CEIBS Student Research

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1 CEIBS Student Research China Shipbuilding Rongsheng Heavy Industries (1101 HK) 11 November 2011 Initiation of Coverage BUY Price: HKD 2.40 Target: HKD 2.97 Upside: 23.8% Key Data Total issued shares (m) 7,000 Market Value (bn) HKD weeks Range HKD Free float 46.30% ROE (2011E) 16.10% Net Debt to Equity (Dec-2010A) 49.30% HKD/USD 0.82 Major shareholder: Zhang Zhi Rong Source: Bloomberg, CEIBS Analysis 54% Sailing through the Storm Environment is still tough, but downside is limited We believe 2012 will be a tough year for shipbuilders, with new contracts decreased by 53.7%, from 137 million DWT in 2010 to 64 million DWT in 2011E (annualized).we believe the downside for the shipbuilding industry is limited and the market has over reacted as 1) Shipbuilding, though cyclical in nature, remains positioned decently for further growth following the past 40 years with a CAGR of 16.2%; 2) Strong iron ore and oil demand from China will offset the demand shock for leading Chinese shipbuilders; 3) Drop in new shipbuilding price will drive up IRR/ROI for new ship investments. Chinese private shipbuilders are grabing the biggest market share In 2010 China overtook South Korea to be the new leader of global shipbuilding industry, in terms of new orders, order book and delivery. With lower labor and steel costs and better management incentives, Rongsheng is gaining the most market shares with new orders of shipbuilding increased from 3% in 2008 to 10% in H It has expended its leading positions in bulker market by focusing on large-and-medium-sized ships. For tankers, Rongsheng has become the 2 nd largest builder of Suezmax tankers globally. The company is now actively developing its containers business. Rongsheng is getting closer to the leading Korean shipbuilders in terms of quality and capacity. Positive earnings momentum driven by diversified income sources Rongsheng is diversifying itself from a pure shipbuilder to a heavy industry China focused major with energy associated topics as its main driver. We believe these moves are positive to Rongsheng s future prospectus because 1) new businesses give average 30% gross margin, comparing to 15% of shipbuilding. 2) New income source can be served as a counter-cyclical effect to Rongsheng s net profits. We expect earnings contribution from non-shipbuilding segment to increase from 1% in 2011 to 26% in Valuation We initiate coverage on Rongsheng with a BUY rating and 12-month target price of HKD 2.97 based on both, P/B and NAV valuation methodologies. Risk factors Downside risks are primarily less-than-expected new orders, higher labor and raw material cost, faster RMB appreciation, less government subsidy, relatively high gearing ratio Exhibit 1 Forecast & Valuation E 2012E 2013E Revenues (RMBm) 4,725 9,473 12,665 19,123 16,201 22,175 Gross Profit (Rmbm) -91 1,848 2,832 4,655 4,152 5,080 Gross profit margin -1.90% 20% 22% 24% 26% 23% EBIT margin % 14.40% 19.10% 20.10% 22.30% 23.10% Net income (RMBm) ,302 1,719 2,439 2,536 2,844 Fully diluted EPS (Rmb) P/E nm P/B nm nm , CEIBS Analysis ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 20. This report has been prepared by CEIBS Global Equity Research. It is published for educational purposes only by students competing in the CFA Institute Research Challenge. Investors should consider this report as only a single factor in making their investment decision.

2 Ranked No. 2 among PRC shipbuilders by order book on hand Exhibit 2 Total New Orders (DWTm) Global Rongsheng 2H H H H 2011 Source: Clarkson, Company Data, Oct Ranked No. 1 by new orders and No.5in the world with a total contract value of USD 6.8bn Investment Summary We initiate coverage of Rongsheng with a BUY Rating and a target price of HKD 2.97, offering a 23.8% upside from current stock price. As of 11 November 2011, China Rongsheng Heavy Industries Group Holdings ( Rongsheng ) was ranked second among all shipbuilders in the PRC, in terms of total order book on hand measured by deadweight tones ( DWT ) and first among privately-owned shipbuilders, according to Clarkson Research. Despite the downturn of the shipbuilding industry during 1H2011, Rongsheng s strong ability to obtain new orders made the company stand out among Chinese shipbuilders. Its 0.24 million square metres shipyard in Nantong City, Jiangsu Province, makes it one of the largest private shipyard facilities in China (see Exhibit 6). Rongsheng was granted new orders for 28 vessels in 1H2011, representing a total volume of approximately 3.4 million DWT with a total contract value of approximately USD 1.3 billion, accounting for 21% DWT of new orders in China and 9% in the world. Rongsheng s new orders in 1H2011 increased as compared with that of 2H2010 despite of the global new orders decrease, as detailed in Exhibit 2. The total orders on hand as of 30 June 2011 were 109 vessels, representing a total volume of approximately 17.4 million DWT with a total contract value of approximately USD 6.8 billion, ranking Rongsheng first in China and fifth in the world in terms of DWT. All the vessels in the order book are scheduled to be delivered during the period from 2011 to Revenue of 1H2011 represented a YoY growth of approximately 37.4% (annualised), EBITDA represented a YoY growth rate of 42.2% (annualised), and EPS represented a YoY growth rate of 16.5% (annualised). The significant growth was primarily attributable to the continuous expansion of the shipbuilding and the engineering machinery business. Exhibit 3 Development of Net Profit Mix 2011E Since 2009, the margin was under pressure due to the downturn of the industry and we estimate the gross margin to keep stable in the coming years for the following reasons: a) The Company s existing order book on hand secured its further revenue increase from 2011 to 2013, with 20.4% CAGR. b) Rongsheng s gross margin of shipbuilding at around 20-23% over the past 2.5 years was at the high-end among its peers. 2012E c) Chinese shipbuilders are gaining market share thanks to the lower labor and steel costs. Rongsheng, as a leading domestic private shipyard, implemented a stricter cost control policy, given the management s stronger incentive to improve efficiency. d) As the largest private shipyard in China, Rongsheng enjoys strong support from Chinese governments, including subsidies and tax beneficial treatment. e) Rongsheng is looking to transform from a pure shipbuilder to a heavy industries China focused major with energy as its core. Over the next years, we expect to see non-shipbuilding earnings increase from 1% in 2011 to 26% in 2014, as detailed in Exhibit E 2014E This strategy is expected to deliver a top-line CAGR of 20.4%, an EBITDA CAGR of 15.2% and an EPS CAGR of 13.6%. Moreover, further efficiency gains in scale effect of shipbuilding business and continuous expansion of engineering machinery business will support margin expansion. As a consequence of top line growth and margin expansion, we expect Operating Cash Flow ( OCF ) to increase, with the OCF-to-Sales ratio expected to rise from negative 24.4% in 1H2011 to positive 13.0% in According to our estimates, cash generated will be employed to reduce Rongsheng s net financial position and will leave the group with enough financial flexibility to expand its production capacity and gain further market shares in both local market and overseas markets. Our target price of HKD 2.97 is based on a method of Net Assets Value and Multiple Analysis. As shipbuilding is the major business segment and the main revenue source (over 95% in 1H2011), our DCF is based on a sum-of-order book approach, that separately values the orders received of different vessels. The Multiple Analysis values Rongsheng at geographical and aggregate level using P/B as the primary valuation parameter, since shipbuilding is a highly cyclical industry. Our target price is the average of the prices resulting from our DCF and our Multiple Analysis. CFA Institute Research Challenge CEIBS Student Research 2

