Sunday, July 14, 2013

China shipbuilders yet to recover from setback while singapore yards still in good shape

With the last few years of shipbuilding and global economy downturn, 2013 we see the global economy with mild recovery but the shipbuilding industry still set with some China big players facing severe credit crunch and some are well-established with strong fundamental chinese shipbuilders. Cosco's share price has plunged 28 per cent to 74 cents while Yangzijiang was down 25.4 per cent to 85 cents as of this month, while they contended with the shipbuilding downturn in China and now the credit squeeze in the mainland banking system.
Going by the gloomy forecasts from analysts on the sector, these Chinese shipbuilders' fortunes may not change for the better any time soon ( while I hold some shares of Cosco two years ago, seems likely it will not be any sooner to see sign of "ROI" with the small sum being set aside to this counter.. . :(   
One long, dark shadow is being cast by another fellow shipbuilder Hong Kong-listed China Rongsheng - once billed as the biggest shipbuilder in the world in terms of tonnage of orders on hand - which faces the grim prospect of insolvency. It has gotten workers to take "holidays" and even had to borrow money from its founder to stave off a cash crunch.

RS also had to contend with laid-off workers who formed a blockade outside the company's Nantong shipyard over a wage dispute, even as it tried to fend off other problems such as a lack of orders this year. Its woeful tale provides a cautionary lesson for investors on the problems plaguing China shipbuilders. China Rongsheng Heavy Industries Group, China's largest private shipbuilder, appealed for financial help from the Chinese government and big shareholders on Friday after cutting its workforce and delaying payments to suppliers.
Analysts said the company could be the biggest casualty of a local shipbuilding industry suffering from overcapacity and shrinking orders amid a global shipping downturn. New ship orders for Chinese builders fell by about half last year.

Hours after China Rongsheng made its appeal in a filing to the Hong Kong stock exchange, where the company is listed, Beijing vowed to bring about the orderly closure of some factories in industries plagued by overcapacity. The statement by the State Council, or cabinet, laid out broad plans to ensure banks support the kind of economic rebalancing Beijing wants as it looks to focus more on high-end manufacturing. It did not mention any specific industries or companies and there was no suggestion it was referring to Rongsheng.

RS said it was expecting a net loss for the six months that ended June 30 from a year earlier, according to the filing. The company reported a net loss of 572.6 million yuan ($93.47 million) in 2012, its worst-ever, despite getting government subsidies of 1.27 billion yuan in that year, its latest annual report shows. It's shares plunged 16 percent to a record low in heavy turnover on Friday, leaving its market capitalisation at just under $1 billion.

Some Investment Research think that Cosco with its large debt burden will be vulnerable. The group's net gearing climbed to 131 per cent as at the end of the first quarter from just 10 per cent at the end of 2010. Cosco's existing $3.4 billion debt would need to be refinanced within the next 12 months. The yard's  free cash flow is also likely to remain negative for the next few years, due to its low net profit margin and increasingly back-end loaded contracts in its order book..

However, one analyst believes that the stress on the Chinese shipbuilding industry from the slowdown in vessel orders may not affect all shipbuilders in the same way. On the flipside, signs of instability at a yard can become a self-fulfilling prophecy, as shipowners withhold progress payments if there is concern that the yard cannot complete the order. As of the first quarter, Yangzijiang's order book was US$3.3 billion, 75 per cent of which is in container vessels. In our view, Yangzijiang's ability to produce high quality, large container vessels and a strong balance sheet with 11 billion yuan in new cash and financial assets makes it a long-term winner in the shipbuilding industry.

By contrast, another Chinese shipbuilder, Singapore-listed Yangzijiang Shipbuilding (Holdings) Ltd, has secured total orders of $1 billion in the first half, Barclays said.
While the Chinese shipbuilding industry faced "unprecedented challenges", China Rongsheng's board was confident management could ease pressure on working capital in the near future and maintain normal operations, the company said in the filing.
The Chinese government has been trying to support the domestic shipping industry since the 2008 financial crisis, and local media reports said this week Beijing was considering policies to revive the shipbuilding business.
The holding orders of Chinese shipyards dropped 23 percent in the first five months of this year compared with a year earlier, according to the China Association of the National Shipbuilding Industry. New orders dropped to a seven-year low in 2012. ($1=6.1258 yuan)

Following the setting up of YOEPL, together with one of our wholly owned subsidiaries, Jiangsu Yangzijiang 

Shipbuilding Co. Ltd (“Jiangsu Yangzijiang”), another new subsidiary named Jiangsu Yangzijiang Offshore Engineering Co., Ltd (“JYOEC”) was set up in Taicang.  On 3 December 2012, JYOEC secured its maiden offshore contract – a Jackup Drilling Rig worth US$170 million. 

