By Koh Gui Qing and Yimou Lee
HONG KONG/BEIJING, July 8 (Reuters) – An appeal for
government financial support from China’s biggest private
shipbuilder presents authorities with some stark choices between
protecting a big employer and its jobs or letting the firm go
under to ease pressure on a sector suffering from overcapacity
and sharply falling new orders.
Since Beijing appears intent on telling investors it is
serious about changing the investment-led growth model of the
world’s second-biggest economy and controlling a credit splurge,
it may seem like the writing is on the wall for China Rongsheng
Heavy Industries Group.
Yet analysts say the government is more likely than not to
judge that Rongsheng, which employs around 20,000 workers and
has received state patronage, is too big and well connected to
fail.
Supporting Rongsheng will not mean China’s economic reform
plans are derailed, they say. Instead, it will mean reforms will
be gradual and the government will cherry-pick firms it wants to
support, which will exclude the small, private shipbuilders that
have been folding in waves.
“Rongsheng is a flagship in the industry,” said Lawrence Li,
an analyst with UOB Kay Hian in Shanghai. “The government will
definitely provide assistance if companies like this are in
trouble.”
Analysts say Rongsheng is possibly the largest casualty of a
sector that has grown over the past decade into the world’s
biggest shipbuilding industry by construction capacity. Amid a
global shipping downturn, new orders for Chinese builders fell
by half last year. In Rongsheng’s case, it won orders worth
$55.6 million last year, compared with a target of $1.8 billion.
Rongsheng appealed for government aid on Friday, saying it
was cutting its workforce and delaying payments to suppliers to
deal with tightened cash flow.
It also called on its shareholders for financial help and
said it was in talks with banks and other financial institutions
to renew existing credit lines. Its 2012 annual report shows its
short-term borrowings were about eight times bigger than its
cash and cash equivalents.
It flagged losses for the first half of 2013, having posted
an annual net loss in 2012 of 572.6 million yuan ($93.47
million), its worst on record.
Annual reports show that Rongsheng has received state
subsidies since 2010, when it listed in Hong Kong.
In the prospectus for its initial public offer, Rongsheng
said it received 520 million yuan of subsidies from the Rugao
city government in the southern province of Jiangsu, where the
company is based.
The state funds paid for research and development of new
types of vessels, and were based in part on the “essential role
we play in the local economy”, Rongsheng said.
“We cannot assure you that we will be able to receive
similar government subsidies in the future,” it said. “If we do
not receive such subsidies, our profit and profit margin may be
substantially less than if we were to receive such subsidies.”
The company said it got state funds of 830 million yuan in
2010, 1.25 billion yuan in 2011, and 1.3 billion yuan in 2012.
As China’s economy grinds towards its slackest growth in at
least 14 years, more firms like Rongsheng are foundering.
Suntech Power Holdings, a solar panel maker also
based in Jiangsu, is waiting to be bailed out by the government
after it was crushed by falling demand and a supply glut, a
source with knowledge of the matter said in March. The
government wants to find a way to rescue Suntech to avoid an
embarrassing collapse that damages its reputation, the source
said.
SHIPBUILDING DREAMS
China’s shipbuilding woes are partly of its own making. A
global downturn in demand has hammered the sector since 2008,
but a national obsession for global dominance in some industries
led China to declare in the early 2000s that it wanted to be the
world’s top shipbuilding nation by 2015.
A state-induced spike in the number of Chinese shipbuilders
followed as the country led a three-fold rise in new global
shipbuilding capacity in the past decade.
As the world’s largest shipbuilder, it had 1,647 shipyards
in 2012, data from China Association of the National
Shipbuilding Industry showed. Over 60 percent of its
shipbuilders are based in Rongsheng’s province of Jiangsu.
In contrast, China’s main rivals South Korea and Japan have
only 10 and 15 active shipyards, respectively, French shipping
broker BRS says.
The rapid increase in capacity combined with a global
shipping downturn is now taking its toll. A fifth of China’s
shipbuilders lost money in 2012, data from the association of
shipbuilders showed, nearly doubling from 2011.
In the Jiangshu city of Yangzhou, up to 80 percent of small,
private shipbuilders have gone bankrupt in recent years, an
industry official said. He declined to be named as he is not
authorised to speak to the media.
There is no official data on job losses resulting from the
collapse of small- and medium-sized shipbuilders.
Despite this, the government is providing support for the
industry, a sign it will also support Rongsheng given its
prominence in the sector, analysts said.
Export-Import Bank of China, which lends in support of
government policy goals, said in January it will increase
lending for the buying or leasing of ships by around $3 billion
this year to support Chinese shipbuilders.
Beijing also devised a plan last year to subsidise early
disposal of ships in use for over 15 years, with the state
paying for 20 percent of the cost incurred, the Economics
Information Daily, a newspaper run by state news agency Xinhua,
said this month. The paper said the plan had not been announced
due to conflicting views. It was not clear if China’s new
government had vetoed the plan designed by their predecessors.
CONNECTIONS
The new central government, installed in March, has been
signalling that it will push forward with reforms that broadly
are aimed at reducing the economy’s reliance on investment-led
growth and exports and gearing it more towards a consumer-led
expansion.
Just last week Premier Li Keqiang said the government wanted
to bring about orderly closures of some factories plagued by
overcapacity. A statement from the State Council, or cabinet,
did not specify any particular industries or companies.
Analysts say what separates Rongsheng from many other
companies are its connections with the government and state
banks. Rongsheng’s Chief Executive Chen Qiang, for example,
enjoys “special government allowances” granted by China’s
cabinet, the firm’s annual reports say.
Rongsheng also said in its IPO prospectus that it has two
five-year financing deals with Export-Import Bank of China that
end in 2014 and in 2015, and a 10-year agreement with Bank of
China starting from 2009.
Experts say Rongsheng’s strong networks suggest the local
governments will not let it fail, even if Beijing does not
approve of a bailout.
After all, local government coffers will suffer the biggest
blow if Rongsheng goes bust. The firm had 168 million yuan of
deferred income taxes in 2012.
“Do people expect one of the largest shipyards in the world
is going to stop building ships completely with
state-of-the-art, brand new facilities?” said Martin Rowe,
managing director of global shipping services provider Clarkson
Asia Ltd. “I think it’s highly unlikely.”
(Reporting by Yimou Lee in HONG KONG and Koh Gui Qing in
BEIJING; Editing by Neil Fullick)
