CHINA HUARONG ENERGY CO LTD (31 March 2015, Hong Kong) - China Rongsheng Heavy Industries Group Holdings Limited ("China Rongsheng Heavy Industries", the "Company" or "We", and together with its subsidiaries, the "Group"; stock code: 01101.HK) announced its audited annual results for the twelve months ended 31 December 2014 (the "Period").
Introduction
Launched a fresh start, China Rongsheng Heavy Industries implemented its strategy of business transformation in 2014 and completed the acquisition of oilfield project in Kyrgyzstan in September. We are proactively transforming into an oil and natural gas exploitation and production operator.
Meanwhile, we demonstrated the strong production capacity of our shipbuilding facilities and outstanding technical expertise of the Group. Our shipbuilding segment has delivered 11 vessels, with a total volume of 2,059,660 DWT, successfully in 2014. More proactively sorting and optimising our order book, we decisively reduced the number of vessels under construction and cancelled some shipbuilding orders. We believe this action not only was in alignment with the Group's strategic plan to optimize the production and operation of its shipbuilding business during the Period, but also effectively reduced our burden on working capital and the credit risk of our order book, in spite of the fact that we have recorded a relatively larger amount of comprehensive net loss for the Period and a reversal of revenue of RMB4,530.7 solely resulted from the cancellation of shipbuilding contracts.
Furthermore, we recorded non-cash provisions and impairments of approximately
4,976.6 million, which is mainly attributed to provision for inventories (in relation to cancellation of shipbuilding contracts) and impairment provision of amount due from customers for contract works. The non-cash provisions and impairments enable us to sort out and assess various factors affecting our business and optimizing our pace of development. The quality of our assets could be assessed more clearly by this kind of
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non-cash provisions and impairments, supporting us to strive for a strategic transformation towards energy sector and being well-equipped for future challenges.
For the Period, the Group recorded a negative revenue of RMB3,802.4 million, which is attributable to the abovementioned reversal of revenue from cancellation of shipbuilding contracts and the decrease of revenue from shipbuilding and other contracts, compared to the revenue of RMB1,343.6 million for the same period of 2013. Losses attributable to the equity holders of the Company were narrowed from RMB8,685.2 million for the same period in 2013 to RMB7,754.9 million in 2014.
Results Analysis and Discussion
Shipbuilding Business
In 2014, we sorted and optimised our order book by reducing the number of vessels under construction and cancelling some shipbuilding orders. We negotiated proactively with ship owners and reached agreement with them on certain orders on hand, resulting in the cancellation, revision and variation of a number of shipbuilding contracts. We believe that this action will reduce our burden on working capital and effectively reduce the credit risk of our order book. Thus, the shipbuilding segment of the Company recorded a negative revenue of RMB3,891.4 million which is mainly attribute to the reversal of revenue from cancellation of shipbuilding contracts for the Period.
By delivering 11 vessels (2 more comparing with previous year) in 2014, with a total volume of 2,059,660 DWT, we demonstrated the strong production capacity of our shipbuilding facilities and outstanding technical expertise of the Group. Since the Group has planned to optimise the production and operation of its shipbuilding business as well as sort out the order book of the shipbuilding business, new shipbuilding contracts for 3 250,000 DWT very large ore carriers and 6 64,000 DWT bulk carriers that we entered into in 2014 have not been made effective.
As at 31 December 2014, our total orders on hand consisted of 35 vessels, representing a total volume of approximately 4,203,700 DWT with a total contract value of approximately USD1,668.4 million. They included 18 Panamax bulk carriers, 1 very large ore carrier, 1 Panamax crude oil tanker, 12 Suezmax crude oil tankers, 1 very large crude oil carrier, and 2 7,000-TEU containerships.
Steel Caisson Project
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We utilised existing facilities and technical expertise to construct the No. 28 and No. 29 steel caisson projects of the Shanghai Yangtze River Bridge and successfully delivered them during the Period, demonstrating our ability in building non-vessel steel structures and securing new sources of revenue. The No. 29 steel caisson, weighing approximately 15,000 tons, is the largest steel caisson of its kind in the world.
