Distress signals

Will another Rongsheng rescue fall through?

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Few reasons to smile now: Zhang

“You may feel like a majestic rooster, but you can still end up being turned into a feather duster.” Such was the withering verdict of the Investment Times on the troubles facing China’s private sector shipbuilding industry and its once proud leader, Rongsheng Heavy Industries.

Shares in the Hong Kong-listed company resumed trading this Tuesday after a short suspension pending details of a proposed bailout. An undisclosed buyer has entered negotiations to acquire the group’s core shipbuilding and offshore engineering business in a deal that could be wrapped up by June.

The Chinese media had previously speculated that Singapore-listed Yangzijiang Shipping was acting as the white knight. But earlier this week the group said it was not involved.

For Rongsheng it could be a case of third time lucky after two previous attempts to keep it afloat ran aground. The company needs to pay off a creditor group led by Bank of China and plans to reinvent itself as a service provider for the offshore oil and gas industry. Investors, however, remain unimpressed.

The share price fell 4% on Tuesday to HK$0.72 – a huge drop from the HK$8.11 ($1.04) it reached at the beginning of 2011 when the company was talking about overtaking Hyundai Heavy Industries as the world’s biggest shipbuilder.

WiC has written previously about the rise and fall of Rongsheng’s colourful founder and former chairman, Zhang Zhirong (see issues 162, 219 and 233). Having made his fortune in property, Zhang turned to shipbuilding a decade ago using his government connections in Jiangsu to build the country’s largest private sector shipbuilder. His crowning moment came in 2010 with a $1.8 billion listing on the Hong Kong Stock Exchange, one of the largest of the year.

But Rongsheng has been hard hit by the global downturn in shipping rates. The Baltic Dry Index has plummeted from an all-time high of 11,793 in 2008 to its current 30-year low of 564. Investment Times estimates that the index needs to reach 2,000 before Chinese shipbuilding becomes profitable again, although some of the state-owned builders are surviving on Beijing’s military contracts.

Zhang tried to ride the downturn out by providing up-front financing for customers that could no longer afford to place orders. According to Century Weekly, Rongsheng’s debt rose from Rmb3.6 billion ($580 million) in 2009 to Rmb25.4 billion by 2011 incurred via loans from Bank of China and the policy banks Chexim and CDB.

After reporting a Rmb1.7 billion net profit in 2011, the company turned in a loss of Rmb573 million in 2012 despite being propped up by Rmb1.27 billion in government subsidies. In 2013, the loss widened to Rmb1.7 billion.

Rongsheng was also developing a reputation for late and cancelled deliveries, not all of which seemed to be recorded in the company’s accounts in a timely manner.

Early in 2014, the Jiangsu government tried to ride to the rescue by brokering a deal with China State Shipbuilding Corporation (CSSC). But the move failed. Investment Times says that CSSC was still angry with Zhang for poaching one of its top executives. But Century Weekly thinks the real reason for the refusal was economic. A source told the magazine: “It would cost at least Rmb5 billion to restructure the operations, plus they have a huge amount of debt. Buying Rongsheng is not a good deal.”

Rongsheng then forged a new agreement with private equity investor Wang Ping for a HK$510 million warrant issue that could rise to HK$3.2 billion. But that was scuppered this month – just days before shareholders were due to vote on it – when news broke that Wang had been detained by the authorities (on allegations unrelated to the deal).

Zhang himself continues to make optimistic noises about Rongsheng’s future. Only a few days ago he was still telling Century Weekly about his plans, though also mused about lessons learned. “In future we will be selective in cooperating with banks,” he promised. “Industries with long cycles encounter many unpredictable factors and bank support is essential.”

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