Jinhui Shipping and Transportation Ltd

OSE:JIN

Earnings Call Transcript 2019-Q1

[Wei Man Ching, Vice President]

Good afternoon, everyone. This is Raymond Ching from Jinhui Shipping. Thank you very much for joining Jinhui Shipping 2019 Q1 results presentation. I trust that you all have had a look at the results announcement and all have a copy of the presentation in your hand. So I shall begin the presentation right away.If we switch to the first page of the presentation, going through the financial highlights for the quarter, revenue for the quarter is USD 13 million. This number has decreased by 29% as compared to Q1 2018 due to a weak freight rate market. There are a number of factors that caused such weakness in the -- in this quarter, and the most important factors that has caused such weakness is the -- across the U.S.-China trade conflict, U.S. restrictions on -- sorry, Chinese restrictions on coal imports. There's also been disruption of the iron ore infrastructure in Brazil and in Australia, although this doesn't affect our class of vessels, mainly Supramax. But nevertheless, we believe that has some filtered effect on the overall freight environment of dry bulk vessels. Of course, there's a slowing global GDP growth. Net profit on quarter is USD 2 million. Free cash flow EBITDA is at healthy level of USD 6.8 million, and the basic earnings per share for the quarter is USD 0.018.In terms of more important events that took place in the quarter, we disposed a Supramax in early January 2019 at USD 7.4 million with a net gain of USD 0.6 million. During the quarter, the group drawn down new revolving loans of USD 33 million for working capital purposes. We invested USD 4.3 million in the real estate market, which we expect to generate steady recurring stream of income for the group and potentially asset value appreciation. We also contracted to acquire 2 secondhand Supramaxes at a total consideration of USD 12 million in Q2 2019. One has been delivered in May 2019.On the next slide are the financial highlights. As you can see on the slide, revenue for Q1 2019, USD 12.765 million, which is -- represents a 29% decrease compared to Q1 2018. There is no net gain on disposal of owned vessels in both quarters. Operating profit dropped 11% to USD 2.943 million. Net profit dropped 20% to USD 1.965 million. And as a result, the basic earnings per share for the quarter compared to Q1 2018 has dropped 22% to USD 0.018. In terms -- on the next page, on the key financial ratios. Total assets had risen to roughly USD 390.5 million. Total debt borrowings has -- rise to USD 116.6 million. Return on equity has dropped slightly to 0.78%. Return on total assets, 0.52%. The current ratio now stands at 1.88:1. Working capital, USD 65.23 million, and we have an available liquidity of USD 119 million. The net gearing is actually not presentable given that it's actually below 0, i.e., we are in net cash. The next slide, I won't go into detail. Right now, we have 19 vessels in our fleet. The next slide just shows the development of our fleet since 1987.On the next slide is the full list of our vessels. We believe we still have a very competitive fleet with high-cargo flexibility, which -- still earning us positive income in this environment. And we are still satisfied with our focus in the Supramax sector. Needless to say, we are quite relieved that we are not in larger-sized ships in the current freight environment.Next slide shows our debt maturity profile. And as of end of March 2019, our total debt is USD 117 million. 26% will be payable within the first year, 12 months. 7% will be repayable within the next 24. 36% will be repayable in between 24 to 60 months, and 11% will be over 5 years.The next slide shows the cargo volume analysis for Q1. Majority of the cargo we carried are minerals with 16% coal, 2% steel products and 1% cement. Cargo volume -- total cargo volume has dropped somehow from Q1 2018 where we carried 4.28 million tonnes to Q1 '19, just shy of 4 million tonnes.In terms of loading port analysis, our ships are very much suited to the intra-Asian trade, and we also see activities being more abundant in the intra-Asia trade. So as a result, 88% of our ships loaded the cargo in Asian ports, and that excludes China. 