Padded order books and delivery delays
preceded the demise of Rongsheng Heavy Industries, once the country's busiest
shipbuilder
(Beijing) – Piles of rusty steel
bars and old ship parts are virtually all that's left of a sprawling shipyard
in the eastern city of Rugao, where Jiangsu Rongsheng Heavy Industries Group
Co. used to employ more than 30,000 people.
Once China's largest shipbuilder, Rongsheng is on the verge of
bankruptcy.
Orders have dried up and banks are refusing credit. Questions have been
raised about the shipyard's business practices, including allegations of padded
order books. And Rongsheng is apparently behind on repaying some of the 20.4
billion yuan in combined debt owed to 14 banks, three trusts and three leasing
firms, sources told Caixin.
The few hundred shipyard workers left – survivors of what's now a
three-year downsizing – are wondering whether they'll ever see their overdue
paychecks. Those with an uncertain future include a worker who cuts steel from
abandoned ships into pieces that can be sold for scrap. "We haven't been
paid since November," the worker said.
Rongsheng is on the ropes now that it has completed a multi-year order
for so-called Valemax ships for the Brazilian iron ore mining giant Companhia
Vale do Rio Doce. The last of these 16 bulk carriers, the Ore Ningbo, was
delivered in January.
With a carrying capacity of up to 400,000 tons, Valemaxes are the
world's largest ore carriers. Vale hired Rongsheng to build the ships starting
in 2008, and has tolerated the shipyard's slow pace: The Ore Ningbo was
delivered three years late.
Rongsheng employees said the Ore Ningbo may have been the shipyard's
last product because no new ship orders are expected and all contracts for
unfinished ships have either been canceled or are in jeopardy.
A Rongsheng manager who asked not to be named said Shipping Corp. of India
recently cancelled an order for a 300,000 ton bulk commodities carrier.
"And work has been suspended on a 57,000 ton crude oil vessel for Shanghai
Northsea Shipping Co."
Another manager said he expected "no business after the delivery of
the last ship to Vale. Most workers have been dismissed. Management can stay,
but their numbers are falling. Their contracts will not be extended after they
expire."
Heavy Debt
Rongsheng's weak financial position was highlighted by a third-quarter
2014 financial report in which the company posted a net loss of 2.4 billion
yuan. It also reported 31.3 billion yuan in liabilities, including 7.6 billion
yuan worth of outstanding short-term debt.
Sources said that Rongsheng's outstanding debt includes 6 billion yuan
owed the Bank of China and 2 billion yuan it borrowed from China Minsheng Bank.
It's also indebted to government policy banks: Some 4 billion yuan has to be
repaid to the Export-Import Bank of China, and 2 billion is owed to China
Development Bank (CDB).
A source close to the company said Rongsheng's capital crunch has
worsened since February 2014, when the CDB demanded more collateral after the
company failed to make a scheduled payment on a 710 million yuan loan. When
Rongsheng refused, the CDB called the loan. Other banks that issued loans to
the shipbuilder have taken similar steps, said the source.
A few months after CDB's move, the Jiangsu Province government
intervened by renegotiating overdue loans and encouraging Rongsheng to
reorganize its business. Provincial officials and representatives from the
Rugao government tried to help in May 2014 by sponsoring a meeting between
Rongsheng and state-owned China State Shipbuilding Corp. (CSSC) officials aimed
at a possible bailout.
At the meeting, officials discussed several cooperation options, said a
source close to CSSC's board of directors. But the talks ended without an
agreement. A CSSC source said his company decided against pursuing a tie-up due
to the complexity of Rongsheng's asset structure and heavy debt.
"It would cost at least 5 billion yuan to restart operations at
Rongsheng's facility, plus they have a huge amount of debt," the source
said. "Buying Rongsheng would not be a good deal."
Also falling through was a proposed deal with an investment firm called
Hongyi Shengli Investment Co., which offered to buy a 19 percent stake in
Rongsheng.
Officials said in February the pending deal would make Hongyi Shengli
the shipbuilder's largest shareholder, and that eventually Rongsheng would be
overhauled and re-emerge as a company focusing on the energy sector. But just
one week after the announcement, police detained Hongyi Shengli's controller,
Wang Ping, on embezzlement charges.
