News / Wan Hai stays in the black, but Evergreen and Yang Ming's red ink raises merger speculation

21/05/2020

Niche carrier Wan Hai was the only Taiwanese container line to post a net profit in the first quarter of this year as its larger compatriots, Evergreen and Yang Ming, traded in the red.

The parlous position of the liner industry has renewed speculation of a merger of these two into one state-sponsored container line, a development that would be strongly resisted by their individual managements.

Following a $27m loss recorded by Yang Ming in Q1, Evergreen reported a net loss of $15m. But Wan Hai managed to stay in the black, with a profit of $3m, significantly below its $35m profit for the first three months of last year.

The trio’s results were impacted by weak demand in the latter weeks of the quarter, due to the coronavirus outbreak in China, and it is expected that Q2 will be far worse for the liner industry.

Taiwan’s Ministry of Transport and Communications announced on Tuesday it had launched a $1bn funding package targeting its distressed shipping sector.

Transport and communications minister Lin Chia-lung is said to have met with the heads of Evergreen and Yang Ming regarding the funding package, but there is no evidence that merger talks were on the agenda.

There is, however, precedence for the consolidation of stoutly independent compatriot carriers in the merger of Cosco and China Shipping Container Line in January 2016, and the joining of the container businesses of K Line, MOL and NYK into ONE, two years later.

Mr Lin said the ministry would “fully support” the shipping industry through the pandemic, “to stabilise the confidence” of customers and meet the need for working capital.

A statement from Evergreen welcome the government’s approach but stressed that the commitment was to act as reassurance for the country’s banks in lending to the shipping industry, rather than as a handout.

“Evergreen appreciates the government’s initiative, which is evidence of a forward-looking and precautionary policy. This government assurance to financial institutions will enable them to provide soft loans to the local shipping industry. In the face of the epidemic’s impact, the more abundant sourcing of finances will, if required, strengthen the industry’s credit position and ensure smooth operation of shipping services.”

Last time Taiwan’s government stepped in to support its two largest carriers was in 2016, in the wake of the Hanjin Shipping bankruptcy, when it approved a $1.9bn credit line relief package with preferential terms to prop up Evergreen and Yang Ming’s balance sheets and boost market confidence.

Subsequently, the state has built up a 48% shareholding in Yang Ming, but the carrier has struggled to achieve sustained profitability, in contrast to its larger rival. Indeed, Yang Ming’s board recently approved a private placement for 300 million preferred shares, expected to be mostly taken up by the state.

Evergreen, ranked seventh in the league of global carriers, is twice the size of Yang Ming in terms of capacity with a fleet of 1.2m teu. Both have large orderbooks, although Evergreen has 540,000 teu of newbuild ships on order, compared with the 200,000 teu Yang Ming has under construction.

Unless they can defer the vessel deliveries, the Taiwanese lines will need to fund high levels of capex in the next two years, exerting additional pressure on their balance sheets.

Moreover, Evergreen has the biggest commitment to scrubber technology of all of its peers, with a reported 75% of its 190-ship fleet earmarked for installations.

Although it is likely to have cancelled some, due to the substantial narrowing of the price of IMO 2020-compliant low-sulphur fuel with traditional heavy fuel, the circa-$5m price of installation and the indirect cost of vessels being out of service for weeks will have dented its results.