China's Yangzijiang navigates rough seas, but raises warning signal

SINGAPORE Wed Aug 7, 2013 6:35am EDT

SINGAPORE Aug 7 (Reuters) - Yangzijiang Shipbuilding (Holdings) Ltd, China's second-largest listed shipbuilder, is standing tall in an industry battered by a supply glut and lack of new orders, thriving on high-margin orders and a profitable side investment business.

The Singapore-listed company concedes, however, that stormy seas could strike next year.

Yangzijiang, based in Jiangsu Province next to China's financial centre Shanghai, could see its profit margins decline as orders secured before the onset of the shipping market crisis run out, leaving the company to compete for ship orders at cheaper prices and lower margins.

"2014 will be difficult, but we will be able to get out of the difficult situation in 2015, as many of our orders will be delivered and our property development will bring profit that year," Ren Yuanlin, Yangzijiang's chairman, told reporters at a press briefing in Singapore.

China's most profitable shipyard reported its net profit in the second quarter of the year fell 8 percent on the year to 881.7 million yuan ($144.03 million), and its gross profit margin edged down to 27 percent from over 30 percent a year earlier.

The results, though weaker from a year earlier, outstripped those of other shipbuilders in China, including the China Rongsheng Heavy Industries Group Holdings Ltd which has been suffering from a liquidity crunch.

Yangzijiang's investment segment saw a hefty 20 percent gain in gross profit year on year, contributing nearly 30 percent of the company's total gross profit, while the contribution from its shipbuilding segment declined to 69 percent from 72 percent.

Banks are willing to lend money at cheap rates to Yangzijiang, which loans out its own cash to other companies in real estate, manufacturing, retail, trading and other sectors, but shipbuiding will remain the core of the company, Ren said.

Yangzijiang is known for shunning businesses with low or no margin that a number of its peers have eagerly pursued, such as those involved in manufacturing equipment used in the offshore energy industry.

Yet, the company still sees offshore as a driver of future growth, along with ship demolition and steel fabrication.

Yangzijiang will start construction of its first jackup drilling rig in late August, on a contract requiring the customer to pay 10 percent of the $170 million up front.

In a bid to win contracts, some Chinese yards have agreed on initial payment as low as 2 percent, a rate Ren considers ludicrously low and risky.

Excluding the jackup order, Yangzijiang's order book stood at $3.24 billion, down from $3.4 billion at the end of 2012, and included 29 container ships and 42 bulk carriers, after winning orders worth $1.01 billion in the first half of the year.

A number of yards, including China CSSC Holdings Ltd , the biggest listed Chinese yard by market capitalisation, and COSCO Corporation (Singapore) Ltd, have been trying to break into the offshore equipment market, which has been dominated by yards in Singapore and South Korea.

Chinese yards are poised to win more orders for jackup drilling rigs than Singaporean yards, the traditional market leader, for the second year straight, but most established drilling companies are wary of ordering with them, worried about cost overrun, execution risk and delayed delivery.

A recent Chinese government plan to restructure its massive shipbuilding industry will help quality yards like Yangzijiang to secure more orders and financial support, but 50 percent of the existing yards, most of which are likely privately-owned, will disappear, Ren said.

Yangzijiang's share price rose 1.6 percent on Wednesday to S$0.94, down 2.1 percent so far this year. ($1 = 6.1217 Chinese yuan) (Reporting by Rujun Shen; Editing by Jeremy Laurence)

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