China Rongsheng’s Government-Aid Call Drives Shares Down

China Rongsheng Heavy Industries Group Holdings Ltd., the nation’s biggest shipyard outside state control, sought government financial support as orders plunged, sending its shares to a record low.

The shipbuilder fell 16 percent in Hong Kong trading after saying it had a loss in the first half and that it was “gradually” reducing production. The company lost about HK$2 billion ($258 million) in market value after saying on July 3 that some idled contract workers had surrounded the entrance of its main factory in Jiangsu province.

Rongsheng is also “restructuring” its workforce and is in talks with financial institutions about renewing credit facilities, it said in a statement today, without elaborating. Trading in the company’s shares resumed in Hong Kong after a suspension yesterday following a Wall Street Journal report the shipbuilder eliminated about 8,000 jobs.

“The capital shortfall at China Rongsheng looks pretty serious,” Ronald Wan, a committee member at the Hong Kong Securities and Investment Institute, said by telephone today. “The financial support it is going to get from the government or shareholders would only be enough to stop the situation from getting worse.”

Billionaire shareholder and co-founder Zhang Zhirong agreed to provide an interest-free 200 million yuan ($33 million) loan to the Shanghai-based yard, it said in the statement. Zhang owned a 28 percent stake as of Jan. 24, according to data compiled by Bloomberg.

Working Capital

Rongsheng is in talks to renew credit facilities “to ease the pressure on the Group’s working capital and ensure the Group’s stable production and operations,” according to the statement.

Shares of the shipyard closed at 89 Hong Kong cents, the lowest since the company’s 2010 listing. The stock has dropped 28 percent this year, compared with an 8 percent decline in the benchmark Hang Seng Index.

Ministry of Industry and Information Technology spokesman Wang Lijian said he couldn’t immediately comment when asked if Rongsheng had contacted the agency about government assistance. Faxed-questions requested by Wang weren’t immediately responded to. Four calls to the press office of Shanghai’s city government went unanswered.

China, the world’s biggest shipbuilding nation, may see a third of its yards shut down in about five years amid a global vessel glut, according to the China Association of National Shipbuilding Industry.

Credit Crunch

Yards may also face labor unrest after cutting jobs and diversifying into offshore equipment to offset the order slump, while contending with the nation’s worst credit crunch in at least a decade. Rongsheng said some workers who were “made redundant” formed a blockade outside the headquarters of the group’s production base in Nantong on July 2.

There has been no strike or other industrial actions by existing workers, the company said in its statement.

“Because of the overall market, there’s no way out for the companies; so only the strongest will survive,” said Sarah Wang, a Shanghai-based analyst at Masterlink Securities Corp. “Life for China’s shipyards will be tougher this year as any form of credit crunch is critical.”

Rongsheng’s principal banks are Export-Import Bank of China, China Development Bank, Bank of China Ltd., and Shanghai Pudong Development Bank Co., according to its 2012 annual report.

Order Book

Bank of China didn’t immediately respond to an e-mailed request seeking comment. Spokesmen for Pudong Bank and Export-Import Bank didn’t answer calls to their office and mobile phones. Two calls to China Development Bank’s publicity department went unanswered.

The order book at China’s shipbuilders fell 23 percent at the end of May from a year earlier, according to data from the shipbuilders’ group. Yards have reduced down-payment requirements, with some slashing their rates to as little as 2.5 percent of contract value compared with 20 percent before 2010, according to UOB-Kay Hian Holdings Ltd.

Lending Clampdown

The nation’s clampdown on excessive short-term borrowing sent the overnight repurchase rate to a record 13.91 percent last month, forcing at least 22 companies including China Development Bank Corp., a backer of the shipping industry, to cancel or delay bond sales. Economic growth in China has held below 8 percent for the past four quarters, the first time that has happened in at least 20 years.

“Currently financial institutions themselves may have tight liquidity, so they are reluctant to lend money to companies in this sector,” China Association’s Wang said. “If they can help some good companies, there would be no problems.”

“Rongsheng’s move reflects the bad market,” said Lawrence Li, an analyst at UOB-Kay Hian in Shanghai. “More small-to-medium sized shipyards, especially those that lack government support, may take the same actions or even close down.”

Rongsheng had as many as 38,000 workers including its own employees and contract staff at the peak of the industry boom a few years ago, UOB-Kay Hian’s Li said. Brazil and Greece accounted for more than half of Rongsheng’s 2012 revenue, according to data compiled by Bloomberg.

Annual Loss

The company posted a loss of 572.6 million yuan last year, after three consecutive years of profits, according to data compiled by Bloomberg. It had short-term debt of 19.3 billion yuan as of the end of 2012, the data show.

The shipbuilder targets new ship and offshore orders worth more than $2.3 billion this year, Chairman Chen Qiang said in Hong Kong in March. The company pared about 3,000 employees last year as it aims to return to profit this year, he said at the time.

Rongsheng’s cash conversion cycle, a gauge of days required to convert resources into cash, more than doubled to 582 last year from 224 in 2011, the data show.

Ten of the 14 analysts tracked by Bloomberg recommend selling Rongsheng stock with the rest rating it hold. The company raised HK$14 billion ($1.8 billion) in its initial public offering in 2010.

Ship prices for a vessel that can carry as many as 13,500 boxes fell to $106 million in April, which was then the lowest since Clarkson Plc started compiling the figures in June 2008. Contracts for new vessels halved to $84.7 billion in 2012, compared with $174.7 billion in 2008, according to Clarkson.

Korean Yards

About 464 shipyards in China won 18.7 million deadweight tons of orders worth $14.3 billion last year, the lowest since 2004, according to Clarkson. That compares with contracts for

14.6 million tons worth $29.6 billion received by 88 yards in South Korea, the world’s second-biggest shipbuilding nation.

China had 1,647 shipyards with annual sales of more than 5 million yuan at the end of December, according to the China Association. The sector contributed an industrial output of

790.3 billion yuan last year.

Shipbuilders are trying to offset the plunge in new vessel prices and orders by expanding their oil-rig business. Rongsheng announced in October its first order to make a tender barge while rival Yangzijiang Shipbuilding Holdings Ltd. got its first rig contract in December.

(Updates with closing share price in seventh paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE