YANGZIJIANG SHIPBUILDING: Strategy to ride through prolonged downturn

US$4.7 billion order book -- that's what Yangzijiang Shipbuilding's main operating subsidiary, New Yangzi Yard, has. It is ranked no.2 in China and no. 6 worldwide as at 31 March 2016.
Photo: Company

Yangzijiang Shipbuilding is one of the few shipyards able to secure contracts in a prolonged industry downturn.

New global shipbuilding orders are down 60% year-on-year in 1Q2016 at 9.66 million DWT.

New orders for dry bulkers and oil tankers were minimal, and there were no new orders for containerships. The only exception was the 30 Valemax ore carriers worth a total of US$2.5 billion placed by PRC shipping companies at PRC shipyards.

In April, the Group secured six of these Valemax contracts, worth a total of US$510 million. Other shipyards that secured these Valemax contracts included China Shipbuilding Industry Corporation, Shanghai Waigaoqiao Shipbuilding, Beihai Shipbuilding and CIC Jiangsu.

"I faced an uproar from my management team when I refused to accept jack-up rig orders after we secured the first one. If I had accepted them, you will feel like giving me a good thrashing today."

- Executive Chairman Ren Yuanlin at Yangzijiang Shipbuilding's AGM on 28 April 2016
Photo by Sim Kih

Q: Please provide details to the vessel terminations.

The customers who terminated their vessel orders were mainly US funds. If no such buyers emerge for the 3 orphan vessels that construction has commenced on, our contingency plan is to transfer them to our ship chartering business segment. If we adopt these 3 vessels, they will be booked at construction cost less the down payment monies received from the initial customer.

Such a book value is lower than the vessels’ current market price. We believe we can operate these 3 vessels profitably. Having said that, we prefer to dispose of these 3 vessels if there are 3rd party buyers.

"We had a mark-to-market gain of Rmb 103 million from currency derivatives used to hedge our order book as the Rmb appreciated against the USD in 1QFY2016."  - CFO Liu Hua Photo by Sim Kih

Q: Please give an update of the jack-up rig on your books.

10% of the contract value of the jack-up rig has been paid up. The customer is still working out its charter contract. If he is able to pay another 20% of its contract value, we are willing to hold the rig until June. Otherwise, we will proceed to dispose of the oil rig on the open market.

Q: What price can you fetch for the jack-up rig?

An independent valuer has estimated the jack-up rig to be worth Rmb 110 million to Rmb 140 million based on current market prices. Its price depends on oil prices. Our impairment of Rmb 110 million for this asset is a conservative amount.


Q: What are the demand trends for the different types of vessels and where are the growth areas?

If the Baltic Dry Index can stay above 1,000, some shipyards will be able to survive. The dry bulk carrier market is dependent on China’s economic recovery and other emerging economies. There is an industry consolidation going on for containerships, and shipping companies are forming alliances. There is demand for the small and large containerships (as in 10,000-TEU and above). There is little demand for medium-sized containerships.

The oil tanker market remains unchanged from last year. There is some demand for oil tankers from oil exporting countries like Iran.

Q: Will the recent rebound in raw material prices affect the Group's profitability?

Raw material prices does not impact profitability if the vessel contract had previously been contracted at a higher shipbuilding price. However the volatility in raw material prices significant impacts us now because keen competition in the shipbuilding market has depressed new vessel pricing.

Last year, our average cost of raw materials was about Rmb 4,000 per ton, inclusive of tax. At this year’s low (before the lunar new year), it was Rmb 2,000 per ton. The current cost is about Rmb 3,300 per ton.

Whether or not the profitability of a new contract is affected by this volatile cost of raw materials depends on how successful we are in price negotiations when securing new shipbuilding contracts. On the other hand, firm steel prices are a sign of global economic recovery.

Q: What is your strategy for dealing with this weak market?

We have several strategies as follows.

• We are strengthening our product offering through R&D effort. We are developing new products such as the 14,000-TEU containership, 84,000 cubic meter LNG vessels, as well as smaller containerships (1100-TEU and 1400-TEU).
  
  
• We have strengthened our sales team. We hired a veteran in marketing for the shipbuilding industry, Zhang Tao, to head our sales team. He is the former administrative deputy general manager of state-owned China Shipbuilding Industry Corp. We now have two sales teams instead of one to enforce a culture for competition within the Group. We have also enhanced our human resource and incentive structure.
  
  
• We have become more flexible in our pricing and payment terms. We are now accepting some orders are very low margins, subject to the customer’s risk profile. We are also willing to accept longer payment terms if the customer has strong financial standing. This is to maintain shipyard utilization levels and retain staff.
  
  
• We have decreased our operating cost structure. Our senior management staff have taken an average pay cut of 20%. We have downsized our manpower by 5%. We have a target to lower procurement costs by 5% this year. Suppliers who do not discount their prices are replaced.