Date
18 October 2018

Relocation to unlock true value of Guangzhou Shipyard

It’s been smooth market sailing since Guangzhou Shipyard International Co. Ltd. (GSI) (00317.HK) proposed its massive private placement and asset purchase plan this week, even though the 60 percent-plus expansion of the equity base will significantly dilute earnings per share. That’s because the connected transactions are expected to unlock the true value of the counter, if all goes to plan.

Apart from benefits of capital replenishment and deleveraging, the fundraising will enable the shipbuilder to embark on a long-awaited shipyard relocation. GSI’s existing plant covers half a million square meters in downtown Guangzhou but the shipbuilder has long sought to move out of the city because of the outdated facilities and shallowness of that stretch of the Pearl River.

The relocation plan has been stalled for years by the National Development and Reform Commission’s ban on adding capacity in the shipbuilding industry. As a result, mergers and acquisitions were left as the only feasible ways to expand output and improve company competitiveness.

The door for such a move opened this week when China State Shipbuilding Corp. (CSSC), one of the two largest shipbuilding conglomerates in the country, decided to raise its stake in GSI substantially and inject Longxue Shipbuilding into the Hong Kong-listed subsidiary.

Longxue is based beyond the city center in Nansha and its facilities are set to become GSI’s new home. The plan sent positive signals to the market and reinforced confidence that the industry is steadily steering away from a protracted downturn. In fact, CSSC assured GSI that the loss-making Longxue will turn around next year — and it will compensate GSI if it doesn’t.

With the acquisition of Longxue, GSI ranks among the top players in the country and can launch the long-delayed relocation plan. The old shipyard will become one of GSI’s most valuable assets immediately after the deal, given how much land values have risen in the city. In 2010, GF Securities estimated the prime riverside plot was worth 12.5 billion yuan (US$2 billion). But with the average home price doubling in the last three years, that estimate is sure to go even higher.

– Contact the writer at [email protected]

SK

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