Steering Yangzijiang to calmer waters amid rough weather
As the Chinese saying goes, every crisis presents both
danger and opportunity. For Yangzijiang Shipbuilding chairman Ren Yuanlin, the
current crisis engulfing the Chinese shipbuilding industry may well open up
another window of opportunity for further business expansion as rival yard
operators drop out of competition.
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Tan Hwee Hwee
18 January 2015
As the Chinese saying goes, every crisis presents both danger and opportunity. For Yangzijiang Shipbuilding chairman Ren Yuanlin, the current crisis engulfing the Chinese shipbuilding industry may well open up another window of opportunity for further business expansion as rival yard operators drop out of competition.
The straight-talking YZJ chairman has never flinched from discussing the shipbuilding crisis in his home country. On the contrary, he has on more than one occasion publicly acknowledged that China's shipbuilding is set to enter a protracted winter that will last at least three years.
Against the headwinds of overcapacity in shipbuilding and limited newbuilding demand across most maritime sub-sectors, the number of Chinese shipyards in operation has already shrunk to about 300 from 3,000 five years ago. Mr Ren projects this number could further decline to under 50 in another three years.
But that does not seem to stop the YZJ chairman from looking at extending the reach of his shipbuilding empire, to which he has devoted almost his entire career.
Remained profitable
Over decades under Mr Ren's leadership, YZJ has become the largest privately owned Chinese shipbuilder, having gone through privatisation in 1999 and a dual listing in Taiwan and Singapore back in 2007.
Despite the doldrums in global shipbuilding, YZJ has also remained profitable: the shipbuilding group posted a net profit of 680.67 million yuan (S$148.78 million) for the September 2015 quarter, although it has not escaped the industry-wide margin compression, evident from a 16 per cent decline in its bottom line.
Mr Ren has pressed on to seek further order expansion and to exploit a window in the rationalisation of the Chinese shipbuilding industry, to break in with new customers and diversify YZJ's product range.
YZJ's first pair of liquefied natural gas (LNG) carrier orders were from Jacques de Chateauvieux's Evergas. Evergas was exploring its options outside Sinopacific Shipbuilding, which was undergoing financial restructuring.
More recently, YZJ won a new build contract for two specialised self-loading bulkers from another new client, Algoma Central, which was seeking a yard to replace bankrupt Nantong Mingde Heavy Industries.
Mr Ren is looking to diversify into these vessel types ahead of a projected decline in newbuilding orders for standard dry bulkers and container ships, which account for a large majority of YZJ's backlog.
Newbuild orders for such vessels are expected to taper off once the International Maritime Organization's (IMO) Tier III greenhouse emission standards come into force in stages from 2016.
Standard dry bulkers and container ships tend to be ordered in larger numbers at one go unlike the LNG and specialised bulkers, but YZJ is seeking to offset the expected reduction in "quantity" (vessel count) by going for "quality" (value per ship).
As a ballpark, Mr Ren said the specialised vessels are priced at least 30 per cent more per piece compared to the standard dry bulkers.
YZJ secured US$2.25 billion of contracts before the end of 2015, inclusive of a total order of US$626 million unveiled in December for the two self-loading vessels, six other container vessels, and three combination carriers. This pushes the yard group's total orders for FY15 beyond its US$2 billion target.
As well as diversifying into higher- value vessels, YZJ has expanded its clout in the Chinese shipbuilding industry. Mr Ren estimates YZJ's market share has doubled to 10 per cent in 2015 compared to a year ago.
He also said he remains open to merger-and-acquisition opportunities, which will bring further market share expansion. Months after YZJ was first tipped for a role in the restructuring of the defunct fellow Chinese yard operator, Rongsheng Heavy Industries (RSHI), Mr Ren told BT, his door is still open to a possible M&A if a suitable price can be agreed with RSHI's bankers.
Added muscle
The added muscle through the proposed RSHI acquisition will boost YZJ's capacity to pursue orders for ever larger vessels, especially in the container shipping market.
To date, YZJ has laid claim to securing orders for the largest container vessels to be built by a privately owned yard in China, but these are still one notch smaller than the mega- box ships delivered in recent years by South Korea.
The "mainstream" container ship market will be 10,000-14,000 TEUs (twenty-foot-equivalent units) - within YZJ's targeted bracket, Mr Ren says.
But while the physical constraints at most international ports for berthing mega ships of more than 14,000 TEUs are yet to be overcome, shipping alliances will seek to outmuscle one another - with the inevitable consequence that box ships can only get larger. Mr Ren is not ruling out going for beyond 14,000-TEU new build container vessels if the opportunity presents itself although, as some industry sources suggest, this could take time to materialise against a consolidation in the box ship sector.
Two major M&As related to container shipping are in the works: CMA CGM's S$3.4 billion acquisition of Neptune Orient Lines; and a merger between Cosco Group and China Shipping Group Co, which includes China Shipping Container Lines Co (CSCL).
Mr Ren welcomes the M&As as a consolidation that will "stabilise the container shipping sector", which has been hit by lower freight rates on slowing global trade. Commenting before the first details were released on the Cosco-CSCL merger, he also believes shipbuilding should be segregated and restructured independently of the other portfolios of the two state-owned enterprises (SOEs) if China wants to "open up" its economy.
While shipbuilding was subsequently left out of the announced Cosco-CSCL M&A, the writing is on the wall that Chinese shipbuilding will undergo a major shake-up with a second merger named between two shipbuilding SOEs: China State Shipbuilding Corporation (CSSC) and China Shipbuilding Industry Corporation (CSIC).
Once it goes through, the CSSC-CSIC merger will reduce the "vicious competition" between the two Chinese shipbuilding SOEs and their affiliated yards on the international stage, Mr Ren projects.