CFO interview: Tackling the business cycle

Sean Wang, CFO of China Rongsheng Heavy Industries, explains how he deals with the cyclical nature of the shipbuilding business.
Sean Wang, China Rongsheng
Sean Wang, China Rongsheng

All industries have their ups and downs, but it is how a business fares during the rockier times that sort the successes from the failures. At the mercy of global trade, shipbuilding industry chief financial officers and treasurers are as much global economists as micro-managers of their own business.

“The shipbuilding business is cyclical because it is affected by international trade and shipping demand,” said Sean Wang, CFO of China Rongsheng Heavy Industries Group, one of mainland China’s largest shipbuilders. His firm has been more successful than most, emerging as the largest non state-owned shipbuilding company in terms of total order book, measured by deadweight tonnage (DWT), in mainland China today.

China Rongsheng’s story spans its entry into shipbuilding six years ago, its expansion into heavy machinery and finally listing in Hong Kong last year. The Jiangsu-based heavy industry group has become China’s second largest shipbuilder after state-owned Guangzhou Shipyard International. “China Rongsheng is a product of the growth of China’s economy and it is the only country where we are able to become a major player in the heavy industry sector globally,” Wang explained.

At the end of last year the company had a total shipping order book for 15.9 million DWT of which it delivered more than 2.5 million DWT. That meant it had 8% of China’s total recorded shipping orders of 195.9 million DWT. And the mainland’s shipping order book is the largest globally representing 40.8% of total global volume, ahead of South Korea’s 33.1% and Japan’s 17.6%.

One way to stay on top is through careful financial oversight. “The key to controlling our costs is to control the raw material cost and to manage the currency fluctuation between the renminbi and US dollar, because it can sometimes take two or more years to execute our shipbuilding contracts [with overseas clients] before we receive full payment,” said Wang.

The other way to stay on top is to expand, thoughtfully. With two production bases in Nantong and Hefei, the firm is one of only a handful of shipbuilders that manufactures offshore equipment in China.

According to Wang, who joined the company as CFO in June last year and was also appointed executive director four months later, shipbuilding and offshore manufacturing share the same facilities and processing technology. It was therefore a natural business area for the company to expand into.

In order to counter the shipbuilding business cycle, China Rongsheng also began focusing on its engineering machinery business line in 2010, which now plays an important role in the company’s growth. It started building small and mid-sized excavators for construction and mining, a segment that had a compound annual growth of more than 20% during the past ten years. Wang expects this rate to continue for at least the next five years. Moreover, the excavator market in China is highly fragmented and has no clear leader leaving plenty of scope for the ambitious firm. China Rongsheng’s engineering machinery business unit may still be small but it could rival its shipbuilding business in size in a few years time, said Wang.

An additional advantage of having a strong engineering machinery business is that it is a purely China-based business conducted in renminbi, providing a natural hedge against foreign currency risk. “With the prospect of the renminbi appreciating it is to our advantage to have a renminbi business to hedge some of our US dollar exposure, because most of our shipbuilding and offshore engineering businesses are conducted in US dollars,” Wang explained.

For its engine manufacturing business, China Rongsheng works with two international diesel engine technology providers under a technology licensing agreement. For now, China Rongsheng only builds low and medium-speed diesel engines, but it is in the process of entering the high-speed diesel engine market for light and heavy trucks as well as the agricultural sector. Wang is also looking to move into the import substitute market for ship engines in China. “We want to capture China’s shipbuilding industry engine demand because many Chinese shipyards currently import engines from Korea and Japan,” he said.

Of course, expanding into a new area adds to the overall complexity of operations. The company called off a listing attempt in 2008 due to volatile market conditions, but successfully completed its initial public offering in November last year. It raised HK$14 billion ($1.8 billion) and was the third largest IPO at the time in Hong Kong for 2010. Its share price dropped four cents to HK$7.96 from its offering price after the first day of trading, but reached a record high price of HK$8.34 in January this year.

Because most of China Rongsheng’s shipbuilding and offshore engineering business units are conducted in US dollars, listing in Hong Kong was a strategic decision by Wang to take advantage of the non-deliverable forward market — the scope of which is limited for a local Chinese company located in the mainland. “Today’s CFO needs to be a business decision maker as well as an accounting and finance professional,” he concluded.

 

This story was first published in the August 2011 issue of FinanceAsia magazine.

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