3 Exhibit Revenue by customer base Greece 14% Rongsheng s product portfolio can be classified into four business segments Exhibit Revenue by business segment Offshor e Enginee ring 3.7% Cyprus 5% Oman 7% Turkey 15% Enginee ring Machin ery 2.6% Norway 2% : Russia 1% China 20% Germany 16% Brazil 20% Exhibit 6 Rongsheng s Manufacturing Sites Marine Engine 0.2% Shipbui lding 93.5% Less competitive shipbuilders are facing lack-of-new orders Business Overview Headquartered in Shanghai, Rongsheng is China s leading privately-owned heavy industries group with a focus on vessels and offshore engineering serving the customers in energy and resource sectors. The company is the second largest overall and the largest privately-owned shipbuilder in China in terms of order book measured in DWT. It has a diversified product offering including bulk carriers, oil tankers, containerships, offshore support vessels, marine diesel engines, small to midsize excavators and cranes for construction & mining uses (see Appendix 4 & 5). With a CAGR of 63.7% in revenue in past three years, Rongsheng outperformed the market in 2010, with net sales increased 33.7% to RMB 12.7 bn, and an improvement in both EBITDA (+58.7% to RMB 2.4 bn) and EBITDA margin (+3 bps to 19.2%). These products can be classified into the four business segments: shipbuilding (93.4% of FY 2010 revenue), Offshore Engineering (3.7%), Engineering Machinery (2.6%) and Marine Engine (0.2%). 1) Shipbuilding (i.e bulk carriers, oil tankers and containerships) Shipbuilding is Rongsheng s most important business area and the segment the company started out. According to Clarkson, bulk carriers and oil tankers are the main products of Rongsheng, accounting for 68% and 26% of orders in terms of DWT, Rongsheng has a strong and diversified customer base, comprising leading shipping, natural resource and financing & leasing companies, spanning over 11 countries worldwide (see Exhibit 5). Clients include, among others, CNOOC, Vale, MSFL, Cardiff Marine, Geden Lines and Frontline. In 2010, 20% of total revenue came from Chinese customers, with Vale from Brazil being the biggest customer overall with 20% revenue contribution. 2) Offshore Engineering (i.e. offshore support sessels such as DPV) Offshore engineering is the second key business segment of the company which is the extension of its established shipbuilding business. Currently Rongsheng is among the few privately-owned enterprises in China that are technically capable to undertake large offshore engineering projects. Despite its young track record, Rongsheng has already secured an offshore engineering order for a deepwater pipe laying crane vessel ( DPV ) by CNOOC. 3) Marine Engine (i.e. low-speed marine diesel engines) Rongsheng carries out its marine engine building business through its subsidiary Rong An Power Machinery. The business was originaly established to supply low-speed & medium-speed diesel engines and dual fuel engines to its offshore engineering and shipbuilding segments to enhance the company s competitive edge. However, in order to grow and diversify its revenues stream, the engines will also be supplied to external customers. 4) Engineering Machinery (i.e. excavators and hydraulic crawler cranes) The company sengineering machinery segment is operated through its subsidiary Rong An Heavy Industries. It was with the acquisition of Zhenyu Machinery, a manufacturer of excavators and crawler cranes in 2010, that the company entered the engineering machinery market. Rongsheng carries out its shipbuilding and offshore engineering activities at its shipyard in Nantong, located in the coastal area of the Yangtze River Delta. The company builds and manufactures its marine engine and engineering machinery products in Hefei in eastern China (see Exhibit 6). Industry Overview 1) Shipbuilding: A limited downside Shipbuilding is a traditional cyclical industry. According to Clarkson, ship deliveries hierarchically increased from 31 milion DWT in 1970 to 61 milion DWT in 2004, and reached 151 milion DWT in 2010 with a CAGR of 16.2%. In the impact of European debt crisis and slowdown of global economy, new contract decreased by 53.7% from 137 million DWT in 2010 to 64 million DWT in 2011 (annualized) due to fallback of global seaborne trade. The ratio of New order/ship deliveries decreased from 90.9% in 2010 to 44.5% in 2011, indicating that less competitive shipbuilders would face lack-of-new order problem and new building price would fall accordingly. In this case, it is possible that ship owners would initiate delay of delivery and shipbuilders slowed down capacity expansion, which would lead to investors overreaction in stock market. At the industry level seaborne trade remains robust in emerging markets like China, and seems largely unaffected by current macro conditions. Macro weakness could result in a short-term slowdown, but we remain optimistic on the medium- and long-term fundamentals of the sector. CFA Institute Research Challenge CEIBS Student Research 3

