Trading of the eight listed units of Cosco and China Shipping on the Shanghai, Shenzhen and Hong Kong Exchanges has been suspended all week in preparation of a joint announcement by the giant state-owned carriers that is widely expected to be news of a merger. Multiple “sources close to the deal” are being quoted by Chinese and foreign media, and Maritime 360, a sister brand of JOC.com within IHS, has learned that the merger is being planned by a five-member team, led by China Shipping Group chairman Xu Lirong. Additionally, filings from both Cosco and China Shipping to the Shanghai and Shenzhen stock exchanges said, “trading in the shares of the company will be suspended with effect from 9.00 a.m. on 10 August 2015 pending the release of an inside information announcement relating to the plan by the controlling shareholder of the company (Cosco/China Shipping ) for a significant transaction which involves the companies.”
Qi Yinliang, founder and chief editor of Chinese shipping website Ship.sh, said he believed Xu Wenrong, chief of discipline and inspection committee, vice general manager Huang Xiaowen, and Yang Jigui, deputy chief accountant, would be put forward by China Shipping. He speculated that Cosco would have general manager Li Yunpeng, and chief accountant Sun Yueying, or vice general manager Sun Jiakang on the merger team. He said Ma Zehua, chairman of Cosco, may not be involved because of his age. The state-owned Assets Supervision and Administration Commission (SASAC), a powerful authority tasked with the modernization and restructuring of large state-owned enterprises, will have direct control of any merger. Reform of giant state-run groups is well underway, with the most notable transport sector consolidation being the placing of China Railways under the Ministry of Transport from the now defunct Ministry of Railways.
China’s shipping industry is dominated by giant state-owned companies, and SASAC is serious about deepening reform across all SOEs to streamline bloated industries and improve their global competitiveness, according to Jin Jiachen, director of the shipping center construction research department of the Shanghai International Shipping Institute. “The government has proposed to inspire market vitality by virtue of intensified private enterprise reform, which includes encouraging reorganization and mergers of private companies and their involvement in reforms of state-owned ones,” she said. But news of a merger between the two carriers did not come as a surprise to Rod Riseborough, CEO of Container Trades Statistics. He told JOC.com that although the consolidation would still be some way down the road, it would be a good move. “It doesn’t make sense to have two companies, both state-owned, competing with each other in a market that is not particularly good,” he said. “If you take the subsidies out, neither carrier is making money. A merger will create a major Asian carrier at a time when most of the other Asian lines are relatively small. The ships don’t go away, of course, but it is the sort of consolidation that we have been talking about for years.”
Riseborough said Beijing had subsidised both carriers hundreds of millions of dollars a year to scrap old ships and build new vessels in Chinese yards. That has left the lines with relatively new and efficient fleets. How to overcome the alliance problem would be interesting, however, and one of the alliances stood to lose more than the other, Riseborough said. Cosco Container Lines belongs to the CKYHE Alliance, while China Shipping Container Lines is part of the O3 with UASC and CMA CGM. “It is too early to say, but if CSCL pulled out of O3 there would be two lines left. That works with 2M, so it may not be a problem. If Cosco came out of CKYHE it would have an effect, but it wouldn’t be the end of them,” he said. But if a giant new Cosco-CSCL line opted to stay with O3 it would add a huge player to the alliance and create greater economies of scale, the CTS analyst said.
Media reports from China said the State Council had approved a blueprint for SOE reform that would introduce a Temasek-like investment holding structure. State-owned capital operating companies would channel funds to the SOEs, pressuring them to make profits but would not likely be involved in business operations. Barclays Research said in a note that the proposed investment holding structure also introduced higher managerial accountability as the board of directors would hold the decision in dismissing poorly performing managers. “We expect the proposed structure is positive for shipping returns,” the note to customers said. “The proposed structure emphasizes returns as SOEs are under pressure from the investment holding company to make profits. “The specific operational improvement is difficult to quantify given the fluidity of the situation which can be subject to the execution of a potential restructuring plan. However, higher cost and operational efficiency is generally positive for shipping profitability, and if done right, Chinese shipping SOEs could potentially narrow the margin and return gap with their non-state sponsored companies.”
Essences Securities believed that container shipping would be the core of a merger, and predicted that a platform bigger than Cosco and China Shipping would be in charge of the integration of assets, financial issues and human resources. Later in the process similar business sectors of the two companies would be merged, and finally the integration of listed companies of the two giants.
