This morning, Bloomberg reported that one of China’s biggest shipyard-companies outside the state’s control, China Rongsheng Heavy Industriies Group Holdings, is “seeking support from the government and its largest shareholder amid a plunge in orders and prices.”
According to the Bloomberg report, it seems that a glut in vessel capacity and declining orders were primary reasons for China Rongsheng’s difficulties and troublingly, it was not the only company that’s being adversely affected.
The China Association of National Shipbuilding Industry sees the possibility of more than one-third of China’s shipyards being shut-down in five years as a result of the inability to secure orders amid a global vessel glut.
With the situation for the shipbuilding industry in China looking bleak, investors in Singapore-listed Chinese shipbuilders like Yangzijiang (SGX: BS6) and Cosco Corporation (SGX: F83) would understandably be worried.
Yangzijiang’s first quarter results, released on April 2013, saw the company post a 31% year-on-year decline in quarterly profit to RMB709m, reflecting difficult industry conditions. Meanwhile, Cosco posted an even larger decline of 65% in first quarter profit to S$9.7m.
These poor results have very likely led to Yangzijiang and Cosco registering declines of 23% and 29% respectively over the past 12 months even as the broader market, represented by the Straits Times Index (SGX: ^STI) climbed by 6%.
With dark clouds on the horizon, investors have to pay attention to companies’ balance sheets to ensure they can weather the storm. A chief reason for a possible shutdown in one-third of China’s shipyards is due to weak balance sheets and China Rongsheng’s a ‘good’ example.
Mounting losses for China Rongsheng have resulted in massive capital shortfalls for the company and tight debt markets in China have exacerbated its difficulties in raising capital.
That’s a situation that investors wouldn’t want their companies to be in and on that front, Yangzijiang’s investors can rest a little easier. The company carries RMB19.7b in cash & other financial assets while sporting only RMB8.93b in debt. Net working capital for the company’s also healthy at RMB10.2b, suggesting the company has some buffer against potential capital shortfalls.
Cosco’s situation is a tad dicier, with S$3.4b in debt and only S$1.70b in cash but with a positive net working capital amounting to S$1.46b, there’s plenty of wriggle-room in the event of any further deterioration in the company’s business.
Foolish Bottom Line
While it’s all doom-and-gloom for Yangzijiang and Csoco’s industry peers over in China, there have been some bright sparks lately. Bloomberg’s report mentioned that “the order book at China’s shipbuilders fell 23 percent at the end of May from a year earlier” but both Singapore-listed companies saw new orders coming in recently.
Yanzijiang announced a new contract worth US$414m yesterday for building 15 vessels while Cosco received a US$170m contract that was announced on 21 June 2013. That might suggest these two companies have some competitive advantages over other industry peers, but it remains to be seen if they can pull free from the sinking ship of the shipbuilding industry over in China.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.