Acquisition of shipyard assets exceeding 5 billion! State-owned enterprise accelerates high-end transformation

With the recovery of the shipbuilding industry and the continued growth of hand-held orders, China Shipbuilding Industry Corporation (CSIC) has also joined the ranks of capacity expansion.

On July 27, CSIC announced a series of related transaction announcements regarding asset acquisitions, optimizing its capacity layout through "two buys and one sell" transactions exceeding 5 billion yuan, and accelerating the transformation of its shipbuilding and repair business toward high-end, green, and intelligent development.

4.04 billion yuan! CSSC Tianjin plans to purchase assets from Tianjin Xingang Shipbuilding Heavy Industry

The announcement shows that in order to actively implement the high-quality development strategy, optimize the allocation of shipbuilding and repair production resources and production capacity layout in the Bohai Rim region, and enhance the production capacity of high-end ships, CSSC (Tianjin) Shipbuilding Manufacturing Co., Ltd., a wholly-owned subsidiary of Dalian Shipbuilding Heavy Industry Group Co., Ltd., a wholly-owned subsidiary of CSIC, plans to purchase part of the assets of Tianjin Xingang Shipbuilding Heavy Industry Co., Ltd.'s Lingang factory area with its own funds of approximately 4.04 billion yuan. The main assets are fixed assets and intangible assets, including 7 plots of land, 1 sea area, 318 houses, buildings and structures, 6068 sets of machinery and equipment, 16 vehicles, and 1151 items of electronic equipment, with a total net book value of approximately 3.8 billion yuan.

The aforementioned assets to be acquired are important production resources for shipbuilding, including one 500,000-ton and one 300,000-ton large dry dock each, equipped with two gantry cranes, as well as a combined factory building, a sectional factory building, a four-spray eight-coating paint shop, and 817 meters of outfitting wharf, 858 meters of ship repair wharf, and 300 meters of sea outlet wharf and other shoreline resources. This transaction constitutes a related party transaction, and the transaction price is based on the appraised value.

On July 25, 2024, the fourth meeting of the sixth board of directors of CSIC reviewed and approved the "Proposal on the Acquisition of Relevant Assets of Tianjin Xingang Shipbuilding Heavy Industry Co., Ltd. by CSSC Tianjin, a Subsidiary Company, and Related Party Transactions." On the same day, CSSC Tianjin and Xingang Shipbuilding signed the "Asset Transfer Agreement."

The counterparty to this transaction, Xingang Shipbuilding, is a subsidiary company (directly holding 77.86% of the shares) of CSIC's controlling shareholder, China Shipbuilding Industry Corporation, established in 2000. The planning and construction of Xingang Shipbuilding's existing facilities began in 2008, and relevant assets were put into use successively from 2010 to 2017. Core production resources such as land use rights were obtained through bidding in 2016. Prior to this transaction, CSSC Tianjin had partially leased the use of the transaction target, including 22 houses, buildings, 20 structures, 3378 items of machinery and equipment, 16 vehicles, 6 plots of land, and 1 sea area use right, with the asset lease term expiring at the end of December 2024.

CSIC pointed out that the purpose of this transaction is to coordinate the use of shipbuilding resources in the Bohai Rim region, further optimize the production capacity layout of Dalian Shipbuilding's shipbuilding and repair, effectively increase the core production capacity of CSSC Tianjin shipbuilding, meet the transformation of CSSC Tianjin to high value-added ship types, and comprehensively improve efficiency and effectiveness. Currently, CSSC Tianjin has a full order book, with production plans scheduled until 2028. After CSSC Tianjin acquires the above-mentioned important production resources for shipbuilding, it will continue to carry out transformation and upgrading capacity construction on the basis of these assets, build a modern shipyard that can meet the needs of mass production of high value-added ships, and effectively ensure the smooth delivery of its hand-held orders and the future market demand for main construction ship types. According to calculations, after the completion of this transaction, the annual shipbuilding capacity of CSSC Tianjin will increase by 2.4 million deadweight tons. In addition, after the completion of this transaction, CSSC Tianjin will no longer need to lease relevant assets from Xingang Shipbuilding, reducing related party transactions between the two companies.