Energy Exploration and Development
On 11 September 2014, we completed the acquisition of 60% interest in the project (the "Kyrgyzstan Project") involving four oilfields located in the Fergana Valley of the Republic of Kyrgyzstan, which marked our breakthrough in the energy exploration and development sector. The Kyrgyzstan Project comprises of five oilfield zones namely, Maili-Su IV, Eastern Izbaskent, Izbaskent, Changyrtash and Chigirchik. The first three oilfield zones are located at the northeastern part of the Fergana Valley while the latter two are located at the Southeastern part of Fergana Valley. The total area covered by these five fields is approximately 545 square kilometres. The remaining recoverable reserves is estimated to be around 638 million barrels (MMbbl) of oil. Under the agreements entered into with the national oil company of Kyrgyzstan, Kbprb3>KepHeq:nera3 ("Kyrgyzjer Neftegaz" Limited Liability Company*), our indirect wholly-owned subsidiary was granted rights to cooperate with the national oil company of Kyrgyzstan in the operation of the five oilfields zones.
From 11 September 2014 to 31 December 2014, we have made satisfactory progress in the project. As at 31 December 2014, we had successfully completed drilling of 10 wells and had produced 16,260 barrels (bbl) of light crude oil, our daily production rate being about 252 bbl of light crude oil, even though only part of the oil wells were in operation. After initial drilling and production, we further understood and acknowledgedt the geological condition of the project. We will continue the process of perforating, testing and fracturing of the new wells to ramp up production. Since the project is still at the initial development stage, the sales of oil has not been reflected as revenue for the Period under relevant accounting treatment.
We have taken certain measures to mitigate the liquidity pressure and to improve financial position. In 2014, we completed issue of convertible bonds amounted to a total net proceeds of HKD3,985 million to strategic investors. In October, we has signed debt optimization framework agreements with a syndicate of domestic banks in Hefei of
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Anhui Province. Plus, the debt optimization framework agreement we have entered into with a syndicate formed by more than ten banks in Jiangsu Province, including Bank of China, The Export-Import Bank of China and China Minsheng Bank, such measures effectively mitigated liquidity pressure of the Company.
Operating Strategy and Prospects
Global economic recovery will remain a challenging course in 2015. Freight fees will remain at lower levels as any fundamental improvements to the situation of surplus capacity in the shipping market will be unlikely. It is well within expectations that the China's shipbuilding industry will generally enter into a stage of structural realignment and rebuilding of strengths.
In September 2014, we obtained the rights to co-operate with the national oil company of Kyrgyzstan in respect of five oilfield zones in Kyrgyzstan by way of the allotment of shares as consideration. Central Asia is a region subject mainly to the influence of Russia, whose export oil prices have not plunged in tandem with international oil prices and have remained apart from the international price level. Local domestic oil prices of Kyrgyzstan have not changed significantly despite the dramatic decline in international oil prices. In view of the low costs and stable local oil prices, we are of the view that, under the current adverse market conditions of the shipbuilding industry, exposure to the energy sector will enable us to diversify our operations and broaden our source of revenue, as well as drive our active transformation from a manufacturer to a supplier in the energy service sector, thereby enhancing contributions to the overall interests of our shareholders.
The directors of the Company are considering a potential sale and purchase transaction involving the related core assets and liabilities of its onshore shipbuilding and offshore engineering business of the Group in the PRC (the "Potential Transaction"). On 10
March 2015, the Company and an independent third party (the "Potential Purchaser") have entered into a memorandum of understanding (the "MOU") in relation to the Potential Transaction. The Potential Transaction shall adjust and optimise the assets and business of the Group, and divest the relevant assets and liabilities of the shipbuilding business and offshore engineering business, which shall help to ease the debt burden of the Group, enhance the flexibility of fund utilisation, better implement the strategy of business transformation and transformation into an energy service provider
focusing in the oil and natural gas market.
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* for identification purpose only
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Mr. Michael Cheng Tel: (852) 3900 1822 Email: michaelcheng@rshi.cn
iRregular Consulting LimitedMs. Catherine Tsang Tel: (852) 6675 5167 Email: catherinetsang@irregularconsulting.com
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