China Rongsheng Heavy Industries – the good, the bad and the ugly…
Earlier this year we had the opportunity to visit China Rongsheng Heavy Industries, one of China’s leading shipbuilding companies. Rhongsheng was founded in 2005 and floated in November 2010 on the back of winning an enormous order from Vale to build twelve ore carrier vessels each 360 metres long, 65 metres wide and 30.4 metres deep with a deadweight tonnage of 400,000. The ambitious founder, 46% shareholder and Chairman, Zhang Zhi Rong, was desperate to challenge the global leaders, South Korean based, Hyundai Heavy Industries and Daewoo Shipbuilding & Marine.
Back in 2008, Rongsheng represented all that is good and bad in China. With Government support, Chinese corporate support, recently announced offshore diversification and the cost of shipping dry goods such as grain, coal and iron-ore at US$55,000 per day, the outlook was superb.
Let’s fast forward to July 2012 and the price of Rhongsheng’ shares have declined from HK$8 to HK$1. For the six months to June 2012, China’s 1,536 shipyards have announced a combined 50% decline in orders. The cost of shipping dry goods has crashed to sub US$10,000 per day (-82%), and Rhongsheng is experiencing a number of operational and credibility issues.
With the global slump in ship orders caused by a glut of vessels, Rongsheng is trying to diversify from shipbuilding and earlier this year they won a contract to build an offshore support vessel for CNOOC, one of China’s largest government controlled oil production and exploration companies.
Last week CNOOC announced a US$15 billion offer to acquire Nexen, a US listed Canadian based oil company. Nexen rose 52% on the announcement. The US Securities and Exchange Commission (SEC) just announced various traders had stockpiled shares of Nexen in the days leading up to the takeover bid. The SEC has claimed US$13m of illegal profit was realized and the finger is being firmly pointed to a Hong Kong based company controlled by none other than Zhang Zhi Rong.
The development of China has seen some extraordinary national champions in industries like ship building, however we wonder how many of these companies will ultimately become global champions. With several front page newspaper disasters associated with misfeasance, we continue to be wary of China’s corporate governance record.
In the meantime we believe a lot of companies in commoditized industries like shipbuilding, steelmaking and cement production are likely use their upcoming results presentation as an avenue to downgrade their outlook.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
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