable.