Forex a constant risk for ship leasing firm

money-glitz | Avery Chen 3 Jun 2019

CSSC (Hong Kong) Shipping, the sole leasing company under China State Shipbuilding Corporation, launched a Hong Kong initial public offering last week to raise up to HK$2.18 billion.

CSSC Shipping ranked fourth in the global ship leasing industry with a market share of 3.9 percent and first in the global non-bank ship leasing industry with a market share of 14.8 percent, according to a commissioned Frost & Sullivan report.

Established in 2012, the company mainly engages in leasing services, ship broking, and loan services.

CSSC Shipping's core business is leasing services, which include finance leases and operating leases. Its customers are mainly in mainland China, Asia, the United States and Europe, according to the prospectus.

The income from finance leases and operating leases contributed about 70 percent of total revenue in the past three years.

CSSC Shipping owns 71 vessels. Its committed portfolio comprised 29 vessels, which are expected to be completed and begin generating lease income before 2021. These 100 vessels have an aggregate value of US$5.6 billion (HK$43.68 billion), and 48 are under finance leases, while 52 are under operating leases.

When asked about the impact from the Sino-US trade tensions, chairman and executive director Yang Li says about 80 percent of the global trade volume is sea-borne.

The trade war had only a limited impact on CSSC Shipping as over 80 percent of its maritime trading routes are unaffected, Yang adds.

The company's revenue increased by 28.92 percent year-on-year to HK$1.33 billion in 2017, and further increased by 58.26 percent to HK$2.1 billion last year.

Net profit grew by 39.43 percent year-on-year to HK$602.59 million in 2017 and further climbed by 17.25 percent to HK$706.52 million in 2018.

However, net profit margin declined sharply by 11.7 percentage points to 33.6 percent last year, due to the decrease in share of results of associates as the company disposed of shares in two associates during the year, CSSC Shipping says.

The return on average net assets was up by 1 percentage point year-on-year to 11.5 percent in 2018, and net interest margin extended 0.9 percentage point to 4.8 percent. The non-performing asset ratio fell by 0.1 percentage point to 0.8 percent.

In addition, the company is exposed to high foreign currency risk, mainly the euro, Swiss franc, Singapore dollar versus the Hong Kong dollar.

The net foreign exchange gain amounted to HK$174.6 million in 2016, but incurred losses of HK$566.1 million and HK$297.4 million in 2017 and 2018, respectively.

Li Jun, chief accountant and general manager of credit and structured finance department, says the net foreign exchange loss in 2017 and 2018 was mainly due to euro-Hong Kong dollar exchange rate fluctuations. The company repaid euro-denominated bonds of 500 million euros (HK$4.28 billion) which expired in February 2018, and it received payment in euro from the disposal of associates in September 2018.

She says the company is affected by the US dollar and Singapore dollar exchange rate and will hedge to manage risk.

CSSC Shipping has attracted four cornerstone investors, including China Reinsurance Group (1508), COSCO Shipping Financial, Wison Engineering Services (2236), and First AutoMobile Finance. They agreed to buy shares worth about US$160 million, accounting for about 60 percent of the total offering.

About 60 percent of net proceeds will be used to strengthen the capital base of the ship leasing business, 30 percent will be for the capital base for sale-and-leaseback projects in respect of marine clean energy equipment, and 10 percent is for working capital and for general corporate purposes.

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