Spending $84.3 mln on shipbuilding a 'risk in calculation': Hai An chairman

Hai An and other shipping companies have set cautious plans for this year after recording a sharp drop in Q1 profits and a big profit in 2022. Compared to a year ago, freight rates for some main routes have fallen considerably. What are your forecasts for rates in the last six months of the year? Will the ship charter market prosper?

The downtrend of the maritime industry started in August 2022, but in the first eight months of 2022, shipping firms still grew well, so last year they recorded a very high profit.

In fact, in the first quarter of this year, major container shipping lines reported losses, including ZIM - the 10th largest in the world, and Wan Hai Lines - one of Taiwan's leading container shipping lines. Most recently, ZIM has just forecast a loss for this year, although it expected a profit at the year beginning. This means that the downtrend of the global maritime industry continues and the domestic container shipping market is no exception.

Moreover, compared to the beginning of the year, freight rates have decreased by up to 70-80%. The maritime industry is a service sector, so it is affected by the economy. Meanwhile, Vietnam's economy is currently facing difficulties, with falling demand and shrinking exports to major markets such as the U.S. and Europe due to tight consumption and poor circulation of goods between regions… so I think the domestic container shipping market in the last six months of the year will be unable to prosper.

The same goes for ship charter services, which are currently mainly influenced by the world market. The situation is less positive in China and the U.S., and even worse in Europe. Recently, the ship charter market has shown signs of growth only in India and the Middle East. However, this did not make up for the declines in the aforementioned major markets, causing difficulties for pushing up charter rates from now until the year-end.

However, although freight rates are going down, they are still higher than before the pandemic, so ship owners can still turn a profit. In the past two years, every company has reported a huge profit, an unprecedented level in history..., so when the charter rates drop, maybe some firms will record losses, and some others will see more humble profits.

For Hai An, charter prices for its fleet are slightly higher than pre-pandemic levels, so the company still targets a profit this year.

Hai An is expected to issue a maximum of VND500 billion ($21.06 million) of bonds to invest in building new ships. Do you think this is a risky move when a large-scale shipping capacity surplus may occur in the coming years?

For container shipping, as many new-built ships will be delivered in 2023, 2024 and 2025 (accounting for nearly 30% of the total tonnage of the global container fleet), a tonnage surplus is likely to be seen. Besides, countries have been expanding their emissions management areas and forcing ships to use diesel oil (DO) with a sulfur content of less than 0.1% when entering these areas. At the same time, the International Maritime Organization (IMO) has applied speed management measures to reduce carbon emissions through the installation of speed limiters from January 1, 2023. The above factors will significantly increase the operating costs for the fleets.

It is not correct to say that there is absolutely no risk, but we always use the word "risk in calculation". That means the company has taken into account the worst case that can happen and how it will affect the firm’s production and business activities.

Firstly, the plan to build three new ships was made in October 2021. Each new ship needs about 12 months to complete. The company is expected to receive the first newly built ship in mid-November this year and the remaining two in January and March next year. Hai An is currently operating a total of 11 ships, of which three were built in 1999, 2000 and 2002 (over 20 years). Therefore, in the coming time, the company will liquidate these ships to ensure service quality and build new ships to replace the old ones.

Secondly, as the shipbuilding contracts were signed in 2021 at good prices. Two years ago, when the company ordered the first ships, after only about six months, if sold, they would make a profit of about $1-1.5 million per vessel. Currently, although the market is going down, the cost of new ships remains unchanged or has risen, so the company always considers selling and restructuring assets in case of business difficulties. In fact, for its old ships, the company has never suffered a loss. This is also an advantage of Hai An's fleet business.

At its annual general shareholder meetings, Hai An has always asked for shareholders’ opinions on the purchase of old ships, but in reality, this business always depends on the market situation. Currently, the shipping market is not favorable, so from now to the middle of next year, the company will only focus on completing these three new ships and has no plans to buy old ships.

In addition, now the company is focusing on serving the domestic container shipping market and the new shipbuilding plan will mainly help Hai An reach the intra-Asia market.

Now Hai An is operating routes to Hong Kong and southern China. This year or early next year it will launch a route to central China or coordinate with other partners to deploy another to South Korea. There is a high demand for shipping cargo between Vietnam and China and South Korea.

The company's stock price increase was in contrast to its Q1 business results. How do you explain this?

Firstly, from the perspective of the board of directors, we only know how to do the best we can as well as provide accurate and transparent information and reports about the company's activities, while the stock price is decided by market supply and demand.

Secondly, at the last annual general shareholder meeting, thanks to the good business results of 2022, the company also proposed to pay stock dividends at a rate of 50%. Maybe that is one of the reasons for the stock price hike.

The lease contracts on many of Hai An's ships have expired and you've had to switch to chartering. What is the company’s plan to improve this situation in the near future?

Starting the container ship business in 2014, Hai An sets its self-exploiting rate at 50% and outsourcing at 50%. In the 2021-2022 period, the company signed several contracts with good charter rates and long-term duration. If the company continues to implement the 50-50 plan, some ships will enjoy good charter rates until the third quarter of 2023.

