North-South Merger Call Re-emergence North Ship 'Change Blood' Stop Damage

With the acceleration of the reform of state-owned enterprises, speculation about the merger of China Shipping Group (South Ship) and China Shipping Heavy Industry (North Ship) has again aroused concern. On April 18, a spokesman for the National Development and Reform Commission (NDRC) said that the fourth batch of mixed-change pilot enterprises had been formed and submitted to the State Council Leading Group on State-owned Enterprise Reform, which would start implementation after approval. Coincidentally, Peng Huagang, Secretary-General of SASASAC of the State Council, also said on April 16 that the merger of North-South vessels involves listed companies, so "when it can be published according to relevant rules, enterprises will be published in accordance with relevant rules and requirements".

"There is the possibility of merger. On the one hand, it can eliminate overcapacity, on the other hand, it can complement each other's advantages and avoid vicious competition. If the integration is successful, it can also improve the international competitiveness of relevant companies." Ma Shuping, a researcher at the Development Research Center of the State Council, told TIME Weekly.

"There is no latest news about the merger of the two vessels." An unnamed securities representative from the Ministry of Heavy Industries and Securities of China told TIME. Discussions on the merger of North-South vessels have been emerging since around 2016. At that time, the North-South vehicle has been integrated into a Chinese medium-sized vehicle, and the response of SASASAC in 2017 is more interesting. In September of that year, Xiao Yaqing, director of SASASAC, talked about whether the North-South ship would merge and said, "Any situation could happen." The time enters the second quarter of 2019, and the North-South ship system seems to be accelerating the capital operation in their respective systems at the same time. On the one hand, the Southern Shipping System has reorganized the assets of its two listed companies through asset replacement and reorganization in accordance with the business sector. While centralizing the marine power business into China's shipbuilding defense, it has also centralized the shipbuilding assets into China's ships. On the other hand, the Northern Shipping System has also begun to accelerate the capital operation of China Heavy Industry (601989.SH), a listed company under its flag, by injecting China Shipping Heavy Industry (Qingdao) Rail Transit Equipment Co., Ltd. (hereinafter referred to as "Qingdao Track") into the listed companies to absorb new high-quality assets, and at the same time, through bankruptcy liquidation, liquidate its non-performing assets.

China Heavy Industries has been in the limelight because of aircraft carriers. China's first domestic aircraft carrier 002 was built by a number of listed companies under China Shipbuilding Heavy Industries, including China Heavy Industries.

According to the annual report, the main military products of China Heavy Industries include aircraft carriers, nuclear submarines, conventional power submarines, frigates and so on. According to the semi-annual report of 2018, revenue from marine defense and marine development equipment accounts for 32% of the company's total revenue.

As of the semi-annual report of 2018, China Heavy Industries has handheld orders for marine defense and marine development equipment, totalling about 103.7 billion yuan.

Under the leadership of China Shipbuilding Heavy Industries, China Heavy Industries has been promoting capital operation since 2016. In February 2016, China Heavy Industries transferred Shaanxi Chai Heavy Industries and Chongqing Gearbox to China Shipping Heavy Industries, and earned 228 million yuan. In October 2017, China Heavy Industries issued a fixed increase announcement, which planned to raise about 22 billion yuan to buy 42.99% of the shares of China Heavy Industries and 36.15% of the shares of China Heavy Industries. In December 2018, China Heavy Industries sold its shares in Shandong Heavy Industries and Qingdao Wushui Heavy Industries to China Shipping Company. Heavy industry, throw out the marine industry business assets, thereby unloading the burden.

"The process of continuous capital operation is the process of reducing the asset-liability ratio, integrating business and improving the rate of securitization of ZhongShip Heavy Wage Assets. The big background is that the shipbuilding industry is in a downturn, the production process and demand are shrinking, and the company is in a dilemma. Zhang Xing (not his real name), an analyst in the private equity market in Shenzhen, told TIME Weekly.

In fact, China Heavy Industries has been losing non-net profit for three consecutive years. According to the financial report, the deducted non-net profit of the company began to turn into a loss in 2015, with a huge loss of 3.33 billion yuan in that year, a loss of 400 million yuan in 2016 and a loss of about 800 million yuan in 2017. This target reached a high of 4.4 billion yuan in 2011 and about 2.8 billion yuan in 2012.

"The environment of shipbuilding industry has changed dramatically." Zhang Xing told TIME Weekly. According to the data of Oriental Wealth, since its listing in 2009, China Heavy Industries has raised a total of about 66 billion yuan from the market, while the company's division of labor in the past 10 years has only accumulated about 1.76 billion yuan. The latest capital operation of China Heavy Industries is to stop losses and clear non-performing assets. On the other hand, according to the above-mentioned statement to TIME Weekly by the unnamed representative of securities affairs of the Ministry of Heavy Industries and Securities of China, "the main purpose is to enhance the company's relevant R&D capabilities".

On March 19, 2019, China Heavy Industries entered bankruptcy liquidation for two companies, Dalian Ship Heavy Industries Group Shipping Engineering Co., Ltd. (hereinafter referred to as "Dalian Shipping") and Dalian Ship Heavy Industries Group Steel Co., Ltd. (hereinafter referred to as "Dalian Steel Industry"). Both of them belong to China Heavy Industries wholly-owned subsidiary Shipbuilding Heavy Industries.

These two companies have caused considerable drag on China Heavy Industries. According to the announcement, in the past three years, Dalian Shipping has been able to earn about 470 million yuan in annual revenue, but it has resulted in a total loss of 633 million yuan, while Dalian Steel has not realized any total business income and is in a state of complete loss, resulting in a total loss of 422 million yuan. The loss caused the two companies to be in debt. Among them, Dalian Shipping was brought to court for arrears of about 15.5 million yuan in material payments from suppliers, and Dalian Steel Industry was also in arrears of 155 million yuan.