Singapore-listed Cosco Investment Singapore (CIS) is to pay $14.4 million dollars for 50% in Chinese ship-repair company Nantong Ocean Ship Engineering Company (NOSEC).
The move will position NOSEC to raise capital more easily after China's accession to the World Trade Organization, expected some time next year. The expected increase in trade following accession should contribute to an increase in the ship-repair business.
The 50% stake CIS is acquiring is currently divided equally between Japanese company Masahiro Trading and Cosco Industrial Investment. Cosco Shipyard Group owns the remaining 50%.
After the acquisition, CIS and Cosco Shipyard Group will own 50% each of NOSEC.
The transaction is expected to be completed by the end of this year. The $14.4 million paid in the transaction represents 90% of the valuation of the relevant assets.
CIS will pay cash for the 25% interest owned by Masahiro Trading in NOSEC and will pay Cosco Industrial Investment by issuing new ordinary shares.
CIS is 60% owned by Cosco Group, a Chinese state-owned conglomerate, while Cosco Industrial Investment and Cosco Shipyard Group are both 100% owned by Cosco Group.
NOSEC was originally a Sino Foreign joint venture established in 1990 between Cosco Group and Kawasaki Heavy Industries.
NOSEC is located close to the port of Nantong in Jiangsu province, close to Shanghai, and its turnover in 2000 was $51 million. As of June this year, the re-valued net asset value of the company amounted to $32 million.
ING Barings acted as financial adviser to CIS on the deal.
"The injection of NOSEC into the Singapore-listed vehicle makes sense because there are more pure shipping groups listed in Singapore than elsewhere in the region, making peer comparisons easier, and research more abundant," comments Andrew Wong, head of corporate finance for China for ING Barings.
"The ship repair business is in a great position to benefit from the huge expansion of trade that will follow China's accession to the World Trade Organization," he adds.
NOSEC is the leading ship repair company in China specializing in repairing foreign ships, and therefore benefits from higher margins than exist in repairing domestic Chinese ship.
In 1999, 96% of its total revenues came from foreign ships.
"Chinese shipyards have a significant competitive advantage in terms of lower labour and materials cost," Wong concludes.
In recent years, the ship repair business has moved increasingly from the US and Europe to Asia and China.