Compared to the past, charter rates have decreased by 50% or even more.

This is completely consistent with the rule of market supply and demand. During the pandemic, the high demand for cargo shipping pushed up charter rates, and ship owners asked charterers to accept high-priced contracts with longer charter periods of at least two years. But now, the market demand has decreased while the supply remains the same and is even increasing, so the market is in the hands of clients who have the right to ask ship owners to lower their charter rates and shorten charter periods.

Currently, Hai An accounts for about 27-28% of the self-exploitation share in the domestic market. Moreover, it has leased out ships for five years and created good relationships with external partners. Some charter contracts have been renewed by partners, but the rates and periods are much lower. Most of Hai An's ships were invested from 2014 to 2018 and the difficult period due to the pandemic (2020 - 2021), so the average investment cost was quite low. Even though this is a difficult period for ship owners due to low charter rates, Hai An is still earning a profit.

Last March, Hai An officially launched and put into operation ZIM Hai An Joint Venture Company Limited (Lotus Link). How does this joint venture work and does the company have any plans to cooperate with other groups?

Forming a joint venture with ZIM, one of the 10 largest container shipping companies in the world, will definitely help the company's business to develop well in the future. For example, ZIM Hai An is currently chartering one ship from the company and will probably continue to hire our ships for its new routes. From this August, the joint venture will charter an additional vessel and extend the current service between Vietnam and Malaysia to India.

Lotus Link has only been operating for four months and is suffering a loss, which is still in the plan. The goal of this joint venture is to start making a profit after about 18 months.

Finding other partners is relatively difficult or almost impossible, because ZIM is one of the top 10 container carriers in the world, so Hai An and other partners (if any) must consider very carefully if they want to cooperate with others. In short, "fishing with two hands" is always something to be avoided in business. In the immediate future, the company will only focus on making the joint venture's operations efficient and profitable. Regarding the search for other partners, if any, we will give priority to partners in other fields such as warehousing, co-operating foreign routes or investing in the fleet, and completing the supply chain.

Reaching this deal with ZIM was a great effort by the company’s leadership that took several years. Hai An has always pursued the "win-win" principle when cooperating with foreign partners, even if we have to accept a little more loss for long-term development. Besides, we must be honest and frank with partners. If we can't reach cooperation at this time, please maintain the relationship to do it at a later date when the market is more favorable.

Although Vietnam boasts great potential for international shipping fleet development, its import and export goods are mainly handled by foreign fleets, accounting for more than 90%, especially on long sea routes to the U.S. and Europe. As the leader of a major shipping line in Vietnam, what suggestions do you have to improve the competitiveness of the Vietnamese fleet to meet global shipping development trends?

In terms of trade, if Vietnam keeps the old tradition of "buying CIF (Cost, Insurance, Freight), selling FOB (Free On Board)", the right to ship goods will belong to outsiders.

For example, if we win such a shipping contract, the cargo owner must have additional responsibilities such as ensuring the safety of cargo during shipping, additional shipping costs and insurance, as well as a variety of other risks, so this is really a difficult question.

Shipping lines will always look to reach out to the world, but also face many difficulties. One of the most important factors is human resources. To do it, they must have good staff. Compared to 20 years ago, life is much better so very few people accept the life of a crew member due to the harsh working environment and being away from home for six months to one year.

Moreover, in the international market, shipping firms have to face competitors with much greater experience and financial potential. In addition, it is necessary to have employees who are fluent in English or the native language. Competing with companies providing services in the host country is also an obstable, not to mention office and staff costs.

Regarding the capacity of Vietnam's fleet, for container ships, Vietnamese enterprises account for an extremely small market share. According to the latest statistics of the Vietnam Maritime Administration, the country currently has more than 3,000 vessels, of which new container ships number about 40-41, or over 1%.

Therefore, developing a container fleet needs orientations. In the immediate future when we cannot operate long routes, we should focus on shorter ones such as those to Hong Kong, China, Southeast Asia and then intra-Asia.

In the domestic market, Hai An, listed on the Ho Chi Minh Stock Exchange as HAH, owns the largest and newest container fleet in Vietnam with 11 units, accounting for 28% of the container shipping market share.

This year, Hai An will invest VND2 trillion ($84.3 million) in building three new ships of 1,800 TEU. The company plans to issue a maximum of VND500 billion ($21.06 million) in convertible bonds via private placement in the 2023-2024 period to serve shipbuilding activities.

In 2023, Hai An has targeted total revenue of VND2.96 trillion ($125.98 million) and post-tax profit of VND492 billion ($20.95 million). Total output is expected to reach 1,006,000 TEU (twenty-foot equivalent units), of which port operations will account for 418,000 TEU, container transport 396,000, and depots 192,000.

In the first six months of 2023, Hai An posted net revenue of VND1.27 trillion ($53.4 million) and after-tax profit of VND206 billion ($8.68 million), down 20% and 64.5% year-on-year, respectively.

On the stock market, HAH closed the Friday session at VND49,550 ($2.1) per share.