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Message From The Chairman

(*extracted from Annual Report 2016)

Dear Shareholders

The year ended 31 December 2016 was a very difficult one for the Group. The offshore and marine (O&M) industry encountered very daunting market conditions. Since the sharp decline of oil prices in 2014, the shrinkage of investment from the oil and gas sector has gradually taken away the wind from under the O&M construction market. This has been further aggravated by very weak growth in global trade.

Harsh market conditions have greatly impacted the Group's results for the year. Group's revenue totalled $2.6 billion, a decline of 27.3% from $3.5 billion in 2015 due to lower revenue contribution from all business segments.

Overall, the Group's net loss attributable to equity holders of the Company is $466.5 million in 2016, 18.2% lower from the net loss of $570.0 million in 2015.

Oil Price Volatility Clouds Offshore & Marine Business

Both shipyard and shipping revenues continued to decline in 2016. Turnover from shipyard operations, which accounted for 98.8% of the Group's total, fell by 27.4% to $2.5 billion, from $3.5 billion in 2015, due mainly to lower contribution from shipbuilding, ship repair and marine engineering. The Group's shipyards also had to contend with fewer orders and lower contract prices in the face of the depressed market.

During the year, the Group delivered 18 projects. COSCO Zhoushan shipyard delivered four oil tankers; COSCO Guangdong shipyard delivered three livestock carriers and two platform supply vessels; COSCO Dalian shipyard delivered three module carriers, two jack-up rigs, one emergency response & rescue vessel, one salvage lifting vessel and one cargo and training ship; and COSCO Qidong shipyard delivered one semi-submersible accommodation vessel.

The dry bulk shipping segment saw revenue declining further to $30.5 million from $39.4 million for the previous year, as over-capacity continued to build up in the face of shrinking demand and lower rates. Because of the continued difficult market conditions and the high cost of maintaining the Group's dry bulk fleet, the Group has scrapped two of its dry bulk carriers in October 2016 and February 2017, and may consider scrapping more dry bulk carriers in 2017.

New Orders Severely Impacted By Dearth of Fresh Capex

Although the price of Brent crude oil had risen to the US$50 per barrel mark by the end of 2016, orders were few and far between as oil exploration and production companies continued to withhold spending in the face of economic uncertainties and oil price volatility.

In spite of the weak market conditions, the Group won a total of 11 new contracts in 2016. They include one trailing suction hopper dredger, one self-elevating workover unit, two crude oil tankers and seven container vessels.

The new projects were secured at lower prices and the Group expects operating margins from new shipbuilding, offshore and marine engineering projects to face continuous downward pressures. The Group also expects higher costs to be incurred for new product types.

As at 31 December 2016, the Group's gross order book stood at approximately US$6.4 billion with progressive deliveries up to 2019, subject to revision from any new cancellation, variation or scheduling of orders that may arise. The order book includes modules of drillship, Sevan 650 drilling unit, semisubmersible tender assist drilling rig, jack-up rig, platform supply vessel and FPSO contracts, and several offshore marine engineering projects which have been substantially completed in construction but are yet to be delivered due to customers' request for extension.

Economic and Market Uncertainties Will Limit Recovery

According to the International Monetary Fund (IMF), global economic growth in 2016 was the weakest since the 2008 financial crisis. However, 2017 is expected to see growth in the US continuing to be strong, and gradual recovery in the Eurozone. Emerging markets and developing economies showed signs of strength and have been slated to drive growth in 2017.

IMF's update on its World Economic Outlook report released in January 2017 estimated global economic growth in 2016 to be 3.1%, in line with its October forecast. Global growth is projected at 3.4% for 2017 and 3.6 % for 2018, also unchanged from its October estimates.

For the energy industry, 2016 was a tumultuous year with great uncertainties over which direction oil prices were going. On 20 January 2016, Brent crude oil traded at US$27.10 per barrel, the lowest in the past 12 years. Prices began to climb above the US$50 per barrel mark only from mid-October 2016 after OPEC and other oil producing countries came to a preliminary agreement to cut their output.

Given the low oil prices during most parts of the year, conditions were highly unfavourable for the O&M market. Major oil and exploration companies continued to tighten spending, cancelled orders or deferred deliveries. Many major O&M players around the world have been facing hardship and taking drastic measures to stay afloat.

In January 2017, the International Energy Agency (IEA) was quoted as saying that oil prices, which had reached around US$56 per barrel, will experience "much more volatility" in 2017.