4 Jan.08 Jul.08 Jan.09 Jul.09 Jan.10 Jul.10 Jan.11 Jul.11 Jan.08 Jul.08 Jan.09 Jul.09 Jan.10 Jul.10 Jan.11 Jul.11 Rongsheng 11 November 2011 Exhibit 8 China Factor on World Trading 75% 50% 25% 0% Exhibit 9 Component of bulks Others 26% Wood 6% Wheet 8% Steel 9% Coal 26% Iron ore 25% Source: China Supply Price Information Exhibit 10 China Steel Production vs. Iron Ore Import ( 000 tonnes) 70,000 60,000 50,000 40,000 30,000 Source: CEIC Exhibit 11 China Iron Ore Import Price (USD/Ton) vs. Iron Ore Import ( 000 tonnes) 70,000 60,000 50,000 40,000 30,000 Source: CEIC Drivers to shipbuilding industry Exhibit 7 Changes in Market shares of leading shipbuilding countries 75.0% 50.0% 25.0% Source: Clarkson, Oct 2011 Source: UNCTAD 68% Iron ore China Korea Japan 0.0% China, a strong engine in ship building industry 13% Coal New ship building price CN Steel Production Import Volume Import Volume Iron Ore Import Price Iron Ore The global shipbuilding industry is mainly driven by world s seaborne trade demands, following the cycle of global economy. Seaborne trade, including trade of bulks, oil & chemicals and containers, is considered to be artery of global economy as it accounts for 90% of the world s merchandise trade in terms of volume. When we looked into world merchandise trade and seaborne trade from 1990 to 2010, we found out that the trend in new orders is exactly in line with world merchandise and seaborne trade. Looking at the geographical distributions at Exhibit, Japan kept losing market share as its shipbuilders became reluctant to expand their capacity following the deep recession in the 1970s, also over 90% of their customers are local, which limits new order expansion. In recent years, the Korean Won depreciated over 40% which greatly enhanced competitiveness of its shipbuilders in the market. At the same time, Chinese shipbuilders took the advantage of lower labor and raw material cost, such as self-supplied shipbuilding plate. In 2006, China overtook South Korea to be the new leader of the global shipbuilding industry. In 2011 claims once more No. 1 with new orders (45.4%), order book (42.2%) and delivery (40.9%) (see also Appendix 17). In emerging markets, China kept a high GDP growth of 8-10% in the past five years, which simulated growing demand in seaborne trade. According to the IMF, emerging markets will keep growing their GDP at 5% in the coming five years which will stabilize the demand in the shipbuilding industry. In particular the China Factor plays an important role in world seaborne trade, including 68% in iron ore sector and 13% in coal sector (see Exhibit 8). Considering iron trade accounted for 25% of bulks trade and over 50% of iron ore relies on imports particularly from Australia and Brazil, we conclude that iron trade import in China was the most significant driver in world seaborne trade, and directly impacted the demand of large sized bulk carriers (see Exhibit 9). In China itself, strong steel production will drive demands for iron ore import. China s domestic steel production has remained strong in 2011, while its iron ore import remained at a low level in 1H2011 (see Exhibit 10). Then, driven by its strong demand, China s iron ore import rebounded heavily since July 2011 and is expected to grow steadily throughout On the other side, declining iron ore price will also stimulate imports. Iron ore price and imports volumes normally have negative correlations. The latest data shows that China s iron ore import price started to decline in Oct 2011 (see Exhibit 11). This declining price will stimulate domestic steel manufactures to increase steel ore inventory and steel production. We expect China s crude oil imports to increase by 5.1% YoY in 2011 to 247 milion tones, the demand for VLCC tankers should go up accordingly. According to a recent Poten & Partners report, the increasing demand for crude oil could create demand for an additional 80 VLCCs by After a heavy drop of newbuilding price in 2009, the price has remained in a historical low level in 2011 (see Appendix 3). Including 12% decrease in bulk carriers, 10% decrease in containers, and 5% decrease in tankers, average new building price decreased by 8% in 2011, which was mainly driven by a decrease of forecast rent. Compared with stable demand in tankers, demand in bulk carriers is influenced more by trade of commodities and macro conditions. On the other side, new orders may recover from 2010 from a low base in 2011, if ship owners have better long-term expectations and want to place more new orders when price is low. 2) Offshore engineering: a huge potential market It s generally accepted that the future growth of oil output will mainly come from offshore drilling. The offshore area of China is relatively under-developed. To catch up the Chinese central government announced this year an Offshore Plant & Equipment Industry Development Strategy ( ). According to this plan, China s government plans to further increase oil & gas production capacity from offshore by 50m tonnes p.a. by 2015, which is estimated to trigger an investment of RMB 250 billion in offshore engineering industry. This will present a huge potential market for domestic producers of relevant equipment. In Mid-2011, China s National Development & Reform Committee ( NDRC ) announced the first batch of four qualified LNG shipbuilders in China with Rongsheng being the only private shipyard on this list. China s demand for LNG ships will be vessels over the next 10 years, by our estimates. We expect Rongsheng to win two new orders for LNG carriers p.a. over and two new orders for FPSO in We expect it to win about 10% market share in domestic offshore engineering equipment market over So it is a long-term growth driver and offshore new orders will be a catalyst to the stock price. CFA Institute Research Challenge CEIBS Student Research 4

5 3) Marine Engine: upward integration with shipbuilding The global marine diesel engine industry posted a strong growth in the past five years with the revenue growing at a CAGR of 16.7%, due to the booming global shipbuilding industry. However, according to Forst & Sullivan, the recent downturn in shipbuilding cycle is expected to negatively impact the marine diesel engine industry. While China is likely to see a significant increase in demand, the marine engine market in China is still met by imports mainly from Korea. As per Frost & Sullivan, of a total demand of 13.1 million horse power (for low and medium speed engines), 7.7 million horse power was met by imports whichis likely to continue to be the case in 2015E as well. So there will be a huge potential market for domestic producers. 4) Engineering Machinery: new business to bring new revenue According to Frost & Sullivan, it is estimated that the domestic excavator market will grow at CAGR of 15.3% by sales volume and at a CAGR of 18.0% by sales value between 2009 and 2015 to reach 273,178 units and USD 32.1 bn, respectively, by While the medium-sized models (6-30 tonnes) will still be the mainstream in the market, the small-sized models (under 6 tonnes) and large-sized models (above 30 tonnes) are expected to post faster growth. Rongsheng has been expanding its engineering machinery production base in Hefei, Anhui Province (see Exhibit 6). The whole project, with an annual production capacity of 30,000 hydraulic excavators, is designated as a major project in the 861 Action Plan of Anhui Province as well as a major implementation project under the Twelfth Five-Year Plan of the Hefei Municipal Government. Exhibit 12 Rongsheng Global Market Share by New Orders 15% 10% 5% 0% Exhibit 13 Global Top 5 Order Book (DWTk) Panamax Bulkers by Shipyard Oshima Tsuneishi Imabari S.B. Co. Zosen S.B. Source: Clarkson, Oct Rongsheng Jinhai Heavy Ind. Exhibit 14 Global Top 5 Order Book (DWTk) Suezmax Tankers by Shipyard A 2007A 2008A 2009A 2010A H12011 Source: Clarkson, Company Data, Oct Samsung Rongsheng Daewoo Hyundai Atlantico H.I. H.I. Sul Competitive Positioning Rongsheng mainly competes against domestic shipbuilders on bulkers, against Korean shipbuilders on tanks, and against both Korean and domestic shipyards on the container side (see also Appendix 5). Its major Korean competitors include Hyundai Heavy Industry, Samsung Shipbuilding and Daewoo. Its relevant Chinese (state-owned) competitors are CSIC, CSSC, COSCO, Guangzhou and (private-owned) Yangzijiang. Key competitive advantages Rongsheng s global market share in new orders of shipbuilding increased from 3% in 2008 to 10% in H12011 (see Exhibit 12). Compared to Korean peers, Rongsheng benefits from lower labor and steel costs. Compared to domestic stated-owned shipyards, Rongsheng s private-owned status gives management a strong incentive to contain costs and improve efficiency. Compared with smaller private shipyards, Rongsheng has strong support from local government. Bulkers: focusing on large-and-medium size Rongsheng plays a leading position in large-and-medium-sized bulkers shipbuilding. As can be seen from Exhibit 13, for Panamax bulkers Rongsheng is now the 4 th largest builder globally and the largest one in China. VLOC (bulker above 300,000 DWT) contributed 33% of its orderbook in 1H2011. Tankers: leading position in key products Rongsheng has actively developed its value added products, such as oil and gas transformation vessels. It is currently the 2 nd largest builder of Suezmax oil tankers globally and the largest one in China (see Exhibit 14). Containership: emerging player in Panamax containerships While Rongsheng previously had less experience in container ship building,the companyt just secured orders for 10 Panamax containers (6,600 TEU), which will be delivered in Now, Rongsheng is 6 th largest builder of Panamax containership in China and ranking 13 th globally. Advanced product lines: approaching to top Korean players The top 3 Korean shipbuilders have recognized technology, long tracked records and more advanced products lines. Since Chinese shipbuilders, who have cost advantages, have won most new contracts of bulkers, Korean shipbuilders turn to more value-added products, such as drilling ships, gas carriers and offshore rigs. Based on strong R&D and powerful facilities, Rongsheng is the only Chinese builder who is comparable to the top Korean players, in terms of product lines. Source: Clarkson, Oct 2011 CFA Institute Research Challenge CEIBS Student Research 5

