Executive chairman, Ren Yuanlin, wants to give shareholders stable earnings growth. Photo by Sim Kih.

CHINA’S LARGEST non-state-owned shipbuilder, Yangzijiang Shipbuilding, posted sterling results yesterday.  2Q09 net earnings surged 80% year-on-year to reach Rmb 607.4 million.

Group turnover rose 41% to Rmb 2.5 billion and 11 vessels were delivered according to schedule.

So far, Yangzijiang is the only yard that has managed to steer clear of order cancellations.

This is remarkable, considering that over half the vessels that it delivers are containerships, the very vessel category worst hit in the shipping slowdown.

This pristine record was made possible by the extensive help the yard had provided to its customers, explained its executive chairman, Mr Ren Yuanlin, during Yangzijiang's 1H09 results briefing.  The briefing was held at Fullerton Hotel yesterday morning and attended by about 30 investors.

Such help included extending the delivery dates of 18 vessels by 5 to 24 months, as well as a 5% rebate for 8 ‘high-margin vessels’, defined as vessels contracted at gross margins in excess of 30%.

The 5% provision on the contract sum of the 8 vessels amounted to total rebates of US$38 million.  (3 were delivered in 2Q09.)

This, on top of the 40% down payment on strike-steel, persuaded customers to hold on to their orders.

The deliberate move to retain orders took into account that replacement orders will be contracted at prices far inferior to what the yard secured during the boom days.

Vessel rebates will only be granted upon vessel delivery, clarified CFO Liu Hua. Photo by Sim Kih

Yangzijiang’s 2Q09 gross profit margins were 24.4%, but Mr Ren, who has seen quite a few shipbuilding cycles through his 30-odd years in the trade, says that gross margins in normal times should not exceed 15%.

In fact, gross margins above 20% indicate an overheated economy, he noted.

Yangzijiang's 2Q09 gross margins had improved 4.1 percentage points compared to 1Q09.

Three factors were cited for the margin improvement:  Firstly, higher margin vessels were delivered in 2Q09.  Secondly, the Rmb appreciated while steel prices remained stable.  Finally, productivity improved as a result of stabilizing operations at its new yard in Jinjiang city.

Effective tax rate increased from 5.3% in 1Q09 to 11.1% for 1H09.  This is mainly due to the full provision for a 5% withholding tax over the earnings of both the yards relating to remittance of dividends to foreign shareholders.

Net cash generated from operating activities more than doubled yoy, to Rmb 610 million.

The company is in a net cash position with reserves of Rmb 5.8 billion and the management expressed intention to maintain dividend payout at 30%.

Order books stood at US$ 6.1 billion, comprising of 139 vessels as at 30 June 2009 and the company is on track to deliver a total of 40 vessels for 2009 on schedule.

Building on speculative vessel demand

The new shipyard currently operates at 50% capacity, while the old yard is at full capacity.

To utilize the idle capacity, Yangzijiang has begun the construction of two 92,500 dwt multi-purpose cargo vessels.  This practice is common among privately owned yards, said Mr Ren.

Yangzijiang's sprawling shipyard in eastern China's Jiangsu province. Photo by Andrew van Buren

There were numerous enquiries for this vessel type but orders for the 2 bulk carriers have yet to be secured.

As raw material prices are currently low and economies of scale can be achieved from mass production of a standard vessel type, Mr Ren believes that the vessels will turn out to be profitable.

After the sale of the first two speculative vessels, he intends to build another two more.

Ship demolition JV

During the meeting, Mr Ren affirmed a Lloyd’s List report of Yangzijiang's intentions to form a ship demolition joint venture with a steel mill.

Mr Ren expects details on the JV to be ironed out over the next 6 months with the relevant authorities, such as the Jinjiang government and environmental bodies.

China leads the world in ship demolition as well as steel production, and Yangzijiang intends to take a minority stake in the JV.

Read our China correspondent's recent visit to Yangzijiang's shipyard in China: YANGZIJIANG SHIPBUILDING: A penny saved…

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