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Financial Information : Financials

Third Quarter Results Financial Statement And Related Announcement

Financials Archive

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Unaudited Third Quarter Financial Statement Announcement for the Financial Period Ended 30 September 2016

Income Statement

Consolidated Statement of Comprehensive Income

Review of Performance

Q3 2016

The Group recorded net loss attributable to equity holders of $102.3 million on turnover of $662.3 million in Q3 2016.

Group turnover decreased by 30.2% to $662.3 million in Q3 2016, from $949.6 million in Q3 2015 owing to decrease in shipyard and shipping revenue.

Turnover from shipyard operations decreased by 30.3% to $654.7 million in Q3 2016 from $939.9 million in Q3 2015 mainly owing to lower revenue contribution from ship repair, ship building and marine engineering.

The Group delivered 5 projects in Q3 2016. COSCO Dalian shipyard delivered 1 emergency response rescue vessel and 2 jack up rigs while COSCO Guangdong shipyard delivered 1 livestock carrier and 1 platform supply vessels.

Turnover from dry bulk shipping and other businesses decreased by 21.0% from $9.7 million in Q3 2015 to $7.7 million in Q3 2016 as most of the prevailing short-term charter rates were lower than those received in Q3 2015. The Baltic Dry Index (BDI), which is a measure of shipping costs for commodities, started Q3 2016 at 677 points and ended the quarter slightly higher at 875 points. In Q3 2016, the BDI averaged 736 points which is 24.4% decrease from the average of Q3 2015 of 974 points. Currently, the group's dry bulk shipping fleet comprises Panamax and Handymax carriers. Shipyard business remained the biggest revenue contributor, making up 98.8% of Group turnover in Q3 2016.

Gross profit for Q3 2016 was $49.3 million as compared to gross loss of $10.7 million in Q3 2015 due to profits from shipyard operations, partially offset by losses in shipping operations on account of lower charter rates.

Other income comprised gain from the disposal of scrap metal, interest income and others. Compared to Q3 2015, other income increased by 2.4% to $19.8 million in Q3 2016 mainly due to higher government grants and sundry income partially offset by lower sale value of scrap materials and lower interest income.

Administrative expenses increased by 161.2% to $296.3 million mainly due to higher allowance for impairment of trade and other receivables of $261.7 million in Q3 2016 as compared to $75.9 million in Q3 2015. This allowance for impairment of trade and other receivables took into account the deterioration in credit risk on some customers as appraised by the Group.

Interest expense increased by 26.5% to $55.9 million in Q3 2016 due to higher bank borrowings to fund shipyard operations.

Overall, the Group recorded net loss attributable to equity holders of the Company of $102.3 million in Q3 2016 compared to net loss of $82.1 million in Q3 2015 due to losses in shipyard and shipping operations.

First Nine Months 2016

The Group recorded net loss attributable to equity holders of $153.5 million on turnover of $2.1 billion for the first nine months in 2016. Group turnover decreased by 23.1% to $2.1 billion in first nine months 2016 from $2.8 billion for the corresponding period in 2015 owing to decrease in shipyard and shipping revenue.

Turnover from shipyard operations decreased by 23.1% to $2.1 billion in the first nine months 2016 from $2.8 billion for the corresponding period in 2015, owing to lower revenue contribution from ship building and marine engineering.

The Group delivered 16 projects in the first nine months of 2016. COSCO Zhoushan shipyard delivered 4 oil tankers; COSCO Guangdong shipyard delivered 3 livestock carriers and 2 platform supply vessel; COSCO Dalian shipyard delivered 2 module carriers, 2 jack-up rigs, 1 emergency, response & rescue vessel and 1 salvage lifting vessel and COSCO Qidong shipyard delivered 1 semi-submersible accommodation vessel.

Turnover from dry bulk shipping and other businesses decreased by 28.4% from $30.2 million in the first nine months in 2015 to $21.6 million in the first nine months in 2016. The BDI started the year 2016 at 473 points and ended the 3rd quarter in 2016 at 875 points. The BDI averaged 572 points for the first nine months 2016, which was a 23.1% decrease from the average of first nine months in 2015 of 744 points. Currently, the Group's dry bulk shipping fleet comprises Panamax and Handymax carriers. Shipyard business remained the biggest revenue contributor, forming 99.0% of Group turnover in the first nine months in 2016.

Gross profit for the first nine months in 2016 was $150.1 million, compared to gross profit of $121.3 million for the corresponding period in 2015, due to higher profits from shipyard operations partially offset by losses from shipping operations on account of lower charter rates.

Compared to the first nine months 2015, other income decreased by 18.5% to $48.4 million in the first nine months 2016 mainly due to lower sales value of scrap materials and lower interest income.

