Mainland taxes force shipbuilder to change focus

PUBLISHED : Friday, 12 August, 1994, 12:00am
UPDATED : Friday, 12 August, 1994, 12:00am

GUANGZHOU Shipyard International has shifted its focus to container manufacturing and steel structure projects, cushioning itself from the difficulties in the shipbuilding industry under China's new taxation system.

''Many analysts have not expected us to have a very good result this year, so we changed our operation strategy,'' chairman Ren Fuwei said yesterday in Hong Kong.

In view of the value-added tax on domestically consumed products, Mr Ren said the Chinese shipbuilder would increase its exports.

In addition, it has slowed down its ship-breaking business as a result of high import tariffs on scrapped steel and falling prices of construction steel in China.

As a gauge of the effectiveness of the new strategy, Mr Ren cited the 80 per cent profit growth of its ''continuing operations'' in its interim result released last Friday.

His calculation excluded income of 41.87 million yuan (about HK$37.59 million) from the sale of foreign exchange entitlements from its continuing operations profit in the first half of 1993,because the amount was carried forward from 1992.

If the foreign exchange entitlements were included, the company posted a 4.4 per cent drop in continuing operations profit.

Mr Ren dismissed worries that the company would stray from its core shipbuilding business.

He noted the operation still accounted for half of its business, with container manufacturing another 43.1 per cent and ship repairing 1.3 per cent.

When the steel structure division began to contribute, he reckoned shipbuilding would maintain a 40 per cent slice, with the remainder evenly split between containers making and steel structure projects.

For the current year, Mr Ren estimated the container output would exceed the initial forecast of 30,000 TEU (20-foot equivalent units), as the company had secured orders of more than that figure as at August 5.

It had also received orders of 15,000 TEU for next year. The containers are solely for export.

But the division's profit margin would remain squeezed this year, in spite of lower materials costs and a recovery in selling prices in the second half of this year, he said.

The margin was one to two per cent lower than that of 1992.

On the shipbuilding front, Guangzhou Shipyard has orders for 13 vessels on hand worth 2.2 billion yuan, which will be completed by 1997.

Mr Ren said the shipbuilding division had reached full capacity with these contracts over the next two years.

Five of the vessels are for domestic sales, which are subject to levy of value-added tax.

Mr Ren said the shipbuilding division had succeeded in reducing operating costs, but it was not enough to compensate for an increase in tax expenses as a result of the value-added tax.

He said the increased tax burden was not fully transferred to its customers, as some represented old orders.

But for recently signed contracts, the tax had been taken into account in the pricing of the vessels.

For its steel structure business, Guangzhou Shipyard is negotiating another joint venture in Guangdong province, after taking a 49 per cent stake in a venture with Havens Steel Co of the United States making ''factory and building steel structure''.

Mr Ren was confident about the new business, describing it as a ''sunrise industry'' in China and pointing to its generous profit margin.

He expected the venture with Havens to begin contributing to profit in 1996 after being in operation next year.

Guangzhou Shipyard intends to relocate its ship repairing operation to the Xinhui plant, which had initially been for ship-breaking.

Mr Ren said the company's ship repairing capacity was now restricted to vessels of less than 10,000 dead weight tonnes due to its geographical limits.