China Rongsheng Heavy Industries – the good, the bad and the ugly, part 2
We had a wry smile this morning after reading Macquarie Equities daily newsletter.
China Rongsheng Heavy Industries’ net earnings have been downgraded by 37% in 2012, 68% in 2013 and an astonishing 79% in 2014. Forecast 2014 profitability is now one-sixth of the the level recorded in 2011.
A significant factor which had come to light is the fact that Rongsheng has provided highly attractive pre-delivery finance to customers to win market share.
As Rongsheng has had operational (and credibility) issues, it has had to increase its working capital and gearing to meet expenses during during the shipbuilding construction period. With the fast decline in their order book, from US$6.6 billion in 2011 to an estimated US$3.6 billion in 2014, cash flows are under pressure.
The extraordinary rise and fall of Rongsheng and the outlook for the Chinese shipbuilding industry lends support to Montgomery’s caution with respect to the materials industry.
We will become more positive on materials stocks when the outlook from the Chinese steelmaking, cement and shipbuilding industries is less pessimistic.
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.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
