Man overboard?

Even Rongsheng’s rivals don’t want it to fail


Happier times for Zhang Zhirong

The Yangtze River Delta has a long history as China’s most important shipbuilding area. Adjacent to Jiangsu, it was home to the first commercial contract gained from an overseas customer: two 27,000-tonne freighters were built for Hong Kong shipping magnate YK Pao. The order was taken so seriously that Margaret Thatcher went to China to launch one of the ships in 1982, naming it World Goodwill as a symbol of Sino-British ties (Thatcher attended the ceremony on her way to Beijing to hammer out the issue of Hong Kong’s return to China).

Today Jiangsu remains home to the biggest cluster of Chinese shipyards, with its firms accounting for a third of the country’s shipbuilding contracts. However, many of them are struggling. The Securities Daily says the market has worsened to a point that prices for new ships have fallen to levels last seen in 1991 – the year that YK Pao died.

Symbiotically the yards are suffering because their clients, the shipping firms face dire times. Declines in freight rates mean that even the strongest state firms are finding the downturn barely navigable. Nanjing Tanker, a marine-freight unit under logistics giant Sinotrans, has reported three years of consecutive losses. It is set to be delisted from the mainland stock market (see WiC227). State giant Cosco narrowly escaped the same fate, returning to the black in 2013 with some timely asset sales to its unlisted parent. At operating level Cosco still reported a Rmb1.5 billion ($242 million) loss for the year.

Weak market conditions feed through to the order book for new vessels. One of the companies struggling most is Rongsheng. Once the world’s biggest shipmaker in terms of orders, Rongsheng said last week that its net loss had ballooned to Rmb8.7 billion in 2013 from Rmb572 million a year earlier. (Rongsheng’s market cap is Rmb7 billion.) The hefty loss came after a Rmb5.1 billion provision made against its receivables, which turned sour after “an increase in default in payment by customers experiencing the current market downturn”.

Adding to the grim picture, Rongsheng’s cash position had eroded to Rmb117 million by late 2013 (from Rmb2.1 billion a year earlier), leading to a candid acknowledgement as to whether it had “sufficient financial resources to continue as a going concern”. Management has cut wages and taken on a Rmb3 billion interest-free loan from major shareholder, the tycoon Zhang Zhirong. Further fundraising is expected through convertible bond issuance.

The most crucial lifeline, however, may have to come from state lenders. Rongsheng says it has reached a debt restructuring agreement with more than 10 Chinese banks in Jiangsu. This involves reducing interest rates on its borrowings and extending repayment terms to the end of 2015.

Apparently even Rongsheng’s competitors don’t want to see the biggest private-sector shipyard sink without trace. Ren Yuanlin, chairman of Yangzijiang Shipbuilding, a local rival listed in Singapore, is said to have assisted Rongsheng in negotiating with the banks and finishing some of its contracts on hand.

“If Rongsheng falls, financial institutions will lose confidence in the industry. It affects the reputation of Chinese shipbuilders globally,” Ren told Singapore’s Lianhe Zaobao newspaper. “We don’t want to see Rongsheng fail.”

Rongsheng bondholders will also breathe a sigh of relief on seeing the company get some local support. So too a lot of local firms who are caught up in a complex web of mutual guarantees (instances in which two or more companies take reciprocal responsibility for each other’s debt, see WiC160). A Rongsheng default could prove disastrous for these lending networks too.

But the picture in Jiangsu still looks pretty bleak. In the past month we have reported on a bank run in the province (see WiC232), while Sainty Marine, another shipbuilder backed by the Jiangsu government, found that its entrusted loans to local property developers were turning bad (see WiC229).

Despite Rongsheng getting the worst of the headlines, plenty of other firms are in the same boat, it seems.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.