It is understood that Xingang Shipbuilding is located in the Tianjin Lingang Economic Zone, covering an area of 3.6 square kilometers, with a wharf and coastline of 4 kilometers, an annual shipbuilding capacity of 2 million tons, and a ship repair capacity of 220 ships. It has 500,000-ton and 300,000-ton shipbuilding docks, an 800-ton gantry crane and large factory buildings, and is the largest and internationally renowned shipbuilding and repair base in North China.

Due to market downturn and various reasons such as management, Xingang Shipbuilding was included in the list of state-owned enterprises under the supervision of the State-owned Assets Supervision and Administration Commission in 2016. In 2019, the company was insolvent and faced bankruptcy. Before 2020, Dalian Shipbuilding took over Xingang Shipbuilding. Among them, the shipbuilding business of Xingang Shipbuilding was managed by Dalian Shipbuilding, and the ship repair business was assigned to Shandong Shipbuilding Heavy Industry.

In order to revitalize the assets of Xingang Shipbuilding, Dalian Shipbuilding invested in the establishment of CSSC (Tianjin) Shipbuilding Manufacturing Co., Ltd. in 2021. After Xingang Shipbuilding stopped production in October 2021, CSSC Tianjin held an unveiling ceremony and groundbreaking ceremony for its first ship on November 25 of the same year.

CSSC Tianjin is an important member of Dalian Shipbuilding's "one headquarters, four bases" strategic plan, and will focus on the construction of large ships. According to Dalian Shipbuilding's 14th Five-Year Plan, CSSC Tianjin will take bulk carriers, container ships, and tankers as its product development direction, aiming to become an important base in northern China for the construction of large civilian ships such as large container ships, oil and cargo ships, and ro-ro ships.

Data from Clarkson shows that CSSC Tianjin currently has orders for a total of 29 ships with 6.27 million deadweight tons, including 13 very large crude carriers (VLCCs) and 2 115,000-deadweight-ton LR2 product tankers, 12 new Panamax container ships, and 2 Kamsarmax bulk carriers. Its VLCC order book ranks first among all single shipyards globally, significantly ahead of New Times Shipbuilding (8 ships) and Dalian Cosco Kawasaki (6 ships).

1.04 billion yuan! Wuhan Shipbuilding acquires 100% equity of Wuhan Wuchuan Hangrong

At the same time, in order to optimize and adjust capacity layout, achieve transformation and upgrading of general assembly and construction, increase production capacity to meet the needs of production and operation, and make up for shortcomings in production capacity, Wuhan Shipbuilding Heavy Industry Group Co., Ltd., a wholly-owned subsidiary of CSIC, plans to purchase 100% of the equity of Wuhan Wuchuan Hangrong Heavy Industry Equipment Co., Ltd. held by Wuhan Wuchuan Investment Holding Co., Ltd. with its own funds of 1.04 billion yuan. This transaction constitutes a related party transaction, and the transaction price is based on the appraised value.

On July 25, 2024, the fourth meeting of the sixth board of directors of CSIC reviewed and approved the "Proposal on the Acquisition of 100% Equity of Wuhan Wuchuan Hangrong Heavy Industry Equipment Co., Ltd. by Wuhan Shipbuilding and Related Party Transactions." On the same day, Wuhan Shipbuilding and Wuchuan Hangrong signed the "Equity Acquisition Agreement."

The counterparty to this transaction, Wuchuan Investment, is a wholly-owned subsidiary of CSIC's controlling shareholder, China Shipbuilding Industry Corporation; Wuchuan Investment directly holds 2.13% of the shares of CSIC.

