Rongsheng – China shipbuilding

Posted on July 30, 2012

Which news gave China Rongsheng Heavy Industries’ shares the bigger trouncing on Monday: US regulators freezing assets owned by chairman Zhang Zhirong relating to an insider trading probe, or a profits warning? Answer: it should not have been the former, because there is plenty else to fret about in shipbuilding.

Like a hangover sufferer wincing with every movement or new noise, it is not as if the industry and its investors did not know what is hurting them: they are still suffering the aftermath of an almighty boom in shipbuilding. Rongsheng said on Monday that it expects first-half profits to “decrease significantly”. It did not quantify the damage, leaving investors free to surmise the worst. Barclays, for example, had already assumed a one-quarter drop in the company’s full-year profits. Little wonder shares dropped 16 per cent.

    Rongsheng’s reasons were bang on trend, namely a sharp drop in orders and prices compared with last year. Globally, new ship orders are down almost three-fifths so far this year, according to Nomura. And margins are clearly under pressure: prices of new container ships (Chinese yards’ speciality) have fallen 15 per cent in the past year, reckons Barclays, while the cost of buying second-hand ships has dropped three times as fast.

    Rongsheng has emphasised Mr Zhang’s non-executive role, although investors might like to bear in mind he is the founder and still owns almost half the company. Still, at least one analyst has cited the SEC case as reason for reversing a more positive stance on the shares. That call may be reasonable depending on how the case progresses, but it looks like a poor excuse for getting the stock wrong. The problem was using historical valuations in the first place since after a party the size of that enjoyed by shipbuilders, the scale of the hangover makes finding historical norms that fit today’s trading patterns virtually impossible.

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