The 400,000 dwt VLOC Rio de Janeiro, built by China Rongsheng image: VALE SA
By Clement Tan and Umesh Desai
HONG KONG, July 5 (Reuters) – 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.
China Rongsheng said it was expecting a net loss for the six months that ended June 30 from a year earlier, according to the filing. It gave no figures.
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.
Rongsheng shares plunged 16 percent to a record low in heavy turnover on Friday, leaving its market capitalisation at just under $1 billion. The Hang Seng Index climbed 1.9 percent. China Rongsheng is down 28.2 percent on the year.
“Obviously it’s bad with the fact that you have a profit warning and there is a request to ease financial pressure through the government,” said Nathan Snyder, a transport analyst at CLSA.
In its filing, China Rongsheng said some workers had been made redundant, although it gave no numbers or timeframe for the losses. The company did not immediately respond to requests for more information.
The Wall Street Journal said this week there had been 8,000 job cuts in recent months, representing about 40 percent of China Rongsheng’s workforce.
TOO RELIANT ON BULK CARRIERS
Analysts said the company was suffering partly because of its reliance on building bulk carriers that ship iron ore from producer nations such as Brazil to China. The bulk market accounted for about 58 percent of its orderbook.
That segment was under pressure due to a slowdown in global steel production, relatively high iron ore port inventory levels and a wave of new ships hitting the market in 2011-12, Citigroup said.
China Rongsheng has said it won only two shipbuilding orders worth $55.6 million last year when its target was $1.8 billion worth of contracts. This year, it received orders to build two drilling rigs used in oil exploration, worth $360 million.
By contrast, another Chinese shipbuilder, Singapore-listed Yangzijiang Shipbuilding (Holdings) Ltd, has secured total orders of $1 billion in the first half, Barclays said.
“Shipyards are a lot like banks, confidence matters … Any yard anybody is worried about is going to find it very difficult to get new orders,” said Jon Windham, Barclays head of Asia industrials equity research.
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.
It was coping with tightened cash flow by delaying payments to suppliers and workers, the filing added. The company denied claims suppliers had towed away machinery from its Nantong production base in eastern Jiangsu province, near Shanghai.
The company said it was in talks with banks and other financial institutions to renew existing credit lines.
According to its December 2012 annual report, issued on March 26, China Rongsheng’s cash and cash equivalents fell to 2.1 billion yuan from 6.3 billion yuan a year ago.
It had borrowings of 16.26 billion yuan that were due in less than a year, said the report, the latest financial statistics available on the company’s website. Total borrowings were 25.1 billion yuan as of the end of 2012.
“The group is … actively seeking financial support from the government and the substantial shareholders of the company, and increasing its efforts in negotiations with its customers to maximise the collection of receivables,” China Rongsheng said in the filing.
One shareholder, founder and former chairman Zhang Zhirong, gave an interest-free 200 million yuan loan on Wednesday, the company said.
NOT ALL SHIPYARDS IN SAME BOAT
A note from Macquarie Equities research said the statement highlighted the “severity” of China Rongsheng’s liquidity problems, adding this was not necessarily representative of the wider sector.
It said other listed Chinese shipyards were not as leveraged as China Rongsheng. The loan from Zhang was a surprise, it said, showing how badly the company needed cash.
Barclays’ Windham added: “The inference that a lot of investors, including myself, will take from that is that they couldn’t get the bank borrowing to do it.”
Receivables pending for more than six months rose to 83 percent from 21 percent a year ago, the annual report said. The industry slowdown was also taking its toll on sales, with inventory turnover at 136 days, up from 73 days.
“Rongsheng will need to address the problems immediately to reassure the market,” said Martin Rowe, managing director of Clarkson Asia Limited, a global shipping services provider.
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) (Additional reporting by Yimou Lee and Twinnie Siu in Hong Kong and Keith Wallis in Singapore; Editing by Dean Yates)
(c) 2013 Thomson Reuters, Click For Restrictions
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