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Saturday, July 13, 2013

Rough seas battering Chinese shipbuilders

Published on Jul 13, 2013
Already hit by downturn, industry now faces credit squeeze

By Goh Eng Yeow Senior Correspondent

TO GET a sense of the severe credit crunch facing China firms, look no farther than the battered shares of Chinese shipbuilders.

Since hitting their respective highs on Jan 14, 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 yesterday, as they contend 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, the two Chinese shipbuilders' fortunes may not change for the better any time soon.

One long, dark shadow is being cast by 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 forced workers to take "holidays" and even had to borrow money from its founder to stave off a cash crunch.

Over a week ago, Rongsheng 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, and a reluctance by Chinese lenders to extend credit to it.

Its woeful tale provides a cautionary lesson for investors on the problems plaguing China shipbuilders.

OCBC Investment Research, for one, flagged the credit risks confronting Cosco in a recent report.
It said: "Should credit conditions deteriorate, we 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."

OCBC also estimated that about half of Cosco's existing $3.4 billion debt would need to be refinanced within the next 12 months.

"Cosco'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," it added.

But Barclays analyst Jon Windham believes that the stress on the Chinese shipbuilding industry from the slowdown in vessel orders may not affect all shipbuilders in the same way.

He said in a note: "Orders are increasingly being concentrated at those yards that shipowners view as stable."

But 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.

"This can cause a quick deterioration in financial liquidity at the yard and is not dissimilar to a run on a bank," he added.

For investors looking for exposure in Chinese shipbuilders, his pick would be Yangzijiang.

"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," Mr Windham said.

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