China Rongsheng Heavy Industries Group Holdings Ltd., the country’s second-largest private shipbuilder, said it expects losses in the first half to widen after customers canceling orders forced it to cut production.
The Shanghai-based company expects a “significant increase” in the net loss for the six months that ended in June compared with a year earlier, according to a filing to the Hong Kong Exchange yesterday. The shipbuilder cited its “conservative operation strategies” for the slump after customers changed orders as global demand stayed sluggish. The company is due to announce earnings later this month.
Rongsheng’s woes illustrate the difficulties private Chinese shipbuilders face competing in an industry dominated by state-owned yards with government backing and easier access to financing. Reviving fortunes at companies like Rongsheng, and the “Shipping Valley” at the Yangtze River, is key to raising confidence in manufacturing in China after a $6.6 trillion credit binge had threatened to stoke a debt crisis.
“They will need to find a strategic way out,” said Ben Kwong, a director at Hong Kong-based broker KGI Asia Ltd. “Many were pinning their hopes on a turnaround,” said Kwong, who added the announcement will put “some pressure” on the shares.
Losses last year widened 15 times to 8.7 billion yuan ($1.4 billion) from 573 million yuan after sales plunged 84 percent to 1.3 billion yuan, Rongsheng reported in March.
Shares of Rongsheng, controlled by billionaire Zhang Zhirong, fell as much as 5.1 percent in Hong Kong today, poised for a third straight day of decline. The stock traded down 1.3 percent to HK$1.56 as of 9:45 a.m. in the city.
“Shareholders of the company and investors are advised to exercise caution when dealing in the shares,” Rongsheng said in the statement.
Rongsheng’s fortunes have risen and fallen with the Chinese shipbuilding industry, which became the world’s largest during the global economic crisis after hundreds of private shipyards opened to compete for orders.
The building spree produced more ships than the world needed amid weak economic growth, putting at risk the yards that expanded using debt. Chinese shipyards saw orders sink to 20.5 million tons in 2012, less than a fifth of their peak five years earlier, prompting companies like Rongsheng to fire staff last year and ask for government support.
Sensing danger, the government stepped in. China issued a three-year plan to urge financial institutions to support the troubled industry. The private yards’ difficulties skewed the industry in favor of government companies.
China State Shipbuilding Corp., China Shipbuilding Industry Corp. and other government-backed companies have won more orders at the expense of companies like Rongsheng. Ship orders are down 11 percent globally this year, while those won by Chinese yards increased 4.5 percent, according to Clarkson.
Rongsheng has since June last year secured HK$5.4 billion through the sale of convertible bonds, including a proposed HK$1 billion lifeline from a holding company controlled by Shi Yuzhu, the billionaire chairman of New York-listed gaming company Giant Interactive Group Inc.
Rongsheng Chief Financial Officer Sean Wang said in May that new orders were starting to improve. The company completed nine ships last year, according to the March earnings report.
“I believe our finances are more stable now, and new orders are starting to improve,” Wang said. “This is why our share price has risen lately.”