China Merchants Energy Shipping (CMES) expects to report a significant rise in net profit for last year, despite having booked large impairments on ageing ships and provisions for expensive charters.
The Chinese tanker and bulker giant’s preliminary result showed net profit increased by between CNY 1.07bn ($170m) and CNY 1.36bn on top of the CNY 1.61bn earned in 2019.
“We managed to took advantage of strong tanker rates in the first half of 2020,” Shanghai-listed CMES said in an exchange filing on Thursday.
“We also reduced financing costs due to lower interest rates for US dollars, an appreciating Chinese yuan and more cash reserves following a private placement. Those gains were partially offset by weak shipping markets for dry bulk.”
The company, part of state conglomerate China Merchants Group, is due to release its full annual result on 26 March.
Large non-cash losses
The stronger profit came despite CMES booked impairments totalling $102m on 16 VLCCs and CNY 301m on nine supramax bulkers.
The VLCCs were built between 2008 and 2012, and all the supramaxes were constructed in 2012.
“The ships are not modern, and the market is seeing less demand for them in recent years,” CMES said. “Moreover, their secondhand prices are decreasing. So we needed to record the impairments.”
With a weak freight market outlook, the company also booked CNY 122m provisions for 14 bulkers chartered in at higher rates on a long-term basis.
Four of those vessels are 82,000-dwt ships fixed at $5,900 per day plus profit sharing on bareboat terms. Six are 32,500-dwt log carriers bareboat chartered at $3,760 per day.
The remaining four are panamax bulkers which earn between $12,600 and $13,600 per day on time charters that will expire later this year or 2022.
“We expect those 14 vessels will generate negative cash flows for us during their charters,” CMES said.
Chinese companies tend to take non-cash charges when they make a profit, as such accounting methods can reduce tax liabilities.
Cosco Shipping Energy Transportation, another Chinese state-backed tanker giant, booked impairment charges totalling CNY 841m for 10 older tankers in 2020.
The preliminary result showed its net profit increased by between CNY 1.81bn and CNY 2.02bn from the 2019 level of CNY 432m.