Some of YZJ other recent ventures that extend on shipbuilding capabilities include steel fabrication for building facades of petrochemical plants, energy equipment manufacturing as well as other non-shipbuilding activities. 
Beyond shipbuilding and its related activities, they have developed supplementary income streams from conservatively managed businesses such as low-risk financial investments. They also leveraged on strong balance sheet to assist ship owners in ship finance and lease vessels for income. 
YZJ currently manage more than Rmb 11 billion of financial assets that are over and above its Rmb 2 billion cash reserve, which is held for working capital, expansion and dividend payment needs. 

Having supplementary income streams puts them in the favorable position of being able to be selective on shipbuilding contracts during downturns. That means they need not enter contracts on compromised terms and conditions. They expect the shipbuilding environment to remain difficult in 2013 and intend to deliver 42 vessels in 2013, which is lower than the 51 vessels done in 2012. 

The poor shipbuilding market has proven to be an opportunity for YZJ to become more client-oriented and competitive. They will focus on developing vessels that meet ship-owners’ needs and focus on large vessels, for which there is greater demand.  Even though faced with stiff competition as many other shipyards are likewise trying to enter this sector to mitigate the shipbuilding downturn, they will not easily take orders with unfavorable terms just to secure contracts. 

Rather, they intend to secure offshore orders selectively, and work towards a good track record of timely and successful deliveries. During the downturn, they will seize opportunities to generate additional income streams through joint ventures with established players in low-risk business sectors that are synergistic with their Group’s development. 

OIL rig-building yards in China may offer lower prices and more attractive financing, but Keppel Fels remains unfazed by talk of keener competition and tighter margins. The world’s largest rig-builder has its own competitive edge – on-time delivery and costs that are kept within budget.

Keppel Fels told The Straits Times: “Look at our orders. The Chinese story has been there for at least two years now, but today, we’re still getting our B Class orders. This year alone, when the Chinese have been playing in full swing, we’ve already got eight jack-ups. ”
This year, Keppel Fels is delivering a record 20 rigs, well over the previous peak of 13 seen in 2009.

Our Tuas yard was abuzz with activity during a recent visit by The Straits Times, with workers clocking overtime hours and the building docks fully occupied. This amid reports of widespread job layoffs at Chinese shipyards even as they diversify into rig-building to offset their ship order slump. There has also been the recent credit crunch on the mainland.

The B Class is Keppel’s signature rig and is its most popular design. Since 2010, its B Class rigs have accounted for about 45 per cent of the total number ordered among rigs of its class globally. Developed by its technology arm and launched in 2000, the rig is able to operate in water depths of up to 120m and drill to depths of 9,000m.

We just delivered its 45th B Class rig recently – a fitting milestone given that this year is parent company The rig was delivered to Arabian Drilling Company (ADC) 14 days ahead of schedule,  on budget and with a perfect safety record. Keppel FELS was awarded an early delivery bonus of US$210,000. Named ArabDrill 50 at a ceremony yesterday, the rig will be chartered to Saudi Aramco for operations in offshore Saudi Arabia. The innovative and cost-effective KFELS B Class jackup rig has proven to be the trusted, reliable workhorse of the industry, and has performed excellently in major offshore exploration and development programmes in various locations worldwide. It has been employed by some 20 international drilling operators in over 15 countries. With usage rates calculated on a daily basis, and costing about US$150,000 to US$190,000 a day, having a more efficient rig can result in cost savings of several million dollars per drilling project. This could amount to many more millions of dollars, if one considers that the lifespan of a rig is typically at least 20 years.

No comments: