Troubled container carrier Yang Ming Marine Transport is hoping a recapitalization plan, along with strong ties to the Taiwanese government and recent growth in global trade, will help lift its operations back into the black.
When officials from Yang Ming Marine Transport told investors in late 2016 the company was planning to implement a government-led recapitalization plan, there was speculation that the Taiwan-based container line was on the edge of monetary collapse and could soon fall into bankruptcy, as another financially troubled Asian carrier—the now defunct Hanjin Shipping— did just last August.
And that kind of speculation was by no means unwarranted. Not only had the industry as a whole seen a year-long downturn in rates and a figurative tidal wave of consolidation, but at the end of calendar year 2016, YMM reported a loss of roughly $495 million for the previous 12 months, more than double the $210 million net loss suffered in 2015. The company’s loss per diluted share (EPS) widened from $0.31 per share to $0.70 per share in 2016 as revenues dropped 9.5 percent year-over-year to $3.82 billion.
Adding fuel to the speculative fire was the fact that Yang Ming, the world’s ninth largest container carrier by fleet capacity, had one of the most leveraged balance sheets in the industry, over 437 percent at one point in the fourth quarter, well above the 120-plus percent considered the industry standard.
The situation was so dire that maritime shipping analyst Drewry Financial Services unfavorably compared Yang Ming to Hanjin when rating the company’s stock, stating that without significant assistance, YMM could be the next company to get caught in the undertow of a consolidating market.
“Even with recovery in the underlying freight market, the debt burden without a restructuring is a red flag and a clear ‘sell’ signal for us,” Drewry Financial Research Services Director Rahul Kapoor and container shipping lead analyst Nilesh Tiwary said in their analysis, published in January. “We see YMM as an apt candidate for a government-backed shareholder bailout.”
Standing Pat. Despite the comments from Drewry and other analysts, Yang Ming was resolute in its stance that it would not allow itself become a victim of consolidation, bucking the recent industry trend toward banding together to weather the storm of overcapacity and low freight rates—a course taken by Chinese state-run lines COSCO and China Shipping, and later COSCO and Hong Kong-based OOCL; CMA CGM of France and Singapore-based APL; Germany’s Hapag Lloyd and United Arab Shipping Co. (UASC); industry leader Maersk Line and smaller north-south specialist Hamburg Sud; and the “Big 3” Japanese container lines Mitsui O.S.K. Line (MOL), Nippon Yusen Kaisha (NYK) and Kawasaki Kisen Kaisha (“K” Line), which announced last November they would merged their respective container operations into a single business unit dubbed the Ocean Network Express (ONE).
“A merger has never been an option for Yang Ming, and it won’t be,” company chair Bronson Hsieh said in January regarding the speculation.
Although the company has a policy against publicly commenting on its financial results, officials pushed back against what they perceived as negative speculation about its future, or rather the lack thereof.
“Yang Ming has not approached its creditors with any demands to restructure any part of its debt and does not have any intention to do so going forward,” the carrier explained in a statement. “Yang Ming is not in default of any of its obligations whatsoever, and any suggestions otherwise are patently false.”
And through the first half of 2017, there were signs Yang Ming had perhaps begun to pull itself out of its financial tailspin. The company posted a net loss of $29 million during the first quarter, followed by a $14.7 million loss in Q2. While these results are obviously still far from impressive, they represent an 84 percent reduction from the same six-month period the previous year.
The company attributed the improvement to several factors. Starting in fourth quarter 2016, Yang Ming renewed its focus on financial improvement, introducing more cost control measures like abolishing loss-incurring shipping routes, cutting down on operational costs, reviewing the marginal contribution management, and rationalizing its agency business.
Among the drastic measures taken, according to the company’s board, was to slash executives’ pay by 50 percent and reduce the salaries of senior line managers by 30 percent.
Another key, the company says, was that it shortened supply and demand gaps.
During the first quarter, the company saw container volume growth that outpaced the U.S. containerized import market, which has been setting new records left and right in the early part of the year. The roughly 215,000 TEUs Yang Ming transported in the first three months of 2017 represented an 8.7 percent year-over-year increase, compared to 7.2 percent growth for the rest of the market during the same time period, according to global trade intelligence provider Port Import/Export Reporting Service (PIERS).