6 Financial Analysis Before we lay out our forecast and assumptions, we would like to highlight a few points: First, Rongsheng books its shipbuilding revenue by a percentage-of-completion method. Rongsheng commences recognition of profit from a shipbuilding construction contract when the vessel s percentage of completion exceeds 20%, to ensure a positive completion of the order can be reasonably assumed. Second, Rongsheng enjoys strong support from the local government (via received subsidies) and is also one of the few yards to have NDRC approval for: a) building 100,000 DWT vessels and above; b) building 4 th Dry-dock (specifically for Offshore engineering) and; c) Marine engine building business. Third, as the company will continue to receive new shipbuilding orders in the future, some of the revenue and hence profit in our forecast period will come from future orders, in addition to the order book on hand. But in our evaluation under NAV method, we only forecast the future income and cashflow according to the existing orders on hand for shipbuilding segment, from a conservative view. Sales: Growth due to increasing capacity utilization and vertical integration We expect 2011E sales revenue to reach 19.1 billion RMB, up 42.2% YoY, driven by its increasing orders received. Due to economic of scale and good cost control methods, Rongsheng has managed to increase its gross margin from 22.4% in 2010 to 23.2% in 1H2011, we expect gross margin to further increase to 24.3% by end of 2011 (see Appendix 8). Exhibit 15 Chinese Top 5 Shipyards Order Book Nov 10 th, 2011 (DWTk) Rongsheng Jinhai Heavy Dalian Shanghai New Times industry Shipbuilding Waigaoqiao S.B. Source: Clarkson We expect Rongsheng s profitability ratios to remain stable amid trough business environment in the future due to the following reasons: a) Rongsheng s gross margin of shipbuilding at around 20-23% over the past 2.5 years was at the high-end among its peers. And the existing orders on hand secured the future revenue and income. b) Chinese shipbuilders are gaining market share thanks to the lower labor and steel costs. Rongsheng, as a leading domestic private shipyard, implemented a stricter cost control policy, given the management s stronger incentive to improve efficiency. c) Rongsheng is looking to transform from a pure shipbuilder to a heavy industries China focused major with energy as its core. Over the next years, we expect to see non-shipbuilding earnings increase from 1% in 2011 to 26% in Rongsheng s order book as at 10 November 2011 increased as compared with that of 31 December 2010 despite of the decrease of the other major competitors, as detailed in Exhibit 15. Earnings: With the EPS of RMB 0.17 Rongsheng achieved in1h2011, we expect 2011E EPS to reach RMB 0.35, which represents an 42% increase over 2010 earnings (see Exhibit 1). The financial performance of the company rests upon the sustained growth of the shipbuilding business and increasing profit margins for the company through expansion of engineering machinery business. Furthermore, the company constantly showed its strong ability in obtaining new orders. Rongsheng obtained new orders for 28 vessels in 1H2011, representing a total increased contract value of approximately USD 1.3 billion, with a grand total contract value of approximately USD 6.8 billion on hand at the end of 1H2011, which provides high revenue and earnings visibility with the bulk of it being monetized over next 2-3 years. Rongsheng s profitability appeared strong as compared with both its overseas and domestic competitiors. Following Rongsheng s 2010 acquisition of RongAn and Zhengyu, two manufacturing subsidiaries engaged in engineering machinery production, Rongsheng announced its acquisition consideration of Anhui Quanchai Group in April The aggregated amount of the deal was RMB 2.1 billion, which will cause the debt ratio to slightly increase from 65% to 67%. However, leveraging on Rongsheng s capability in producing low-speed diesel engine, the acquisition will enhance Rongsheng s ability to enter into the market of producing high-speed diesel engines, which is the principal business conducted by Quanchai. It also enables the Group to secure a stable and reliable supply of engine parts, which in turn will aid the sustainable growth of the Group s engineering machinery segment. Leveraging on the PRC government s policy to enhance investment in agricultural machinery, high-speed railway construction and logistics, the acquisition also allows the Group to expand its business and to further diversify its revenue sources. CFA Institute Research Challenge CEIBS Student Research 6