Wuhan Wuchuan Hangrong was established on November 18, 2022. Its main assets include fixed assets and intangible assets, specifically including office buildings, factories, land, and machinery and equipment. Except for sporadic payable taxes, there are no other liabilities; the main business is real estate and production equipment leasing, and all operating income comes from real estate and production equipment leasing income. Wuhan Wuchuan Hangrong is adjacent to the production area of Wuhan Shipbuilding. To ensure normal production and operation, Wuhan Shipbuilding currently leases land and factory buildings from Wuhan Wuchuan Hangrong.

The announcement shows that in 2023, Wuhan Wuchuan Hangrong's total assets were approximately 940 million yuan, total liabilities were 2.6966 million yuan, operating income was 29.6857 million yuan, and net profit was -4.8382 million yuan. In the first five months of this year, Wuhan Wuchuan Hangrong's operating income was 15.7905 million yuan, and net profit was 2.0665 million yuan.

China Heavy Industry stated that Wuchang Shipbuilding currently has a backlog of orders extending to 2028, with full production capacity. The acquisition of Wuchang Shipbuilding Finance will effectively address Wuchang Shipbuilding's shortcomings in high-tech products and high-end shipbuilding segment construction capacity. After the transaction, Wuchang Shipbuilding's production facilities, including land and buildings, will be significantly expanded, with all related industries concentrated in the Shuangliu factory area for integrated and collaborative development. This will improve asset utilization and production efficiency, enabling the transformation and upgrading of warship assembly and construction, and will have a positive impact on the company's operating results. In addition, after this transaction, Wuchang Shipbuilding will reduce the leasing of assets related to Wuchang Shipbuilding Finance, reducing related-party transactions between the two companies.

After this transaction, Wuchang Shipbuilding Finance will become a wholly-owned subsidiary of Wuchang Shipbuilding and will be included in China Heavy Industry's consolidated financial statements.

It is understood that Wuchang Shipbuilding is a large, modern shipbuilding enterprise under China Shipbuilding Group Corporation. It was founded on June 6, 1934, originally named Wuchang Machinery Factory. During the First Five-Year Plan period, it was listed as one of the 156 key construction projects of the state and renamed Wuchang Shipyard. In 2009, it completed its corporate reform. In 2014, Wuchang Shipbuilding Heavy Industry Group Co., Ltd. was established.

In 2020, due to urban construction and its own development needs, Wuchang Shipbuilding relocated from Wuhan Wuchang to Wuhan Xinzhou, settling in the Shuangliu area and striving to embark on a new journey of high-quality development. The Wuchang Shipbuilding Shuangliu factory area covers approximately 4,200 mu (approximately 280 hectares), with a 2,800-meter shoreline. It has two outdoor shipways and four indoor shipways. Three wharves have been built, with a total of 11 berths, meeting the construction requirements of vessels under 30,000 tons. It has an annual production capacity of 18 civilian ships and 120,000 tons of bridge steel structures.

Wuchang Shipbuilding is a nationally important base for the construction of special ocean engineering vessels and government vessels, a production and construction base for small and medium-sized oil and chemical tankers and feeder container ships, a world-class base for bridge and heavy equipment manufacturing, and a key state-owned military enterprise and a large modern enterprise mainly engaged in shipbuilding. For many years, Wuchang Shipbuilding has always adhered to the primary responsibility of strengthening the military, carrying out limited related diversified operations, and cultivating the domestic and international markets with its defense, marine, and application industries to promote the company's sustained high-quality development.

As an important supplier of shipbuilding and marine engineering equipment in China, Wuchang Shipbuilding has practiced its corporate mission of "building fine equipment for national defense and creating material wealth for society" with its achievements. It has accumulated rich experience in the research and development and manufacturing of government vessels, scientific research vessels, engineering vessels, oil and chemical tankers, feeder container ships, yachts, and special auxiliary vessels. In recent years, Wuchang Shipbuilding has responded to the new trend of green, low-carbon, and intelligent shipping development, fully grasped market opportunities, and cultivated the oil and chemical tanker market, concentrating on the delivery of 19700DWT, 14620DWT, and 7200DWT series stainless steel chemical tankers. The "Wuchang Shipbuilding" brand has gradually taken shape in the chemical tanker market.

