China Rongsheng Says Authority Studying Unit Restructure

China Rongsheng Heavy Industries Group Ltd., the private Chinese shipbuilder whose woes made it a symbol of the country’s credit binge, confirmed the government is studying a possible restructuring of its Jiangsu unit.

The maker of bulk carriers and oil tankers has been notified by a government authority that it had hired an independent third party to consider and potentially restructure Jiangsu Rongsheng Heavy Industries Co. the Shanghai-based company told the Hong Kong stock exchange yesterday.

The statement comes after the Jiangsu shipyard belonging to China’s second-largest private shipyard was listed among 51 shipbuilding facilities deemed worthy of policy support in a Ministry of Industry and Information Technology document dated Sept. 3. Rongsheng’s struggles illustrate the difficulties private shipbuilders face in competing with state-owned yards that have government backing and easier access to financing.

The company doesn’t “currently possess any confirmed details on the potential restructuring, which might involve a restructuring of assets, business, debt and/or equity and might involve a dilution of its equity interest attributable to the group,” it said in the statement.

Trading in China Rongsheng’s shares will remain suspended. The company Aug. 29 suspended trading of its shares in Hong Kong pending the announcement after posting a fourth straight half-yearly loss in the six months ended June. The stock had gained 12 percent for the year through Aug. 28 before the halt.

Revenue attributable to the Jiangsu unit constituted about 89 percent of total group revenue last year, and 91.4 percent for the six months ended June 30, 2014, the company said in the statement.

Fluctuating Fortunes

China’s State Council on Sept. 3 said the country will seek to promote mixed-ownership reforms in the shipping industry, encouraging private capital to invest in state-owned marine shipping companies.

Rongsheng’s fortunes have risen and fallen with the Chinese shipbuilding industry. The country became the world’s biggest center for building ships during the global economic crisis after hundreds of private shipyards opened to compete for orders amid weak economic growth. Yards that expanded using debt are the most at risk.

Orders at Chinese shipyards fell to 20.5 million tons in 2012, less than a fifth of their peak five years earlier, forcing companies such as Rongsheng to cut their workforce and seek government’s support.

Widening Liabilities

Rongsheng’s financial woes have limited its ability to ride the surge in new ship orders that according to the China Association of the National Shipbuilding Industry have climbed 78 percent in the six months ended June from a year earlier. The company’s first-half sales tumbled 78 percent to 341 million yuan ($55.5 million) as it avoided “low-price orders,” the company said. It had contracts for 90 vessels worth about $4.2 billion as of the end of June.

Rongsheng’s current liabilities exceeded its assets by about 12.3 billion yuan as of June 30, the company said Aug. 29. That’s wider than the 6.68 billion yuan gap as of Dec. 31. The company said Aug. 30 that it remains overdue on 262 million yuan of bank loans after making full interest payments in July on 8.3 billion yuan, according to a Hong Kong stock exchange filing.

Banks haven’t yet taken any action to enforce the loan agreements and demand immediate repayment, Rongsheng said. The company said it has also received preliminary consent from a bank for a waiver on a 609 million-yuan loan for which the company is in breach of its covenants.

It raised about HK$4 billion ($516 million) in the first half by issuing bonds that can be converted to stock. That sum included as much as HK$1 billion sold in May to a holding company controlled by Shi Yuzhu, the billionaire chairman of New York-listed gaming company Giant Interactive Group Inc., leading to speculation he might be seeking an overhaul.

In a move to diversify its business away from shipbuilding, Rongsheng said Aug. 21 that it plans to issue 1.4 billion shares to fund the purchase of a 60 percent stake in oil fields in Kyrgyzstan.

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