7 Exhibit 16 Rongsheng Cost Structure 100% 75% 50% 25% 0% Exhibit 19 Gearing Ratio 120% 100% 80% 60% 40% 20% 0% Others % Labour cost Raw materials and consumable used H2011 Exhibit 17 Expenses Breakdown by nature In % H2011 Raw materials and consumable used Labour Others Total Exhibit 18 Expenses Breakdown by nature Change in Rmb vs. USD by 2% Change in steel cost by 4% 85.20% Change in labor cost by 10% -5% -8% -2% 5% 8% 2% Source: CEIBS Analysis 54.65% 56.46% H2011 Note: Total debt/total debt plus total equity Source: Clarkson Steel, equipment (including engines and other materials) and labor costs are the key cost factors for the shipbuilding process. These three costs usually account for around 85% of the total cost base (including SG&A and other administrative costs allocated), as detailed in Exhibit 16 and Exhibit 17. Moreover, the bulk of its costs are usually denominated in RMB (we estimate 10% of costs are in USD on equipment costs) while debtors from customers are mainly denominated in foreign currency (we estimate 30% of debtors are in RMB for domestic clients). Therefore, Rongsheng is sensitive to steel price fluctuation, labor cost fluctuation and RMB appreciation. Exhibit 18 shows the sensitivity analysis of earnings with increase/decrease in steel price, labor cost or RMB appreciation Cash Flow: Increasing with revenues and margin Rongsheng s gearing ratio is relatively high when compared with its Chinese shipbuilding peers. We believe this is mainly attributable to its aggressive expansion activities: it has built a yard with total 4 million square meters, acquired several engineering machinery subsidiaries and obtained an accumulated USD 10 billion orderbook in just 6 years time. As a result, Rongsheng is currently geared at 1.9x as of 1H2011. It s in the net operating cash outflow position, mainly because Rongsheng s major operation input construction materials purchase occurs in the beginning phase of the construction while the debtors are collectible upon certain completion milestones. Please refer to Appendix 9 for the detailed cashflow statements from 2009 to 2013E. However, we estimate it should be in a net cash position as of December 2012 due to increased revenue and margin. And management s target debt ratio is 70%. Sales growth and profit expansion will increase operating cash flow. According to our estimates, Rongsheng will generate about RMB 4 billion operating cash flow per year on average from the existing orders of shipbuilding segment for the next three years. This cashflow will be used to finance capital expenditure in other machinery segments and a reduction of net financial position. Financial structure: Healthy balance sheet with strong financing ability At the end of 1H2011, Rongsheng s balance sheet shows healthy solvency with a debt ratio of 65%, consistent with that of 2010, and healthy short-term liquidity represented by a current ratio of 135% which indicated no immediate solvency risk. For details of Rongsheng s financial leverage comparison with major industry competitors, please refer to Appendix 6. Compared with industry debt ratio of 34%, relatively higher debt ratio of 65% does not propose immediate burden some risk and still presents a healthy financing structure, since Rongsheng s debt ratio has been decreasing from year 2008, which shows management s strong awareness and ability to control its leverage, as detailed in Exhibit 19. Furthermore, the company turns over its inventory approximately every 54 days representing highly efficient operations; but, this figure may be skewed as engineering machinery inventories rise. The debtor turnover day in 1H2011 shows 287 days, which increased from 149 days in 2010, mainly due to the credit term granted to machinery customers are longer than those granted to shipbuilding customers. In the presence of tight monetary policy, Rongsheng continued enhancing its close cooperation with several financial institutions to support itscontinued growth by securing multiple credit facilities. In January 2011, Rongsheng obtained credit facilities of: a) RMB 10 billion from China Everbright Bank b) RMB 11 billion from China CITIC Bank In August 2011, Rongsheng obtained further credit facilities of: a) USD 0.22 billion from Crédit Agricole b) RMB 28 billion from Agricultural Bank of China The increase in available credit lines of RMB 50.4 billion strengthens the operational and strategic flexibility of the company significantly. CFA Institute Research Challenge CEIBS Student Research 7

8 We apply two valuation techniques:multiple Analysis and Net Assets Value Valuation We evaluate Rongsheng by applying two techniques: Multiple Analysis and Net Assets Value (NAV). Given the heavy assets nature of Rongsheng s business we use P/B as our key ratio for the multiple analysis. The NAV Analysis is used to adjust our results and obtain a more conservative price. Base Case estimation with multiple analysis: We choose P/B as our key ratio for valuation, as Rongsheng operates in a cyclical industry, and is currently experiencing a downturn. Additionally, P/E is applied to cross check the results. Following the management s strategy, Rongsheng is currently diversifying its business towards machinery, although right now its main business is still shipbuilding (about 89.7% of the total revenue in the 1H2011, see also Appendix 8). We expect machinery to become a significant growth driver going forward. Therefore, we define two groups of comparable companies (see Appendix 12): a) comparable companies in the shipbuilding industry, which also include global competitors b) comparable companies in the machinery industry We conservatively assume that Rongsheng does not make significant progress in its machinery business, and follows the valuation level of shipbuilding industry, therefore we estimated its price of HKD For the second group we optimistically forecast that Rongsheng can diversify its business in 2012, that makes Rongsheng in the middle of shipbuilding and machinery industry valuation level, and the price will be HKD We use the average of both prices as our target price of HKD We use P/E to double check our results results and the price of HKD 4.21 is very similar to the value we get from P/B multiple. Why We Use NAV Method Liquidation Value Senario Analysis Bear case estimation with NAV Valuation: To better gauge the downside of our valuation, we adopted NAV to value the company in a liquidation scenario for Rongsheng s shipbuilding and offshore business. Rongsheng s shipbuilding and offshore business are driven by new orders, and a building process for a new ship usually span for 2-3 years of period, so we treat each new order as a project and use NAV method to calculate liquidation value for shipbuilding and offshore business to get a bottom line of Rongsheng s value in the bear market. We calculate the liquidation value for shipbuilding and offshore business based on the following assumptions: a) We assume all futher cashflow comes from shipbuilding segment only, no revenue contribution from marine engine and engineering machinery sectors b) Because the existing order s construction period spans to 2014, we assume Rongsheng will liquidate its business in 2014 by stopping to receive any new orders starting from now. Therefore we only discount FCF from 2011 to 2014 to calculate the NAV. c) When disposing the PP&E, we designed three senarios for the liquidation valuation (see also Appendix 14): 1) P/B=0.8 ; 2) P/B=1 ; 3) P/B=1.41 (current median value of shipbuilding industry) d) Capex: About 25% of the proceeds (HKD 2,899 million) from IPO outlined in the future plan of proceeds for shipbuilding and offshore business from 2011 to 2013 in its prospectus. However, in 1H2011 capex has already reached HKD 2,500 million, so we expect the total capex for shipbuilding and offshore will exceed the budget slightly in 2011, but the total expenditure may extent to a longer period since the industry is experiencing a downturn. e) Change in net working capital: 9.8% of the incremental revenue in E as consistent with the percentage of 2010, since there is no change in credit sales policy under the liquidation assumption we assume the percentage will not change. f) A&D expense: 2.5% of revenue in 2011E, consistent with the percentage of 1H2011, but will increase after heavy capex investment in g) We adjust the revenue assuming that RMB will appreciate 3% for the next three years. h) Based on the expectation of Rongsheng s management, we discount the revenue so as to include order cancellation risk in our model. i) WACC is 8.39% and 9.64% respectively for 2011 and WACC assumptions are summarized in Appendix 11. CFA Institute Research Challenge CEIBS Student Research 8