Clarksons' data shows that as of now, Wuchang Shipbuilding has a total backlog of 40 vessels, including 21 chemical tankers, 7 offshore engineering vessels, 5 general cargo ships, 3 container ships, 3 ro-ro ships, and 1 other vessel. The delivery schedule extends to 2028. In the current field of construction of chemical tankers of 10,000 DWT and above, Wuchang Shipbuilding has a backlog of 19 vessels, ranking third globally, second only to Yangzhou Jinling (34 vessels) and Wuhu Shipyard (33 vessels).

114 million yuan! Dalian Shipbuilding transfers 100% equity of Bohai Shipbuilding

In addition to purchasing assets, China Heavy Industry is also optimizing its production capacity layout and transferring assets. The announcement shows that in order to serve the national strategy, further optimize the production capacity layout of shipbuilding and ship repair, and accelerate the high-end, green, and intelligent transformation of shipbuilding and ship repair, the 100% equity of Bohai Shipbuilding Heavy Industry Co., Ltd. held by Dalian Shipbuilding was transferred to the company's related shareholder, China Shipbuilding Group Bohai Shipbuilding Co., Ltd., at a price of approximately 114 million yuan.

This transaction will be implemented through the following steps: First, Bohai Shipbuilding will use December 31, 2023, as the base date and will proportionally transfer assets related to Dalian Shipbuilding's business (cranes, floating docks, etc., movable assets highly related to civilian shipbuilding business, with a book value of 254 million yuan after audit) to Dalian Shipbuilding to offset its liabilities to Dalian Shipbuilding. Second, after the transfer, Dalian Shipbuilding will transfer 100% of its equity in Bohai Shipbuilding to Bohai Shipbuilding.

On July 25, 2024, the fourth meeting of the sixth board of directors of China Heavy Industry approved the "Proposal on the Transfer of 100% Equity of Bohai Shipbuilding Heavy Industry Co., Ltd. by Dalian Shipbuilding and Related Party Transactions." On the same day, Dalian Shipbuilding and Bohai Shipbuilding signed the "Equity Transfer Agreement".

The counterparty to this transaction, Bohai Shipbuilding, is a wholly-owned subsidiary of China Shipbuilding Group Corporation, the indirect controlling shareholder of China Heavy Industry. Bohai Shipbuilding directly holds 2.24% of the shares of China Heavy Industry. This transaction constitutes a related party transaction.

The announcement stated that since 2016, Bohai Shipbuilding has experienced a significant decline in revenue and has been losing money for eight consecutive years, with accumulated losses reaching 3.475 billion yuan, which has had an adverse impact on the operating performance of China Heavy Industry. The main reasons for the losses are as follows: First, from 2014 to 2020, deeply affected by the international financial crisis, the global economic growth rate slowed down, the new ship market remained sluggish, transaction volume and prices continued to decline, the shipbuilding industry was at a cyclical low point, capacity utilization remained low, and the shipbuilding industry generally experienced industry-wide losses. Second, Bohai Shipbuilding mainly builds large bulk carriers and ore carriers. Since 2015, the demand structure of the international shipping market has undergone significant changes, and the demand for bulk carriers has rapidly declined. Bohai Shipbuilding has significantly insufficient new orders, leading to large losses since 2016.

As of the valuation base date of April 30, 2024, Dalian Shipbuilding's non-operating receivables from Bohai Shipbuilding amounted to approximately 1.643 billion yuan. Bohai Shipbuilding agreed and stipulated in the transfer agreement to ensure that before the completion of this transaction (i.e., before the completion of the business registration change of the target company), it will fully repay Bohai Shipbuilding's non-operating debts to Dalian Shipbuilding in cash. As of the signing date of the equity transfer agreement, the outstanding guarantee provided by Dalian Shipbuilding to Bohai Shipbuilding was 470 million yuan, which will be fully released before the completion of this transaction.