On March 4, a Rongsheng statement said its board had dropped plans to
sell a stake to Hongyi Shengli. A banking source said this meant Rongsheng's
"second plan also failed."
Rongsheng's demise began in 2011, six years after Zhang started the
company with money made when he worked as a property developer in the 1990s.
The new shipyard stunned the industry by clinching major vessel orders from the
start, even at a time when most of the world's shipyards were slumping.
Rongsheng's success attracted investors and banks to the company's side,
fueling its expansion.
In retrospect, said a Rongsheng executive, the company went too far.
Financial reports for the years 2008 to 2011 show Rongsheng planned to spend
between 1.5 billion yuan and 5.4 billion yuan annually on fixed-asset
investments.
The executive said company founder and former chairman Zhang Zhirong
supported the expansion plan in hopes that greater production capacity would
help accelerate shipbuilding and deliveries. In addition, a source close to
Zhang said some expansion decisions were designed to improve the company's
bottom line through real estate development that had nothing to do with
building ships.
Nevertheless, the shipyard, a sprawling facility spread across one-third
of Changqingsha Island in the middle of the Yangtze River, suffered from a lack
of capacity and management problems. As a result, the company had trouble
meeting its contract obligations, including delivery timetables.
"All of Rongsheng's problems are tied to difficulties with
delivering ships," said a Rongsheng manager. "Many of Rongsheng's
order cancellations were due to its own delivery delays."
Rongsheng built ships with a combined capacity of 8 million tons in 2010
and was preparing to begin filling US$ 3 billion in new orders the following
year. But the company's 2011 orders wound up totaling only US$ 1.8 billion.
That same year, according to shipping information provider Lloyd's List,
Rongsheng's customers canceled contracts for 23 new vessels. A former Rongsheng
engineer said the company had to significantly cut its equipment purchase
spending plan because "there was no money."
In 2012, Rongsheng received orders for only two ships. Layoffs ensued,
with some 20,000 workers getting the axe. The company closed the year with a
net loss of 573 million yuan, down from a 1.7 billion yuan net profit in 2011
and despite 1.27 billion yuan in government subsidies. The bleeding worsened in
2013, with 8.7 billion yuan in reported losses.
Despite a recovery of the Chinese shipbuilding industry in 2014,
Rongsheng saw no relief, as its clients canceled orders for 59 vessels that
year.
Things were looking up for Rongsheng in May 2014, when it announced
orders for six bulk carrier vessels from a European ship owner. But the
contract was later dropped because Rongsheng couldn't find a bank willing to
finance the project.
In years past, Rongsheng found it easy to get bank support for building
orders. But according to a ship financing expert, banks changed their tune
after Rongsheng started having trouble repaying loans. The repayment woes
surfaced after the company apparently overstretched its order books to the
point where it couldn't deliver vessels on time.
Padding the Books
Moreover, sources close to the company said Rongsheng tried to look
stronger than it was by exaggerating its records with fake orders.
The problems surfaced shortly after Rongsheng's November 2010 listing on
the Hong Kong Stock Exchange raised HK$ 14 billion. The company wowed investors
by declaring that it received orders for 111 ships. And Zhang impressed
government officials by announcing that "Rongsheng is moving toward
assuming a leadership position in the global shipbuilding industry."
In fact, though, the company's troubles had been quietly mounting behind
the scenes since at least July 2009, when a Greek customer, Thenamaris Ships,
cancelled an order for a 15,600 ton Suezmax bulk commodity ship after the
shipyard missed its delivery deadline.
The ship, later named Roxen Star, was eventually built and bought by
Roxen Shipping, a company controlled by Chinese businessman Guan Xiong, for US$
72 million. The deal helped Rongsheng retain market confidence as it prepared
for the listing.
In fact, according to several sources at Rongsheng, it was Zhang who
bought the Roxen Star and paid Guan Xiong and Roxen Shipping.
Since then, Guan and his companies have reportedly stepped in to rescue
some US$ 2 billion worth of ship contracts that were canceled by Rongsheng's
other customers. Without these orders, Rongsheng never would have maintained
its status as the No. 1 shipbuilder in China from 2009 to 2013.