9 Exhibit 20 Senario Analysis: Liquidation Value for Shipbuilding and Offshore Business Method Weight Price HKD NAV 70% 2.35 P/B 30% 4.41 Source: CEIBS Estimate We estimate a year-end target price of HKD 2.97 because of the down trend in the industry We choose the neutral scenario (P/B=1) to calculate our final NAV value. The final NAV value of HKD 2.35 is lower than the one derived from P/B, which is because that: a) We didn t consider the value of marine engine and engineering machinery sectors. b) We use NAV and liquidation assumption to value shipbuilding and offshore business, which is more conservative than the market-oriented valuation methods. (P/E, P/B) We expect year-end target price of HKD 2.97, which was 30% / 70% weighted average of the prices resulting from our Multiple and NAV Analysis (see Exhibit 20). We assigned a lower weight to the Multiple Analysis because of the down trend in the industry and the bearish mood in the market. But we think Rongsheng could offer further upside potential in the medium term, as long as the diversification strategy proves to be successful. We believe that the market is still waiting for further evidence from the other three sectors performance to include the growth potential into Rongsheng s stock price, but we also understand that there is risk of executing such strategy. Investment Risks Overcapacity risk Imbalance between supply and demand in world shipping markets, combined with a steady rise in shipping costs will create a double squeeze on the industry. It is expected to persist for longer than the slump in late 2008 and 2009, because demand is likely to take a longer time to absorb the excess ships. Currency risk Rongsheng s gross margin will be squeezed if the Chinese yuan appreciates, given USD contracted revenues and a primarily Chinese yuan based costs structure. To mitigate this risk, the company is actively pushing counter measures. In 2010, new orders from domestic customers accounted for about 33% of total new orders, providing a natural hedge, while the expansion into engineering machinery and steel structure businesses will further increase the company s yuan based revenues (see Exhibit 18). On the contrary, with about 7.9% of its RMB 1.58 billion loans in USD or HKD as of end of H1 2011, Rongsheng is set to benefit from any USD depreciation going forward. Raw material cost risk Rongsheng is sensitive to cost variance due to the time lag of 1-2 years between taking orders and manufacturing. Steel price is volatile; labor cost is rising in China; we assume 5% rise p.a. in FY Rongsheng is flexible inmanaging labor cost given 75% its workers are contract workers (about 20,000 persons) hired by third-party companies that provide contract labor services (see also Exhibit 18). Order cancellation and delay risk Rongsheng entered into a number of new product offerings (i.e. Offshore, LNG carriers, see also Appendix 5) as well as new segments (i.e. Engineering Machinery and Marine Engine), order cancellation and delay risks increased due to execution. If clients terminate their orders and there is no breach by the company of its contract obligations, the company may retain the installments, and the vessel could be disposed at the company s discretion. But loss cause by order cancellation looks limited because: if shipowners terminate their orders and there has been no default on Rongsheng s part, Rongsheng may retain the installments, and the vessels will be at its sole disposal for sale. Rongsheng experienced 24 order cancellations in 2009, which did not cause notable loss. Management Team Rongsheng has an experienced and well-recognized management team with proven execution capabilities, as highlighted below. Mr. Zhirong ZHANG, Chairman Mr. Zhang has more than 14 years of experience in corporate management, real estate development and the investment industry, and about four years of experience in corporate management of heavy industry business. Prior to his involvement in heavy industry, Mr. Zhang was engaged in construction materials trading and construction subcontracting in the early 1990s. In 2006, Mr. Zhang entered the heavy industry business by establishing Rongsheng Heavy Industries Group of which he currently holds 54% (see also CFA Institute Research Challenge CEIBS Student Research 9

10 Appendix 16). His relatives and friends control an additional 17.1%. Mr. Zhang received a MBA from Asia Macau International Open University in He is the chairman and executive director of Glorious Property Holdings Limited, which is listed on the Hong Kong Stock Exchange. Mr. Qiang CHEN, CEO Mr. Chen, 49, was ranked 41 st among the world s most influential people in the shipping industry by TradeWinds, a prestigious Norwegian shipping magazine. He became the deputy manager at Jiangnan Shipyard Group in He later became a founder of Shanghai Waigaoqiao Shipbuilding, a top shipbuilding enterprise in the PRC. He holds a doctoral degree in the naval architecture and ocean engineering and has been awarded special allowances by the State Council as a shipbuilding expert. Hi current sharholding represents 2.8% (see Appendix 16). Sean WANG, CFO Mr. Wang has many years of experience in financial operations and project management at a number of multinational firms listed on the US Stock Exchange and NASDAQ. Mr Wang won the CFO of the year in China award in He studied at Peking University and received a master s degree in science from University of Hamline in Corporate Governance & Corporate Social Responsibility As Corporate governance (CG) and corporate social responsibility ( CSR ) are good ways to improve transparency and enhance long term value, we assessed Rongsheng s CG and CSR activities in recent years. Corporate Governance Although it was newly listed, Rongsheng published its first CG report adopting a professional framework in Generally speaking, Rongsheng complied with good practices in the CG report and results are reported as below: a) Independence of the Board of Directors: 4 of 12 members are independent b) Internal control & Remuneration committees: Composed of independent directors c) Financial & Internal control disclosure and transparency: Rongsheng follows COSO reporting guidelines well d) Independence of chairman: Chairman and CEO are separated (see also Management Section). At the same time, we also noticed some procedures that can be improved in 2011: a) Appointment Proposal Committee: Name list has not been established yet b) Board of Directors members maximum offices in other companies: Limit to the number of offices directors can cover has not been established c) Audit Committee and Remuneration Committee: No meeting was held during 2010 Corporate Social Responsibility The heavy machinery industry is very concerned about CSR, because establishing and maintaining an occupational health & safety system and an environment management system are of high importance to employees as well as the society. Since its incorporation five years ago, Rongsheng has been proactively creating jobs, boosting the income level of local residents, increasing government tax revenue and consequently generating regional economic development, all of which have been well recognized by the local government. For examples: a) In 2008, Rongsheng donated RMB 11 million to Wenchuan earthquake victims; b) In 2010, Rongsheng participated in the Love & AIDS Connection 2010 World AIDS Day Social Campaign as well as the Red Ribbon Charity Auction, which have helped to clear misconceptions about AIDS, eliminate the stigma attached to AIDS and assist children orphaned by AIDS; c) Till 2010, Rongsheng has ordered over RMB 27 million worth of worker s supplies from the Rugao Disabled Persons Service Center; Rongsheng s shipyards were acknowledged by Occupational Health and Safety Management System Standards (i.e. OHSAS 18001:2007) and Environment Management System Standards (i.e. ISO 14001:2004). CFA Institute Research Challenge CEIBS Student Research 10

