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Market observer with legal background and interest in financial services, physical commodities trading, shipping and irrational exuberance. Values entrepreneurship and good governance, may also use some behavioral investment/contrarian criteria.
  • How To Add $100m To Your Company's Annual P&L With One Paragraph 2 comments
    Aug 22, 2012 5:05 AM

    China Shipping Development, listed in Hong Kong and Shanghai with about $2 billion market, is the largest Chinese tanker and coastal dry-bulk operator, heavily expanding in large wet and dry tonnage. I was browsing its 2012 H1 Results (a loss of RMB395 million or about $62 million) when I stumbled upon the following paragraph:

    "During the period, the Group adjusted the estimated useful life of vessels from the range of 17 to 25 years to 25 years. Residual values of vessels were adjusted from USD180 (approximately RMB1,350) per light displacement ton to USD470 (approximately RMB2,960) per light displacement ton. As a result of these changes in accounting estimates, the depreciation decreased by approximately RMB300,897,000 for the period and will also decrease by approximately RMB601,794,000 for year ended 31 December 2012."

    In other words, the change in depreciation policy added some $50 million to the result for 2012 H1 and will add some $100 million to the full year - reducing the expected losses accordingly.

    This is at a time when it is quite clear that estimates of useful life of shipping assets should be reduced, not increased. Oversupply, charterer vetting procedures and new vessel designs make vessels older than 15 years less competitive and older than 20 years useless for international trade. Scrap steel prices are also on a downtrend and in any event the long-term average is nowhere near USD470 per ldt.

    Straight-line depreciation may not be very much appropriate for a highly cyclical sector like shipping. It is also a non-cash expense. However, using and planning around conservative accounting policies means respect for the shareholder. A number of posts in this instablog expand on depreciation policies in shipping.

    But whatever works for China Shipping Development, which is down 40% for the year and going nowhere. And anyway this is peanuts compared to Groupon accounting: blogs.smeal.psu.edu/grumpyoldaccountants...

    Themes: Shipping, Accounting
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  • Jeremy Johnson, CFA
    , contributor
    Comments (783) | Send Message
     
    Thanks for pointing this out. Asset lives are a key piece of my stock analysis.
    22 Aug 2012, 11:02 AM Reply Like
  • Adjusted Return
    , contributor
    Comments (359) | Send Message
     
    Author’s reply » One year plus after the change in depreciation policy, China Shipping Development decides to scrap a bunch of quite small, old, coastal trade bulkers and tankers - http://bit.ly/1ibtR11.

     

    After writing these old vessels down to their scrap value, around $53m, they take a $70m impairment charge - according to the company, "it is anticipated that the average price for the Company to dispose vessels is approximately US$300/long ton".

     

    These are the bright guys that increased last year the residual value to $470 per ldt, and the expected life to 25 years.

     

    Brighter than their investors of course. One wonders about the rest of the fleet.

     

    29 Jan, 04:02 PM Reply Like
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