In addition, the IEA cautioned that although the agreement between OPEC and other oil producing countries to cut oil output would shore up prices, it would also encourage increased production from the United States and other nations. It said that higher prices could also weaken global demand.

Prospects for the O&M market is hampered by fleet oversupply and lower rates amidst a continued slide in global rig utilisation. IHS Petrodata's weekly rig count on 19 January 2017 showed that worldwide utilisation of jack-ups, semi-submersibles and drillships stood at 67.7% of 459 marketed/contracted units, compared to 74.0% of 556 marketed/contracted units a year ago. Total supply of rigs was listed as 829, compared to 850 a year ago.

Compounding the weak market is the substantial number of floaters and jack-ups that are under construction or on order and are due for delivery through to 2020. Analysts expect rig contractors to continue deferring deliveries of a sizeable number of their orders in 2017.

Reports have also indicated that global demand for offshore supply vessels (OSV) will continue to decline, while the fleet continues to grow.

We expect oil producers and exploration companies to watch the market very closely before committing to any new capital expenditure.

Earlier in September 2016, the World Trade Organisation slashed its forecast for growth in trade of goods from 2.8% to just 1.7% in 2016. Its global trade growth forecast for 2017 was revised to between 1.8% and 3.1%, down from 3.6% previously.

Due to slower trade growth, dry bulk shipping sector also saw its worst year in 2016. The Baltic Dry Index plummeted to a historic average low of 290 points on 10 February – the lowest since the index was launched. It recovered to close at 961 points by the end of the year. However, the continued oversupply of ships could depress rates.

According to Clarkson Research, total contracting activity in 2016 fell 71.0% from 2015 – with just 480 reported orders, the lowest in 20 years. Clarksons' new building price index fell 6.1% from 131 points in 2015 to 123 points in 2016.

The shipbuilding sector remains challenging in spite of some predictions that the market could pick up after 2017, with demand coming largely from the Asia Pacific region, as well as Latin America and the Middle East.

Going forward, the performance of the Group's business hinges on the further recovery of oil price and the resumption of investment in offshore exploration and production, as well as a quicker pickup in global trade.

Meeting Challenges, Improving Capabilities

In the face of the challenging market conditions, the Group continues to take a prudent approach to its operations and finances. Efforts include tighter monitoring and control of cost, wastage and risks, and further improvements in our project execution and productivity.

Our marketing team continues to adjust its strategies and approaches to the uncertainties in the market to secure new contracts. It has become even more customer responsive and service-centric, and it is further exploring new application areas for our ship building and offshore and marine expertise.

While oil prices have nearly doubled in January 2017 to around US$56 per barrel compared to a year ago, downward pressures are ever present and could still persist due to market uncertainties. There are concerns about increased output from North American shale producers coupled with lower global oil demand and increased use of renewables and clean energy. The global economy is facing many imponderables, especially the changing political landscape in various parts of the world that has revived the threat of protectionism that could derail growth. 2017 will be very challenging for the Group.

As a result of the severe difficulties faced by the Group, no dividend has been recommended by the Board of Directors.

We had requested for a suspension of trading in our equities in December 2016 as our Parent Group, China COSCO Shipping Corporation Ltd, had in that month announced a restructuring exercise for its heavy industry manufacturing units. The Group was subsequently informed that the purpose of the proposed restructuring is to centralise operations and management of the shipyard businesses of the Parent Group. The Parent Group plans to acquire the Group's equity interests in COSCO Shipyard Group Co., Ltd, COSCO (Nantong) Shipyard Co., Ltd and COSCO (Dalian) Shipyard Co., Ltd. The Parent Group has informed the Group that it will remain supportive of the Group's future development.

The Group has not entered into any definitive agreement with any party and there is no assurance that any transaction will materialise.

The Board is grateful for the continued support of the staff, shareholders and valued customers, as the Group continues to navigate cautiously in the highly uncertain global business landscape.

We would like to welcome onboard Mr Gu Jing Song, Vice Chairman, President and Non-Independent Executive Director and Mr Li Xi Bei, Non-Independent Executive Director who both joined the Group on 30 August 2016. The Board would also like to record its appreciation to Captain Wu Zi Heng, former Vice Chairman and President, Mr Liu Lian An, former Non-Independent Executive Director and Mr Ma Zhi Hong, former Non-Independent and Non-Executive Director, for their contributions to the Group during their tenures.

Wang Yu Hang
Chairman