Rongsheng's profitable period was marked by orders from around the
world. Its first big client, Norway's Golden Ocean Group Ltd., ordered six
freighters in 2005. The following year it banked orders for 49 vessels worth a
combined 3.2 billion yuan.
In 2008, Rongsheng clinched contracts for 16 ships worth a total US$ 1.9
billion. The biggest deal – a US$ 1.5 billion contract with Vale for 12 Valemax
carriers – was the largest shipbuilding contract ever signed.
For years financiers stood behind Rongsheng. In November 2009, for
example, Minsheng Bank's Minsheng Financial Leasing Co. provided 900 million
yuan financing for eight ship orders.
Financing was a key ingredient in Rongsheng's formula for success. After
the global financial crisis of 2008, many ship owners could no longer afford
paying in advance for new vessels. So builders such as Rongsheng started
arranging up-front financing with Chinese banks that got projects off the
ground.
As a result, Rongsheng's borrowing from banks rose to 25.4 billion yuan
in 2011 from 3.6 billion yuan in 2009.
Rongsheng also won government support. From 2010 to 2012, it received
hefty tax breaks and subsidies from the Rugao government. These incentives were
worth 830 million yuan in 2010, 1.25 billion yuan the following year and 1.3
billion yuan in 2012, company financial reports show.
Financiers backed off, though, when it became apparent that Rongsheng
was failing to meet delivery schedules and losing customers.
An employee of Everbright Bank who asked not to be identified said the
bank's assessment of Rongsheng found that its biggest problems were tied to its
production operations. "But by the time the bank realized the
problem," the employee said, "the company was already in financial
trouble."
Rongsheng's and Zhang's dealings with the phony contract angel Guan also
played into the company's loss of favor with customers and financiers.
An example of this sleight-of-hand tactic revolved around a contract
signed in August 2011 for 20 crude oil carriers to be built for a Hong
Kong-based ship owner called Global Union. The order was written into
Rongsheng's records, but a source said that not a single ship was delivered. It
wasn't until July 2014 that Rongsheng acknowledged the order had been
cancelled.
Behind Global Union is a Hong Kong based company named CMG Shipping,
which is controlled by Guan, company documents show. According to business
registration records in Hong Kong, Guan launched 12 shipping companies in that
city in 2010 and 2011. In May 2010, some of these companies ordered nine bulk
freighters from Rongsheng.
Rongsheng's order books show that through the years Guan's companies
have ordered at least 30 ships from the shipyard, and 17 were cancelled.
A Rongsheng employee said Guan and Zhang are friends and business
partners. Another source close to Rongsheng said Zhang paid for the ships
bought by Guan's companies through shady contracts. The source said Zhang
pulled all the levers for an order for six bulk carriers in 2011. The company
placing the order was Marshall Islands-registered Superior Gain Investment
Ltd., a company that was formed and registered as a business shortly before
ordering the ships.
Zhang essentially placed the orders to pad the company's order books,
the source said. In this way Rongsheng could "control the timing of order
cancellations," the source said. "That's why Rongsheng could have a
huge number of orders in hand."
Rongsheng officials have never explained the company's order-book
methodology to investors, nor responded to claims that Zhang and Guan conspired
to inflate the shipyard's business. Stock investors have sold off Rongsheng,
and it now trades at around 75 Hong Kong cents a share, down from a peak of HK$
8.35 in 2011.
But a company employee who works in the office of Rongsheng President
Chen Qiang said that Zhang and his business partner placed ship orders that did
not have to be publicly disclosed.
And Lei Dong, director of the president's office at Rongsheng, said no
listed company disclosure rules were violated because the shipbuilder can
choose between two ways of reporting orders for vessels that won't be built as
long as a contract remains valid.
However, an industry source said Rongsheng's true list of valid orders
is much smaller than reported. "I think Rongsheng counts all intended and
cancelled orders," the source said.
A source close to Zhang said 28 of the 49 orders for ships placed in
2006 and 2007 were later canceled. And although Rongsheng planned to build 33
ships in 2009, the source said, only 10 were delivered.
(Rewritten by Han Wei)
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