China's shipbuilding industry responds to prosperity with capital operation

In mid October, due to a major asset restructuring, Songfa Shares, which had been suspended for several days, released an asset replacement and restructuring plan, planning to acquire 100% equity of Hengli Heavy Industry through major asset replacement and issuance of shares to purchase assets.

The company will transform from the original daily ceramic product manufacturing industry to an important private institution in the shipbuilding industry. The actual controllers of Songfa Corporation and Hengli Heavy Industries are both Chen Jianhua and Fan Hongwei, the leaders of Hengli Group. This move is also seen as a milestone event for Hengli Group to enhance its weight in the shipbuilding industry.

Although the global economic development is facing many uncertainties, the prosperity of the shipbuilding industry, especially China's shipbuilding industry, is already a clear sign and an area with great development certainty. Therefore, it is still attracting heavyweight capital to increase investment.

Mergers and acquisitions, as a capital tool, have also found their place in this process. Just like the shell resources of Songfa Corporation, which were not very successful in previous operations, they are expected to play an important role this time.

And China Shipbuilding and China Heavy Industries, two old players of state-owned enterprises, are also expected to become new giants through mergers and acquisitions, representing Chinese shipbuilding companies to gain greater discourse power worldwide.

1、 Order

Just having orders is not enough.  

In the past two years, both new and old shipbuilding companies in China have frequently received good news of orders in hand and new orders added.

Hengli Heavy Industries, founded in July 2022, quickly started its shipbuilding business by acquiring assets under 13 companies including STX (Dalian) Shipbuilding Co., Ltd. The first batch of 61000 ton bulk carriers started construction in March 2023 and was delivered ahead of schedule a year later.

According to Clarksons, Hengli Heavy Industry has signed 1.82 million CGT of new orders from 2024 to present, with bulk carriers accounting for the highest proportion of orders at 43% and containers accounting for approximately 29%. The overall order size ranks about 15th in the world.

Yangtze River Shipbuilding, one of the top private shipping companies, has signed 2.86 million CGT of new orders since 2024. The main types of orders on hand are container ships, accounting for 60%, while gas ships, bulk carriers, and oil tankers account for 11%, 10%, and 10% respectively.

Among state-owned shipbuilding enterprises, China Shipbuilding Industry Corporation's four major shipyards, Jiangnan Shipbuilding, Waigaoqiao Shipbuilding, Guangzhou Shipbuilding International, and China Shipbuilding Chengxi, have a total of 12.69 million CGT of orders in hand. China Heavy Industry Corporation's Dalian Shipbuilding, Wuchang Shipbuilding, and Beihai Shipbuilding have a total of 5.62 million CGT of orders in hand. Just by looking at the order volume after the merger, it can be seen that the leading position in the industry will be more stable.

The strong performance of Chinese shipping companies in orders has led to the emergence of new scenarios for RMB settlement.

Hudong Zhonghua, a subsidiary of China Shipbuilding Corporation, recently announced that it will build six 13600 TEU large container ships independently developed by the Canadian company Seaspan, and mentioned that this batch of orders will be settled in RMB, which is one of the few shipbuilding orders directly signed by foreign shipowners with Chinese shipping companies using this new payment method so far.

It should be noted that in the first half of 2024, export ships accounted for 93.5% of the new orders received by Chinese shipping companies, which means that the vast majority of Chinese shipping companies' customers are foreign ship owners. The more foreign ship owners accept the new method of RMB settlement, the more Chinese shipping companies can reduce exchange rate and interest rate risks.

This is actually how Chinese shipping companies are exploring how to deal with the problem of "too many orders".

Due to the long production cycle of heavy industry such as shipbuilding, shipping companies can only receive partial down payment upon receiving orders. They need to borrow money from banks to purchase materials and equipment, pay labor costs, and other expenses with the orders as collateral. Finally, the ship is launched and delivered, and the shipyard collects the payment and repays the bank loan.

Chinese shipping companies holding multiple orders and building multiple ships at the same time need to maintain a high total bank loan amount and pay high financial interest every year, which actually has a significant impact on the profit margin of the shipping companies.

The expected revenue of Hudong Zhonghua in 2024 is 23 billion yuan, and the ideal net profit margin is only 4%. The net profit margin of China Shipbuilding is also at this level, and the net profit margin of China Heavy Industry is even lower, currently only 2.44%. Of course, there is also the impact of low-priced orders received in the early stage that lowered the current net profit margin.

The contradiction between order quantity and production capacity is also difficult to balance, and the shipbuilding industry is not a place to talk about "low profit, high sales". There are also many heavy industrial enterprises that die on expanding production capacity. For Chinese shipping companies that currently have no shortage of orders, they can definitely think about longer-term things.

2、 Financing

Shipping companies solve problems through capital operations.

Financing costs are a matter of life and death for shipping companies. Due to the delivery cycle of orders, the shipbuilding industry heavily relies on bank loans. The loan interest rate can not only determine the life and death of shipbuilding companies, but also affect the rise and fall of a country's shipbuilding industry.

In recent years, the South Korean shipbuilding industry has been surpassed and left behind by China due to the difference in interest rates between the two countries.

South Korea has followed the pace of interest rate hikes by the Federal Reserve and has raised benchmark interest rates multiple times since the second half of 2021, taking measures such as interest rate cuts and reserve requirement ratio cuts. At present, the loan interest rates in China are more than 40% lower than those in South Korea, and the lower capital costs compared to major competitors have brought greater competitive advantages to China's shipbuilding industry.

There are also many capable and large-scale ship financing institutions in China. According to the list of the top ten ship financing institutions in 2023 released by Lao's Daily, the Export Import Bank of China has a mortgage loan portfolio of 18.5 billion US dollars, firmly ranking as the second largest ship financing institution in the world.

Bank of Communications Golden Leasing has over 18 billion US dollars in ship assets, making it the largest ship leasing company in China and the world's top ship financing company.

But besides bank loans, can equity financing also solve problems for shipping companies? From the various capital operations of the industry leader 'China Shipbuilding', this is possible.

In 2019, China Shipbuilding Industry Corporation Limited ("CSSC") and China Shipbuilding Heavy Industry Corporation Limited ("CSIC") implemented a joint restructuring and established China Shipbuilding Industry Corporation Limited. Later on, both the net profit margin and ROE of the company were significantly higher than the average level of the shipbuilding industry.

In 2023, Waigaoqiao Shipbuilding, a wholly-owned subsidiary of China Shipbuilding Industry Corporation, obtained 34.97% equity of its shipping company through debt to equity swaps. This not only offset significant impairment and bad debts without using up operating cash flow, but also provided long-term benefits for the future business development of a high-quality shipping company.

Nowadays, Chinese shipbuilding companies are also merging with China Heavy Industries through stock exchange and absorption. Compared to cash acquisitions, stock exchange and absorption mergers can reduce transaction costs and alleviate cash outflow pressures. Whether from the perspective of industrial integration or capital market performance, it is a relatively low-cost and high profit operation.

The predecessor of Hengli Heavy Industry, STX (Dalian) Shipbuilding Co., Ltd., is also expected to gain new life due to mergers and acquisitions carried out by listed companies

According to the trading plan announced by Songfa Group, in addition to major asset swaps, it also includes issuing shares to purchase assets, issuing shares to no more than 35 specific investors to raise matching funds, and using equity financing to inject blood into Hengli Heavy Industry, a financially struggling shipbuilding company on the breakeven line.