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Only In China? – RMB3.8 Billion Negative Revenue!
Aspire, Thought Leaders | 15 April 2015
By: Kevin Gin, CFA
Articles (5) Profile

Just when you think you have seen just about everything, something pops out and surprises you. Shipbuilding company China Rongsheng has reported negative revenues.

Yes, it has reported negative revenues. You may ask how can that be? Well, much depends on how revenues are or were booked in the past. This also depends on whether management is conservative or aggressive in recognising revenues.

What does that say about order books? Or perhaps even the accounting treatment of other line items?

Negative Revenues of RMB3.8 Billion
China Rongsheng (Rongsheng) recently reported negative revenue to the tune of RMB3.8 billion or about $830 million (current exchange rates).

The negative revenue was partly due to a decrease in revenue from shipbuilding and other contracts. The main culprit for the negative revenue however, was the reversal of revenue from the cancellation of shipbuilding contracts.

Serious Questions About Revenue Recognition
The fact that Rongsheng is the victim of contract cancellations, while alarming, is not critical. The main question is how these revenues were booked in the past. Such accounting practices could also extend to expenses, value of assets, etc.

Rongsheng’s largest business segment is shipbuilding. As reported in its 31 December 2014 report, total orders on hand consisted of 35 vessels, representing total contract value of about US$1.67 billion. In light of recent developments, how water tight are these orders? Are they profitable, if at all?

Political Connections?
Another theme that comes to mind while looking at the company is the corporate repercussions from political upheavals. Rongsheng’s major shareholder, Zhang Zhi Rong had to step down from his chairman position after his other company, Well Advantage, had to pay US$14.2 million to settle a US insider trading case involving CNOOC (China National Offshore Oil Corporation), a state-owned enterprise.

Man-of-the-hour: Zhou Yongkang

Within the broader scheme of things, CNOOC falls under the ambit of CNPC (China National Petroleum Corporation), a government-owned corporation. Deposed senior leader of the Communist Party of China, Zhou Yongkang, spent 32 years to build up CNPC, eventually becoming its general manager and party secretary.

With Zhou and many of his associates now under investigation, it would seem that many of his business dealings, including CNOOC, CNPC and by extension Rongsheng, could be faced with greater scrutiny.

Tough Road Ahead
For Rongsheng, the road ahead looks to be even more bumpy. As a whole, the shipbuilding industry continues to be plagued by capacity overhang. This could mute any recovery in the shipping and hence, shipbuilding industry.

With additional reporting by Simeon Ang.

Kevin Gin, CFA focuses on valuation anomalies across certain industries and geographies. Kevin brings with him more than 25 years of investment experience.

Please click here for more information about this author.

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The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

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