11 Appendix Appendix 1 Remarkable development over the past 5 years since Rongsheng s establishment Appendix 2 Order Book History Year Vessels DWT (million) USD (billion) E Total Appendix 3 Newbuilding Price (USDm) VLCC Suezmax Tanker Aframax Tanker Panamax Tanker Capesize Bulker Sep 2011 Source: Clarkson, Oct 2011 CFA Institute Research Challenge CEIBS Student Research 11

12 Appendix 4 Product Display Appendix 5 Product portfolio analysis of Rongsheng s main competitors Bulk carrier Tankers Product line Type Capacity (DWT) Rongsheng YZJ COSCO Samsung HI Hyundai HI Daewoo VLOC >300,000 China No. 1 Capesize >100,000 Panamax 60,000-99,999 China No. 1 Global No. 5 Handymax/ Handysize <40,000 ULCC/VLCC >200,000 Suezmax 120, ,999 China No. 1 Global No. 2 Aframax 80, ,999 Panamax 60,000-79,999 Handymax/ Handysize <60,000 Post-Panamax >40,000 TEU Containers Panamax 30,000-40,000 TEU China No. 1 Sub-Panamax <40,000 TEU LNG - Under way Global No. 1 Gas carrier LPG - Under way Global No. 1 Offshore Offshore ships/drilling ships Global No. 1 Appendix 6 Financial highlights of competitors (1H2011) Name Financial Leverage Debt/Assets Ratio Current Ratio Rongsheng Shanghai Waigaoqiao Free- B China CSSC Holdings Ltd-A China Shipbuilding Industry-A Guangzhou Shipyard International Samsung Heavy Industries Hyundai Heavy Industries Daewaoo Shipbuilding & Marine Average CFA Institute Research Challenge CEIBS Student Research 12

13 Appendix 7 Balance Sheet As at 31 Dec (RMBm) E 2012E 2013E Property, plant and equipment 5,688 7,164 12,124 13,747 14,436 14,944 Land use rights Investments Intangible assets Long-term deposits Deferred tax assets Total non-current assets 5,791 7,326 13,042 14,629 15,282 15,754 Non-current assets held for sale Inventories ,557 2,028 1,908 2,707 Amounts due from customers for contract works 1,641 4,646 4,091 5,369 4,050 5,544 Trade and bills receivables Other current assets 5,673 3,782 7,555 8,929 8,725 9,979 Restricted cash 1,607 1,867 4,010 4,010 4,010 4,010 Cash and cash equivalents 2,087 2,863 10,413 5,822 7,102 6,601 Total current assets 11,923 14,645 27,954 26,588 26,214 29,414 Amounts due to customers for contract works -8,858-8,084-4,853-6,370-6,208-8,497 Advances received from customers for contract works Trade and other payables -5,087-4,817-3,126-4,070-3,829-5,433 Current income tax liabilities Bank borrowings -1,396-3,976-9,149-7,815-6,500-4,500 Preferred shares -2,240-2, Finance lease Other current liabiltiies Total current liabilities -17,773-20,411-18,181-19,358-17,591-19,995 Preferred shares Bank borrowings ,767-4,752-3,752-2,752 Shareholder's loans Finance lease Deferred tax liabiliites Non-current liabilites ,180-5,084-4,004-2,924 Minority interests ,068-1,068 Total equity ,859 15,846 18,833 21,180 CFA Institute Research Challenge CEIBS Student Research 13

14 Appendix 8 Income Statement Y/E 31 Dec (RMBm) E 2012E 2013E Turnover Shipbuilding 4,698 9,184 11,842 17,160 14,948 17,732 Offshare engineering ,174 3,747 Marine engines Engineering machinery Elimination , Total turnover 4,725 9,473 12,665 19,123 16,201 22,175 Cost of sales -4,816-7,625-9,834-14,468-12,049-17,095 Gross profit -91 1,848 2,832 4,655 4,152 5,080 Profit before tax ,307 2,044 2,932 2,963 3,742 Taxation Profit after tax (540) 1,305 1,780 2,592 2,675 2,994 Net profit (527) 1,302 1,719 2,439 2,536 2,844 % of sales (only pre elimination available) Shipbuilding 99.4% 96.9% 93.5% 89.7% 92.3% 80.0% Offshare engineering 0.6% 3.1% 3.7% 3.8% 7.2% 16.9% Marine engines % 2.1% 3.3% 3.1% Engineering machinery % 2.7% 3.4% 3.2% Gross margin nm 19.5% 22.7% 15.3% 18.3% 16.9% Net profit margin nm 13.7% 13.6% 12.8% 15.7% 12.8% Appendix 9 Cash Flow Statement Y/E 31 Dec (RMBm) E 2012E 2013E Profit before tax ,307 2,044 2,932 2,963 3,742 Tax paid Depreciation and amortisation ,028 Changes in working capital 4,268-1,849-5,518 1,386 1,357-1,039 Finance costs Finance revenue Other adjustment Cashflow from operations 4, ,441 4,278 4,878 2,984 Capex -2,575-1,090-4,367-2, Others Cashflow from investments -2,241-1,215-4,074-2, Cashflow from financing 1,615 2,747 17,209-6,269-3,298-3,285 Total cashflow 3,407 1,035 9,693-4,591 1, CFA Institute Research Challenge CEIBS Student Research 14

15 Appendix Assumption for Multiple Analysis 1) Investment is according to the prospectus proceeds plan 2) Engineering machinery and marine engine sectors' growth rate is 30%, which is based on the management forcast 3) Gross magin is 25% for Engineering machinery and marine engine sectors 4) Although new orders are the driver for shipbiulding and offshore business, we think new order in 2012 cannot make significant contribution to 2012 s revenue Source: CEIBS Estimate Appendix 11 DCF Assumptions to 2014 Notes % of debt 65.00% 70% Due to the diversify strategy, the company will invest more in the near future to expand its offshore, engineering machinery and marine engine businesses, therefore its debt weght will increase. Cost of Debt 2.76% 2.76% (1-effective tax rate)*total pre-tax cost of debt annualised interest rate 3.20% 6.60% Average cost of outstanding debt in 1H2011, since 11,842m RMB bank loan will be due in 2012, we assume the average cost will increase due to the increased interest rate of China for 2012 to 2014 Effective Tax rate 13.8% 13.8% Although the subsidiary eligible for EIT exemption will end in 2012, the local government strongly supports the shipbuilding business, therefore we think the subsidiary could sustain and the low effective tax rate will not change. % of Equity 35% 30% Cost of Equity 18.85% 18.85% Cost of equity=risk free rate+beta*country risk premium Risk Free Rate 3.74% 3.74% China long term bond rate( 10-year) Country risk premium 11.55% 11.55% Expected market return value based on the total accumulated investment risk for the country or region selected in country risk (Bloomberg) Beta Beta is calculated using the following: Relative index: SHSZ300 index. Date range: 11/02/09-11/11/11 Period: weekly WACC 8.39% 9.64% Source: Bloomberg, CEIBS Analysis CFA Institute Research Challenge CEIBS Student Research 15

