We may offer shipowners 3-6 months of free berth space, says Ren Yuanlin on riding the tough times with customers. Photo by Sim Kih.
LEADING CHINESE shipyard Yangzijiang has posted stellar FY08 results – a near doubling in both top and bottom line - revenues jumped 91% yoy to reach Rmb 7.4 billion while earnings to shareholders grew 82% to reach Rmb 1.6 billion.
The good news: Inspite of its huge order book – some 155 vessels worth US$6.9 billion currently - the shipyard has yet to see any order cancellation, thanks in part to government assistance.
In the bulk carrier sector where supply glut is most severe, Cosco Singapore has announced 4 cancellations of orders to build new bulk carriers while JES International has announced 6.
Cosco had announced this week its FY08 earnings had fallen 10% yoy.
Building of new dry bulk carriers and multi-purpose carriers contributed 18.7% of Yangzijiang FY08 revenues. New container ships contributed 81.3%.
”Our customers are entitled to preferential ship finance terms from Chinese banks,” said its executive chairman, Mr Ren Yuanlin, who updated investors on government action for the industry during an analyst briefing this week.
Not every yard is eligible. Yangzijiang is one of only 3 non-state-owned shipbuilders in the prosperous coastal Jiangsu region that has passed the stringent requirements under the “key marine enterprise scheme”.
After all, Yangzijiang’s yard has about a million square meters of production space and over two kilometers of deepwater coastline - the largest capacity among publicly listed shipbuilders that the state has no equity interest in.
China’s government had announced earlier this month measures to protect eligible state-owned and private shipyards. (Read: CHINA SHIPBUILDING: Fiscal shot in the arm )
One other reason orders are intact is the shipyard’s policy to secure 40% of contract value in down payment before work commencement (20% cash deposit when contracted plus 20% bankers guarantee on strike steel ceremony).
Jobs formerly sub-contracted will be done in-house, says CFO Liu Hua. Photo by Sim Kih
27 vessels were delivered in FY08, all on schedule, compared with 16 vessels in FY07. Another 40 vessels are on schedule for delivery this year.
”As our vessels are built on mature technology, production efficiency will increase as workers become more and more skillful,” said Mr Ren.
Gross profit margin was lower at 18.5% (FY07: 23%) mainly due to the company’s decision to increase its provision policy for potential cost variation.
As a result of a worsening economic climate, provisions, previously 0.5% of the contract price on vessels for which construction had commenced, were increased to 8% with effect from FY08.
The weaker gross profit margin was also partly caused by increased material cost and a weakening of the USD against RMB.
Mr Ren believes FY09 margins are likely to improve as the yard is currently building vessels for contracts signed in 2007, when the yard began to embed buffers for fluctuations for currency appreciation, raw material and labor costs into the contract value.
Net margins were 21.5%, boosted by “other income and gains” which had more than doubled to some half a billion yuan (Rmb 506.7 million).
These “other income and gains” comprise mainly interest income, foreign exchange related gains and gains derived from disposal of financial assets.
A final tax-exempt dividend of 1.8 Singapore cents was proposed. In addition to the interim tax-exempt dividend of 1 Singapore cent, dividend yield works out to 6.7% based on a recent close price of 41.5 cents.
Operating cash flow improved 20.8% to Rmb 2.6 billion in FY08. The shipyard is now in a net cash position with cash reserves of a whopping Rmb 3.1 billion as at 31 Dec 2008.
Below is a summary of issues addressed by Yangzijiang’s executive chairman, Mr Ren Yuanlin, and its chief financial officer, Ms Liu Hua, at the briefing.
Yangzijiang's management discussed govt policies and internal measures for sector downturn at its FY08 analyst briefing. Photo by Sim Kih
Q: Orders appear to be delayed rather than cancelled. How long is this delay?
A: Two situations give rise to a prolonged delivery schedule. The first is when a vessel’s original production schedule is overly tight due to it having been contracted when yards were at full capacity. Such orders may be prolonged by up to 12 months.
The second is when a shipowner requests for assistance due to finance difficulties. Such orders will be extended by 6 months (from a 3.5-year schedule).
Q: What is the situation for cancellations in the industry?
A: Its frequency is rather high. These occur when deposit was low or when a yard cannot deliver.
Q: Now that all the Chinese yards are targeting domestic demand, won’t there be a supply glut?
A: Yes, competition is fierce. A job that formerly attracts 3 tenders now attracts 6. Barriers to securing contracts are high as shipowners now have stringent requirements on yard capability.
Existing orders will keep us busy over next 3 years, so we will not develop business at the expense of profitability.
Q: What vessel types are in demand in China?
A: There is some demand from independent power producers which have secured government funding to own bulk carriers. There is also demand for emergency supply vessels.
Q: Won’t the utility company just buy from the second hand vessel market now that prices have collapsed?
A: The second hand vessel market is one option. They can also take over partially completed vessels abandoned by owners who have difficulty completing the outstanding payments.
Q: Please explain your interest income gain in the light of your fall in net cash flow.
A: Interest income increased in FY08 due to our investments in principal protected bank products.
Q: What will your forex policy be for FY09?
A: We have no long term forex policy as we believe the yuan will track the USD. The reason is because a strong yuan will adversely affect China’s employment levels, which the government cannot allow. On the other hand, a weak yuan is unlikely.
Q: Are you open to strategic investors from Korea or Japan?
A: We are open to M&A only if it improves our core capability such as in technology or management. For example, we will not acquire a well-equipped yard with no orders.
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