Bohai Shipbuilding currently has three fundraising investment projects: "Bohai Shipbuilding Ship and Ocean Engineering Module Supporting Center Construction Project," "Bohai Shipbuilding Ship and Ocean Engineering R&D and Manufacturing Capacity Improvement Project," and "AP1000 Nuclear Power Main Pipeline Technical Transformation Project." The funds raised for these three projects have been basically invested, and the main assets involved have reached the predetermined usable state and have formed corresponding R&D and production capabilities. Due to the transfer of 100% of Bohai Shipbuilding's equity, the above three fundraising projects will be transferred to Bohai Shipbuilding in their current state (including the remaining funds in the special account for raised funds).

It is understood that Bohai Shipbuilding Heavy Industry Co., Ltd. is a large-scale modern enterprise and a national-level major technological equipment localization research and development base, integrating shipbuilding, ship repair, ocean engineering, large steel structure processing, metallurgical equipment and large hydropower equipment manufacturing. Its predecessor was Liaoning Bohai Shipyard, founded in 1954, and was once known as the "First Shipyard of New China."

Bohai Shipbuilding Heavy Industry was once active in the bulk carrier and tanker construction market, delivering four 400,000-ton ultra-large ore carriers (VLOCs) to Vale, as well as more than ten VLCCs. However, since 2018, Bohai Shipbuilding Heavy Industry has not received any merchant ship orders. In 2021, Bohai Shipbuilding Heavy Industry delivered the last few 210,000-ton Newcastlemax bulk carriers and the 318,000-ton VLCC "AL SIDDEEQ" from Kuwait Oil Tanker Company (KOTC) in its backlog, as well as the 325,000-ton VLOC "Nansha Rongguang" built on a turnkey basis for Port Shipbuilding Heavy Industry (now CSSC Tianjin).

Since 2022, Bohai Shipbuilding Heavy Industry has delivered the Phase II "耕海1号" marine ranch complex, the "Bei Diao 996", China's largest deep-sea equipment comprehensive test vessel, and the "Da Sheng No. 1" mobile offshore testing platform built for the 716th Institute. Clarkson's data shows that Bohai Shipbuilding Heavy Industry currently has no ships under construction in its order book.

China Shipbuilding Industry Corporation stated that the transfer of 100% equity of Bohai Shipbuilding Heavy Industry by Dalian Shipbuilding is mainly to serve national strategies, further optimize the layout of shipbuilding and repair production capacity, accelerate the high-end, green and intelligent transformation of shipbuilding and repair, and achieve high-quality development. Bohai Shipbuilding Heavy Industry has been losing money for many years, with accumulated losses exceeding 3.4 billion yuan since 2016, seriously dragging down the company's operating performance. This transfer will effectively end the adverse impact of Bohai Shipbuilding Heavy Industry's continued losses on the company. After the completion of this transaction, Bohai Shipbuilding Heavy Industry will no longer be included in the company's consolidated financial statements. This transaction is expected to have a positive impact on the company's 2024 performance, and it is preliminarily estimated that the company will obtain equity transfer income of approximately 306 million yuan in 2024.

Previously, China Shipbuilding Industry Corporation released its performance forecast for the first half of 2024, predicting that net profit attributable to shareholders of the listed company will reach 500 million to 580 million yuan, a year-on-year increase of 160.25% to 201.89%. China Shipbuilding Industry Corporation pointed out that during the reporting period, the company continued to strengthen production plan management and key cycle target management, focusing on improving production efficiency, and making every effort to ensure production and delivery. The number of products delivered increased year-on-year, and operating income increased year-on-year; at the same time, the company continuously strengthened lean management, highlighted value creation, strengthened cost control, and the gross profit margin increased year-on-year, resulting in year-on-year growth in operating performance in the first half of the year.