8% will be in Australia and 4% in China.In terms of discharging port, this pattern, again, I will stress that it has been this kind of trading pattern for a long time while fleet -- 91% are discharged in -- of the cargoes are discharged in China and 9% are discharged in Asia, excluding China.On the next slide is the time charter equivalent of our owned vessels. For Q1 2019, the post-Panamax fleet has dropped significantly to $6,262 versus Q1 2018 $11,480. The Supramax fleet shows more resilience. However, it still experienced a slight drop from Q1 2018 $8,537 to Q1 2019 $7,827. On average over our fleet, the time charter equivalent for 2019 Q1 is $7,658, which represents -- I would say is in line with the market, the drop probably around 13% from $8,795 in Q1 2018.In light of very challenging freight environment, frankly, driven mainly by factors beyond our control, i.e., the macro environment, geopolitical events, we placed particular emphasis on to keeping costs down. And we're happy to report that we have been successful on this front. And for Q1 2019, we've driven down the running costs down to $3,459, depreciation $2,237 and the finance costs of $457. This is -- there's a slight rise in the finance costs obviously because we've also drawn down additional loan for working capital purposes. But overall, we believe our cost structure is very competitive, and we believe that we can pick up the challenges in the upcoming expected volatile environment.We have capital business, fairly simple, and so I think it was more important how we are looking ahead of us. So we turn to the last slide on the market outlook. Needless to say, I believe all of us has been hearing, reading and also watching enough news about the most important headline in the business world lately, which is the U.S.-China conflict. I mean the -- this sour relationship obviously has caused a lot of instability in global trade, from actual physical trade like shipping commodities to financial markets. It -- from public information, of course, I don't know anything more than any of you do. It looks like that the situation is unlikely to be resolved anytime soon. Market sentiment has been weak, and we believe that it is likely to remain weak until more clarity, in particular, on this front, the U.S.-China conflict. It really depends on how this situation unfolds.Global economic growth is likely to remain sluggish. I think it's also quite apparent now that even the United States, the Federal Reserve also stated that inflation is lower than expected, signaling to the market that economic growth is under threat. And the -- there is no rush to raise interest rates. Interest rates, there are even talks in the market, gossip that interest rates may even be reduced. These are clear signs that the economic growth is not so strong. Put it that way.On the dry bulk side, we haven't seen any particular shocks, other than, I would say, beyond human control shocks like infrastructure problems in the iron ore sources like Australia and Brazil. Overall, we see that the actual dry bulk volume is likely to remain stable. However, there will be changes in terms of the long-term composition, i.e., the volumes of the [ background ] cargoes versus the market cargoes is -- there's going to be changes and of course because of the conflict, mainly between U.S.-China but in fact, I think there's a global shift in terms of trade pattern. So we also expect changes in trade routes. Against this backdrop, we believe that any major capital expenditure is likely to be unfavored or people will be very hesitant in terms of making major new capital expenditure. So we believe that the supply of first vessels -- new vessels is likely to be -- continue to be moderate, and this is a good news. Supply will therefore be more predictable and under check, which will form some kind of support to the freight market.There has been -- in terms of the 2020 sulfur cap, there's a major regulatory change. There has always been on and off discussion about how risky it is going to be, that the -- or the differential between low sulfur fuel and the current high -- the high sulfur fuel, the price differential is going to be large. Some -- for a period of time, that they'll see the actual that is not so big. So there are actually conflicting views in the market right now. We hope we continue to hold the same view. For our class of vessels, the smaller vessels, Supramax, for our type of trade, which we mainly trade in intra-Asia where activities are most abundant, we do not see favorable economics on overinvestment in scrubbers for our vessels. So we will not be doing that. We have no plans to do that for the time being.Overall, the risk or the volatility of the market, the uncertainty in the market is [ unknown ]. We remain cautiously optimistic, and we have -- that's why we have taken actions to boost up our balance sheet as much as possible. And we'll remain financially nimble as much as possible in order to respond to any unexpected events going forward.That's all for me. We'll take any questions from any of you now. Thank you.