Administrative expenses increased by 89.0% to $344.4 million mainly due to higher impairment of trade and other receivables of $245.7 million in Q3 2016, as compared to an allowance for impairment of trade and other receivables of $75.7 million in Q3 2015. This allowance for impairment of trade and other receivables took into account the deterioration in credit risk on some customers as appraised by the Group.

Interest expense increased by 36.6% to $168.2 million in the first nine months of 2016 due to higher bank borrowings used to fund shipyard operations.

Overall, the Group recorded net loss attributable to equity holders of the Company of $153.5 million in the first nine months 2016 compared to net loss of $86.1 million for the corresponding period in 2015 due to losses in shipyard and shipping operations.

The Group continues to face challenging market conditions in the offshore marine, shipbuilding and shipping industry. The offshore marine industry remains weak due to low crude oil prices that have prevailed for over two years and from which recovery remains uncertain. The shipbuilding industry continues to face over-capacity amidst a weak global economy, and under these conditions, the Group's shipyards have had to contend with fewer orders and lower contract prices. Subdued global economic conditions have led to depressed shipping rates for the Group's dry bulk fleet.

Balance Sheet
(30 September 2016 vs 31 December 2015)

Cash and cash equivalents remained unchanged at $1.6 billion.

Trade and other receivables increased $81.0 million to $5.3 billion mainly due to an increase in advances paid to suppliers (from $262.2 million to $451.0 million), partially offset by lower construction contracts due from customers in the marine engineering and ship building segments (from $4.6 billion to $4.3 billion). The collectibility of the construction contracts due from customers in the marine engineering and ship builing segments of $4.3 billion of these as of 30 September 2016 is dependent on the customers taking delivery of these construction projects in the future.

The deferred income tax assets of $284.3 million as at 30 September 2016 (as compared to $236.9 million as at 31 December 2015) comprises of mainly temporary differences arising from provision and accrued expenses, as well as tax losses. If the market and operating conditions deteriorate further in the future, there may exist a risk of recoverability of these deferred income tax assets. Management will consider impairing these assets should such conditions exist.

Trade and other payables decreased $102.0 million to $2.3 billion mainly due to lower accruals for operating expenses and a decrease in advances received from customers (from $241.9 million to $165.3 million).

Total borrowings increased by $408.9 million to $6.9 billion due to additional funding procured to finance shipyard operations.

Shareholder's equity decreased by $189.5 million mainly due to the losses incurred in first nine months in 2016 and a decrease in currency translation reserve.

Cash Flow

Net cash used in operating activities for the quarter was $82.9 million. This was mainly due to cash used for working capital during the quarter.

Net cash used in investing activities for the quarter was $0.7 million. This comprised principally the purchase of fixed assets by shipyard operations, partly offset by interest received during the quarter.

Net cash used in financing activities was $463.0 million. This was mainly due to net repayment of bank borrowings during the quarter.

Commentary

As at 30 September 2016, the Group's gross order book stood at approximately US$6.8 billion with progressive deliveries up to 2019. These include modules of drillship and FPSO contracts for certain Brazilian customers which amount to approximately US$1.3 billion. The Group's gross order book of US$6.8 billion includes several offshore marine engineering projects which have been substantially completed in construction but are yet to be delivered due to customers' requests for extension of delivery.

This order book continues to be subject to revision from any new, cancellation, variation or scheduling of orders that may arise. New orders received in the first 9 months of 2016 include 1 trailing suction hopper dredger, 1 self-elevating workover unit, 2 crude oil tankers and 7 container vessels.

These orders were secured at low contract values due to the weak global economy and depressed shipbuilding and offshore markets and the Group expects operating margins on new ship building and offshore contracts to continue facing severe downward pressure as these conditions continue to prevail.

In offshore marine engineering operations, the Group is one of the largest marine engineering groups in the People's Republic of China. Its order book in this segment covers a wide product range that includes FPSO, semi-submersible accommodation rig and vessel, Sevan 650 drilling unit, semisubmersible tender assist drilling rig, jack-up rig, platform supply vessel, emergency response/rescue/field support vessel, DP3 accommodation barge, subsea supply vessel, shuttle tanker, cargo transfer vessel, modules of drillship and FPSO.

For new product types in offshore and shipbuilding sectors, the Group expects to incur higher costs during execution. The Group also expects competition to remain keen as crude oil prices continue to remain low and global economic conditions remain generally weak. The Group will nevertheless strive to continually improve its expertise and capabilities for long-term sustainable growth in the offshore marine engineering and shipbuilding sectors.

