Singapore Corporate News - 31 Mar 2008

Cosco may quote contracts in yuan

China's largest shipyard group which has US$6.5 billion worth of contracts exposed to the appreciating yuan - is considering quoting its future contracts in the Chinese currency, its vice-chairman and president Ji Hai Sheng told Singapore reporters in a conference last week.

Meanwhile, it is also trying to renegotiate some of its past contracts to secure higher prices given that Chinese shipyards are now faced with the triple whammy of significantly higher steel prices, labour costs as well as the yuan.

'Going forward, our future contracts may be quoted in renminbi. We will fix the price in renminbi, but will still be paid in US dollars. We will specify in the contract that the customers will pay the renminbi amount due to us in US dollars, based on the exchange rate between the two currencies at that time of remittance,' said Mr Ji.

So far, all of Cosco's and other Chinese shipyards' contracts - stretching to 2012 - are fixed in US dollars. Cosco now has US$6.5 billion worth of contracts under construction.

But the fast appreciating yuan and raw material costs have raised doubts as to whether these contracts will be as profitable as before. Last year, the yuan climbed 7 per cent against the US dollar. It has put on another 4 per cent so far in 2008, and is expected to rise at least another 10 per cent in the next 12 months.

Mr Ji said Cosco has already broached the idea with some of its customers and they are 'generally open' to 'sharing the currency risk'. But he admitted that the continued appreciation of the yuan will blunt the competitive edge of Chinese shipyards.

Meanwhile, he said that the group is talking to its new build customers to accept an increase in the price of past contracts. 'A contract is made up of two parties. If both parties agree, then we can raise the price. Some may agree because they are old customers,' he said.

Mr Ji added that Cosco aims to have ship repair, new buildings and marine engineering contribute one-third each to its operations in two years' time so that it can better weather the ups and downs of each of the business segments.

He remains bullish about Cosco's prospects, and does not agree that the next two years will be 'challenging'. Mr Ji was talking to Singapore reporters in the QDII Funds Conference organised by Financial PR on Friday. Nine Singapore listed Chinese companies with a combined market capitalisation of $17 billion had a full day's discussions with 40 plus Chinese fund managers from 23 funds.

Some are qualified domestic institutional investors (QDII) - funds permitted to invest overseas.

Another participant of the conference was Yangzijiang Shipbuilding. Its chairman Ren Yuan Lin said the group's earnings this year won't be affected by rising raw material costs. 'The impact will come 18 months from now,' he said.

Every 10 per cent increase in steel prices will squeeze its margin by 1 percentage point. And every 1 per cent gain in yuan will lower its profit margin by 1 percentage point as well.

'So if the renminbi climbs by 25 per cent, we will have no profit at all.'

So far this year, steel prices have surged by 20 per cent. To mitigate the rising costs, Mr Ren said Yangzijiang has raised its price by 20 per cent for new orders. It has also improved the efficiency and productivity of its yards.

K-Reit may raise more funds after its rights issue

K-REIT Asia will look at more forms of financing once its $551.7 million rights issue is completed, Tan Swee Yiow, chief executive of the trust's manager, told BT.

The real estate investment trust (Reit) is holding an extraordinary general meeting today to get shareholder approval for a rights issue to raise $551.7 million in gross proceeds - partly to repay the $942 million bridging loan it took from Keppel Corp when it purchased its one-third stake in One Raffles Quay (ORQ) last year.

K-Reit is expected to get the mandate for the rights issue easily enough. But shareholders will want to know what plans the trust has to raise the balance needed to repay the loan.

Mr Tan said that the management is well aware of the need to raise more funds, and will address the issue with 'appropriate debt instruments' after the rights issue.

'The $942 million is a bridging loan and we will have to resolve it somehow,' said Mr Tan. 'We will have to address that, but we are not addressing it at the same time as the rights issue because we want to do the rights issue first,' Mr Tan said.

The rights issue, which will significantly reduce the Reit's gearing, will put the trust in a better place to negotiate with banks, he said.

Upon completion of the rights issue, K-Reit's gearing will be cut to 27.7 per cent, from 53.9 per cent at present, which is approaching the maximum allowable limit of 60 per cent.

To raise more funds, K-Reit will look at a variety of options, including convertible bonds, commercial mortgage-backed securities and straight debt, Mr Tan said.

Right now, the rights issue means that Keppel Corp and Keppel Land, which have both given irrevocable undertakings to take up their respective allocations of the rights units, could increase their stakes in the Reit. As at end-February, KepCorp and KepLand together owned 72.7 per cent of the Reit.

Mr Tan said that this 'can't be helped'. K-Reit had initially decided to go with a convertible bond and unit issue to finance its ORQ purchase. But the plan had to be called off because of weak equity and credit markets. If the issue had gone through, both KepCorp and KepLand would have reduced their stakes, Mr Tan said.

'Moving forward, if the situation is appropriate, there is nothing to stop them (KepCorp and KepLand) from reducing their stakes, which is the long-term plan,' Mr Tan said. He is also Keppel Land's chief executive for Singapore Commercial.