16 Appendix 12 Sales turnover breakdown and forecast Shipbuilding P/E P/B EV/EBITDA 2010A 2011E 2012E 2010A 2011E 2012E 2010A 2011E 2012E COSCO Corp Yangzijiang Guangzhou CSSC Daewoo N/A N/A Hyundai H.I Samsung H.I Median Machinery Sany Heavy Shanghai Zhenhua Taiyuan N/A N/A Tian Di Sc. & Tech N/A Guangxi Liugong Mach N/A N/A Median (include machinery) Source: Bloomberg, Consensus Estimates; As of Nov 11 th, Appendix 13 Senario Analysis of Liquidation Value for Shipbuilding and Offshore Business Bullish Neutral Bearish Multiple of PP&E P/B=1.41 P/B=1 P/B=0.8 NAV per share HK$ Source: CEIBS Calculation CFA Institute Research Challenge CEIBS Student Research 16

17 Appendix 14 NAV model for Shipbuilding and Offshore business NAV-Liquidation Value 2010A 2011E 2012E 2013E 2014E Revenue 12,307 17,191 16,121 21,478 1,008 Adjustment factor for exchange rate risk Discount factor due to cancellation or delay of orders Adjusted revenue 16, , , % revenue growth 34% 40% -6% 33% -95% EBIT 1,969 2,696 2,330 2, EBIT Margin 16.0% 16.0% 14.9% 14.0% 14.5% - Tax % of EBIT 13% 13% 13% 13% 13% + Depreciation & Amortization % of revenue 3% 2.5% 3.2% 3.2% 3.2% - Change of working capital ,006 % of incremental revenue 9.8% 9.8% 9.8% 9.8% 9.8% -Capex -4,367-2, Free Cash Flow -2, ,349 2,475 2,059 PP&E for the terminal year P/B=0.8 11,182 P/B=1 13,977 P/B= ,708 Present value factor Present value ,163 2,119 1,639 P/B=1.41 Sum of present value 5,398 PV of Terminal Value of PP&E 14,783 Net debt -2,438 NAV 17,742 NAV per share (RMB) 2.53 NAV per share (HKD) 3.10 RMB/HKD Nov P/B=1 Sum of present value 5,398 PV of Terminal Value of PP&E 10,484 Net debt -2,438 NAV 13,444 NAV per share (RMB) 1.92 NAV per share (HKD) 2.35 RMB/HKD Nov P/B=0.8 Sum of present value 5,398 Source: CEIBS Calculation PV of Terminal Value of PP&E 8,387 Net debt -2,438 NAV 11,347 NAV per share (RMB) 1.62 NAV per share (HKD) 1.99 RMB/HKD Nov CFA Institute Research Challenge CEIBS Student Research 17

18 Appendix 15 SWOT Analysis Strengths According to Clarkson Research, Rongsheng ranked second among all PRC shipbuilders and first among private-owned PRC shipbuilders. It had the largest shipyard in PRC in terms of dwt of order book Experienced management team with an average of approximately 20 years of experience in heavy industries or related fields The company s vertical integration should help improving operational efficiency and saving costs Established sound relationships with premium domestic and global clients, such as CNOOC, Vale, Frontline, Cardiff and Geden Line Weaknesses According to Clarkson Research, Rongsheng ranked second among all PRC shipbuilders and first among private-owned PRC shipbuilders. It had the largest shipyard in PRC in terms of dwt of order book Relatively short corporate history (founded in 2005) A private company (vs. SOE status of most domestic competitors) Highly subject to government policies Relatively short track record of ship delivery Advanced technology and R&D capabilities. One of the few privately owned shipbuilders in China with independent production design capacity Cooperation with CNOOC offers a good natural market for its offshore engineering business Well-positioned to capture potential huge market in offshore engineering China s labor cost per unit of ship built is about 1/3 of Japan and Korea s. In addition, steel plate price in China is about 20% cheaper than in Korea and Japan Rongsheng has strong support from local government, which offers government subsidy to Rongsheng to compensate costs of R&D, SG&A and interest expenses. Rongsheng has received RMB 830m government subsidy in 2010, about 48% of its net profit Opportunities Recovery in shipbuilding industry China will build 50mt offshore oil production capacity in China s inshore continental shelf and continental slope in , leading to about RMB 250bn demand for offshore engineering equipment Favorable government policies promoting domestically made vessels should bode well for the company s offshore engineering and shipbuilding businesses Threats Any industry downturn could cause order cancellations or delays Margin squeeze from rising steel and labor costs Margin squeeze caused by RMB appreciation or USD depreciation Market competition could intensify Source: CEIBS Analysis CFA Institute Research Challenge CEIBS Student Research 18

19 Appendix 16 Corporate shareholding and major businesses Appendix 17 Geographical Shipbuilding Distribution & Capacity New Contracts by Countries Others Others Japan Japan China China Korea Korea DWT % DWT % DWT % DWT % ,093, % 50,912, % 60,438, % 61,008, % ,954, % 47,156, % 105,118, % 95,357, % ,614, % 33,509, % 70,681, % 69,844, % ,330, % 4,884, % 27,525, % 19,115, % ,138, % 10,160, % 68,654, % 49,832, % ,508, % 2,238, % 25,167, % 24,468, % Order Book by Countries Others Others Japan Japan China China Korea Korea DWT % DWT % DWT % DWT % ,064, % 88,060, % 46,422, % 80,129, % ,596, % 109,621, % 91,614, % 113,789, % ,926, % 129,303, % 175,362, % 179,450, % ,371, % 134,433, % 220,937, % 210,533, % ,326, % 109,590, % 207,446, % 174,856, % ,930, % 84,473, % 205,981, % 155,716, % Ship Deliveries by Countries Others Others Japan Japan China China Korea Korea DWT % DWT % DWT % DWT % ,276, % 29,351, % 13,036, % 25,685, % ,483, % 27,392, % 16,621, % 28,917, % ,331, % 27,732, % 21,248, % 34,743, % ,634, % 29,289, % 35,905, % 43,823, % ,336, % 32,366, % 62,489, % 47,824, % ,980, % 25,775, % 52,972, % 43,736, % Source: Clarkson, Oct 2011 CFA Institute Research Challenge CEIBS Student Research 19