[Unknown Analyst]

Yes. This is [ Byu ] from Hong Kong Zhongcai Finance Investment. Congrats. Congratulations on the solid performance for Q1. The question was around the fleet, so you have acquired 2 vessels in Q2, right? I want to know what is the motivation behind this and what's the strategic plan for the fleet going forward.

[Wei Man Ching, Vice President]

The -- okay. The whole reason behind acquiring 2 secondhand vessels, to be honest, they are not very young, but they are 2 -- these ship vessels are some of the most well-maintained, good quality vessels we have seen. We'll be frank to all of you. Surprisingly enough, these are Chinese vessels, Chinese made. But accordingly to our experience, we have found that vessels be it made in China or made in Japan, made in Korea, those vessels that were made in the early 2000s, i.e., before the actual bulk market took off, when -- if you think of it, shipyards at that time would -- begging for business, okay. And the quality that -- of these ships at those times were very, very well made. They used extra steel plates. The engine rooms are better arranged. The deck quality was a lot better. I can go on and on about this. But overall, we're very surprised of the quality as well as it was very well maintained from -- in the seller. The seller actually owned this vessel from the newbuilding. So with this -- and of course, it was a very good price. It was a low enough price where we see that even us, and let's say, for example, 5 more years of use under our management, under our operation, which we can confidently achieve, just considering, for example, the demolition price of such vessel, the risk capital that we actually are committing is very, very low. So i.e., for example, I mean we are literally risking roughly even a little bit north of USD 1.6 million for each ship. But the rest, by the time we finished operating it in the market -- of course, at a very low cost. And these vessels, you can also imagine the depreciation, the noncash item will also be minimal. We will still fetch roughly around USD 4 million, possibly plus, on demolition value. So we believe it's a very good value proposition. We can increase our carrying capacity spending very, very little capital. So this is the rationale.

[Unknown Analyst]

So what's the plan going forward?

[Wei Man Ching, Vice President]

We will -- to be honest with you, as I explained to you what our management are thinking, we live in a very, very volatile world now. I believe that you will all agree. So we will always see on what -- for potential opportunities. But as the operating environment keep changing, the hurdle rates are all -- the criteria that we will consider when making new investments would also change. It's a very unpredictable environment -- world out there. So we have to be very, very careful. But we believe that these 2 deals are very good deals.

[Unknown Analyst]

My second question is regarding the speed of investments. So I saw an increase in the investment on the equity market and debt market, so the strategic planning for this kind of investment going forward given the U.S.-China [ inter-trade ] relationship and the capital market [ trend ].

[Wei Man Ching, Vice President]

We have been very careful about that, of course. Bear in mind, this set of results was reported in March. We have been of course -- review the market constantly. For the debt instruments, they're mainly short-dated investment-grade bonds, where we basically are making use of the liquidity to achieve some yield, additional yield for the company. In terms of equity investment, again, we are picking the more large caps in reliable names and have been paring down such equity holdings as soon as we see weakness in the market. I mean of course, as you say, the future plans, it is volatile. We see the volatility. So obviously preserving capital will always be the pinnacle impulsion.

[Unknown Analyst]

My third question is regarding the IMO regulation. The regulation will be effective in this September this year. So I'm not sure if the fleet of our company will be required to install the equipment.

[Wei Man Ching, Vice President]

Which IMO regulation? Are you talking about the scrubber, i.e., the sulfur cap? Or are you talking about the ballast water?

[Unknown Analyst]

The ballast water.

[Wei Man Ching, Vice President]

The ballast water, we -- no, we haven't. I believe, actually, no, we have not installed a ballast water management system yet on our vessels, but we have already have got extension on the requirements of installing ballast water management systems. Okay? And these extensions run all the way until 2022, so we have time. Why we did that is because -- if we would have put up money to invest into ballast water management systems the day they announced it and looking at the price of the installation of installing ballast water management systems on our ships now, I think I would cough up blood, to be honest. You could say the price is more than half, and they still continue going on a down trend. So we saw that coming, and we didn't -- we did not want to be guinea pigs. So we very quickly went to apply for the extension. So we got maximum extension all the way until 2022, early 2022 for every ship.

[Unknown Analyst]

All fleet?

[Wei Man Ching, Vice President]

Sorry?

[Unknown Analyst]

So this applies -- this extension applies to all the fleet?

[Wei Man Ching, Vice President]

The entire fleet.

[Unknown Analyst]

Okay, got it.

[Wei Man Ching, Vice President]

Each application for the extension is individual, but we did the application of an extension for every single vessel we have, every.

[Unknown Analyst]

Good to know. Yes.

[Wei Man Ching, Vice President]

In this environment, to be honest, it's very hard for us to try and boost revenue. So finding ways, be early, be innovative to cut expenses and expenditure or delay them till the price drops is one of the ways that we are trying to squeeze profit out of the business.

[Unknown Analyst]

Yes. That is quite reasonable.

[Wei Man Ching, Vice President]

Anymore questions from anyone?In that case, I'll call it an end. Thank you very much for dialing in to listen to the presentation. We hope that we can bring good news in the next quarter or the -- in the next few quarters. And hopefully by then, the -- or the uncontrollable market risk in terms of geopolitical events would have been resolved by then. We -- if that happens, I think the results will be quite -- should be a lot more encouraging. Thank you very much again. Have a good evening.