China: Rongsheng Faces Share Price Drop, Net Loss

The board of directors of China Rongsheng Heavy Industries Group Holdings Limited (the Company together with its subsidiaries) has noted the decrease in the price of the shares of the Company on 3 July 2013.

“Having made such inquiry with respect to the Company as is reasonable in the circumstances, the Board confirms that, save for the matters disclosed in this announcement, it is not aware of any reasons for these price movements or of any information which must be announced to avoid a false market in the Company’s securities or of any inside information that needs to be disclosed under Part XIVA of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), ” the Company said in a press release.

The clarification comes as a result of  various news articles appearing in the press recently that allege that the Group is facing serious financial difficulty and has not duly paid its workers and suppliers. In addition, it is claimed that on 2 July 2013, a large number of workers commenced striking and formed a blockade outside the headquarters of the Group’s production base in Nantong. What is more, as reported by media, in response to the Group’s failure to settle payments, certain suppliers of the Group towed away machinery from the Group’s production base in Nantong.

According to the Board, the demand in the global shipbuilding market has continued to decline and prices for new vessels have failed to rebound. Throughout the shipbuilding industry, banks and other financial institutions have tightened credit facilities available to shipbuilders, and many shipowners have delayed, renegotiated or defaulted on payments to shipbuilders. These factors have caused higher pressure on the Group’s working capital in recent months, and the Group has tightened cash outflow by delaying its payment to its suppliers and workers.

The Board confirmed that there has not been any incident of abscondment of salary payment by any subcontractor of the Group nor any incident whereby suppliers of the Group have towed away machinery from the Group’s production base in Nantong in response to the Group’s failure to settle payments.

As disclosed in the annual report of the Company for 2012, in response to the depressed shipbuilding market, the Company is implementing a ‘‘Transformation and Advancement’’ strategy which focuses on serving clients in the energy sector and transforming the Group into an integrated heavy industry conglomerate.

In response to the decline in the business of the shipbuilding, engineering machinery and marine engine building segments at the start of 2013, and in line with the ‘‘Transformation and Advancement’’ strategy, the Group’s workforce is also undergoing restructuring and optimization. The Group is also gradually downsizing production in its engineering machinery and marine engine building segments. As a result of the foregoing factors,  the Group has implemented workforce restructuring and optimization in its shipbuilding, engineering machinery and marine engine building segments.

It has been confirmed that on 2 July 2013, certain workers who had been made redundant during the workforce restructuring and optimization process formed a blockade outside the headquarters of the Group’s production base in Nantong. However, the workers dispersed after the Group’s management explained the policies of the Group to them. The Board stressed that there has been no incident of strikes or other industrial actions by existing workers of the Group.

In order to ease the pressure on the Group’s working capital and ensure the Group’s stable production and operations, the Group is currently in discussions with a number of banks and/or financial institutions for renewing existing credit facilities. In addition, the Group is also actively seeking financial support from the government and the substantial shareholders of the Company, and increasing its efforts in negotiations with its customers to maximise the collection of receivables.

In particular, a company controlled by Mr. Zhang Zhi Rong (a substantial shareholder of the Company) has entered into an agreement with the Group on 3 July 2013 to grant an interest-free and security-free loan of RMB200,000,000 to the Group to finance its working capital (including but not limited to expenses incurred as a result of its workforce restructuring and optimization).

In line with usual practice in previous years, some of the workers at the Group’s production base in Nantong (mainly outdoor workers) have been notified to suspend work for the period from 2 July 2013 to 5 July 2013 due to the high temperature. Nevertheless, the Group has not ordered a complete work stoppage of its production base in Nantong, and the operation and production of the Group have not been disrupted.

On 1 July 2013, the Group delivered another 76,000 DWT Panamax to Minsheng Financial Leasing Co., Ltd. Other vessels on order are also scheduled to be delivered in accordance with their production plans.

The Company will continue to optimize its workforce structure and implement its ‘‘Transformation and Advancement’’ strategy amid the industry trough.

“The Board has full confidence that the Group can alleviate the pressure on its working capital caused by the unfavourable market conditions in the near future and maintain its normal production and operations. Based on the foregoing, the Board believes the above incidents will not have a material adverse effect on the operations, financial conditions and operating results of the Group as a whole”, the Group pointed out.

Having reviewed the unaudited consolidated management accounts of the Group for the five months ended 31 May 2013, market conditions in the past few months and the preliminary estimation by the Company’s management, the Group is expected to incur a net loss for the six months ended 30 June 2013 as compared with the published unaudited net profit for the same period in 2012.

During the first half of the year 2013, as affected by the continuing decline of the shipbuilding market, orders and prices of vessels decreased sharply as compared with the previous year, which resulted in the estimated net loss for the Group for the six months ended 30 June 2013.

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Press release, July 5, 2013