The linchpin of Yang Ming’s turnaround efforts is a recapitalization plan under which the company plans to raise about $330 million in new funds via a number of private stock offerings scheduled through the end of 2017, $30 million more than the $300 million analysts have projected the carrier needs to see it through the year.
Under the recapitalization, Yang Ming initiated a reverse split of its then-outstanding shares and issued new stock to investors. In a reverse split, the number of shares of a given company’s stock is reduced considerably, thus increasing the relative value of each individual share. In the first round of issuance, which was completed in February, YMM said it acquired $54 million in investments from various public and private entities in exchange for 161 million shares.
By June, following a second issuance round, that number had jumped to a total of $108 million from private investors. Yang Ming said at the time it plans to continue with the remaining rounds of issuance in order to achieve its recapitalization goal of $330 million by the end of the year. The following month, the company announced that it was releasing an additional 500 million shares of company stock, largely in response to interest shown by current stockholders.
“Based on the company’s recent results and the overall performance and trend in the industry, Yang Ming remains optimistic in our forecast for 2017,” the carrier said in a statement.
Taipei Connection. One reason Yang Ming can make such confident statements about its future is that it although it’s technically a privately held company, it also has a close relationship with the government of Taiwan, which just prior to the recapitalization, owned a 33 percent stake.
The sizable public investment in the private company is something that separates it from competitors, particularly since the government has set up a $1.9 billion fund for shipping companies to draw down upon, if needed.
“It is inaccurate to compare Yang Ming with other carriers in view of Yang Ming’s ownership structure and the unwavering support from the government of Taiwan,” the carrier said in a statement provided to American Shipper.
But the truth remains that Yang Ming has lost over $1.2 billion since 2009, and the last time the carrier actually made money was in 2013, when it reported a $92 million profit. But even though the financial clouds haven’t completely parted—and might not for some time—analysts are beginning to paint a less gloomy picture of the company’s finances.
As of early August, the consensus forecast among six polled investment analysts covering YMM advised investors to hold their position in the company, according to the Financial Times. That’s been the consensus forecast since the sentiment of investment analysts improved in May, quite a turnaround from prior predictions that the company would significantly underperform.
YMM in the first half of 2017 saw its revenues climb 15.6 percent year-over-year to $2.07 billion, according to the company’s most recent financial statements. Higher base freight rates contributed to the revenue increase, as did a more than 10 percent increase in container transport volumes to 2.28 million TEUs compared with first half 2016.
Also helping Yang Ming’s cause is the fact that in addition to there being fewer carriers from which to choose, the number of large-scale vessel sharing agreements (VSAs) has also been reduced from four to three as of April 1, 2017. Formerly a member of the CKYHE Alliance, Yang Ming joined up with Hapag-Lloyd, “K” Line, MOL and NYK to form the awkwardly named THE Alliance.
The grouping combines roughly 3.5 million TEUs of containership capacity, about 18 percent share of the global fleet, according to the lines. THE Alliance operates 32 joint services: five Asia-North Europe loops, three between Asia and the Mediterranean, 11 transpacific services to the U.S. West Coast, five transpacific services to the U.S. East Coast, seven transatlantic services and one Asia-Middle East service.
The VSA, like the competing (and larger) 2M and OCEAN alliances, allows members to share costs and risks, and most importantly, increases vessel utilization, which could turn the aforementioned growth in revenue and transport volume into actual profits.
So although Yang Ming began 2017 looking like it could—and to some, would—be the next casualty of a rapidly consolidating market, through a series of tough, but necessary moves, including pay reductions at the company’s top levels and a recapitalization plan, as well as joining a new cost-sharing shipping alliance.
It still remains to be seen if YMM can avoid the same fate as Hanjin, but at the very least, it has taken some significant steps to stay afloat in an industry that is still struggling to find a balance between supply and demand. This will depend in large part on overall global trade growth and what steps carriers take to manage excess capacity, but the company in June reiterated that it expects its losses this year to shrink considerably from 2016’s $495 million.
“Recent performance indicators show continuing signs of recovery,” the carrier said in a June statement. “Based on second quarter data, we are seeing a scenario where there is stronger demand over existing supply on many of the trade lanes Yang Ming serves.”