The Baltic Dry Index (BDI) averaged 572 points in the first 9 months of 2016, a decrease of 23.1% from the average of 744 points in the first 9 months of 2015. The Baltic Exchange Handysize Index (BHSI) averaged 322 points in the first 9 months of 2016, a decrease of 15.3% from the average of 380 points in the first 9 months of 2015. The Baltic Exchange Supramax Index (BSI) averaged 534 points in the first 9 months of 2016, a decrease of 24.0% from the average of 703 points in the first 9 months of 2015. Currently, the Group's dry bulk shipping fleet comprises Panamax and Handymax carriers.

Amidst excess tonnage and overall weak macroeconomic conditions, the world dry bulk shipping market has declined to a very low level in 2016. On 10 February 2016, the BDI declined to 290 points, the lowest since the Index was created. Given these market conditions, any recovery in the dry bulk shipping segment will remain depressed. Under such difficult market conditions and considering that the upkeep costs of the Group's dry bulk fleet will continue to increase, the Group has scrapped one of its dry bulk carriers in October 2016 and is planning to scrap another one by the end of 2016 or early 2017.

As the world shipping market continues to face tonnage over-capacity pressures, new ship building orders have fallen to a very low level in the first 9 months of 2016. The ship building segment will thus continue to be highly challenging.

The Group's offshore marine segment has been adversely affected by current situation of low crude oil prices which has already persisted for a significant period of time. For more than two years, the global offshore market has been slowing down significantly. There are still no signs of sustainable improvement.

Since the latter half of 2014, crude oil prices have been falling to multi-year lows from which recovery seems uncertain. On 20 January 2016, Brent Crude Oil traded at US$27.10 per barrel, the lowest in the past 12 years. In the first 9 months of 2016, Brent Crude Oil prices averaged US$43.17 per barrel, a decrease of 23.7% from the average of US$56.60 in the first 9 months of 2015.

Many oil majors have cut expenditure leading to very few orders for rigs and support vessels. The average utilisation rate of jack-up rigs, semi-sub rigs, drill ships and support vessels have continued their decline in the past year.

Under such challenging circumstances, the decline in new orders which started in 2014 has continued into the first 9 months of 2016. Moreover, some customers have delayed accepting delivery of projects upon completion and it is possible that more customers will seek to delay delivery of projects or seek deferment of payment schedules. Construction contracts due from customers in the marine engineering and ship building segments amounted to $4.3 billion as at 30 September 2016 (as compared to $4.6 billion as at 31 December 2015) and may be subject to impairment if the market and operating conditions deteriorate further in the future.

The future of the DP3 Deepwater Drillship (DDD) continues to remain uncertain. While it has been successfully completed by COSCO Dalian shipyard and trials and testing have been carried out, COSCO Dalian shipyard is currently still in discussions with relevant oil companies to negotiate for a lease or to sell the DDD. There is no assurance that any lease or sale will materialise especially since the DDD is a specialised vessel.

In 2015 and 2016, the Group experienced delivery date extensions and order cancellations for several of its projects. These included extensions for the Sevan Developer which is being built by COSCO Qidong shipyard for Sevan Drilling, the jack-up drilling rig (hull number N408) which is being built by COSCO Nantong shipyard for KS Drilling, the harsh environment semi-submersible accommodation rig which is being built by COSCO Qidong shipyard for Axis Nova, the advanced semi-submersible accommodation vessel which is being built by COSCO Qidong shipyard for Prosafe Rigs. In addition, the orders for the two floating accommodation units that COSCO Nantong shipyard (hull number N381) and COSCO Qidong shipyard (hull number N675) contracted to build for the TEEKAY group have been terminated. The Group will continue to monitor the risks associated with these projects as well as contracts for modules of drillships and FPSO with certain Brazilian customers.

Amidst persistent weakness in the state of the global economy, challenging market conditions and depressed crude oil prices, an increasing number of the Group's customers may be unable to meet their contractual payment obligations to the Group, either in a timely manner or at all, or may otherwise default on these obligations. Moreover, any tightening of the availability and cost of credit in a market that is already under considerable stress could also adversely affect the ability of customers to meet their financial obligations. These will adversely impact the Group's financial position.

Any adverse volatility in currency movements, rise in wages, prices of raw materials required for production as well as higher financing costs may exert even greater downward pressure on the operating margins of the Group's shipyard operations.

Against the backdrop of such difficult conditions, the Group recorded a net loss attributable to equity holders of $153.5 million for the first 9 months of 2016. Overall, the Group expects that these difficult and challenging business and operating conditions to persist and may even worsen. As such, 2016 will remain a very difficult and challenging year for the Group.

Balance Sheet