The Zhitong Finance App learned that China Ship Leasing (03877) issued a letter to shareholders. The letter stated that China Ship Leasing adheres to the general policy of steady operation, maintained steady growth in business performance at a high level, and achieved the “14th Five-Year Plan” business goals proposed in 2020 two years ahead of schedule. At this stage, the company will place more emphasis on risk diversification and profit stability, prioritize stability over scale expansion, and focus more on projects with clear returns. The company pursues the improvement of the asset value, quality and technological content of the fleet, and continues to maintain steady and reasonable growth.

Below is the full text of the letter to shareholders:

Dear investors:

2023 will be a year full of surprises and elusive. New shipbuilding prices hit the second-highest level, with shipyard orders being plentiful, and shipowners' intense games; the pace of green decarbonization of shipping is accelerating, but the exact implementation of technical routes is uncertain, leading to unclear impacts; the two major canals are “restricted” due to natural and human reasons, causing the freight rates of related ship types to fluctuate greatly; shipowners' repurchases have increased, and the scale of the ship leasing market has narrowed, but more and more financial leasing companies are entering the market, leading to intense internal pressure.

At the macro level, the Russian-Ukrainian conflict, the conflict between Palestine and Israel, frequent wars in the Red Sea region, and geopolitical risks continue to rise. Affected by this, the global industrial chain supply chain pattern continues to be restructured, from focusing on cost efficiency to focusing on safety and stability, showing the evolutionary characteristics of diversification and regionalization, and there is a trend of further fragmentation. In order to cope with inflation, the Federal Reserve raised interest rates one after another, making capital costs high. Combined with the “scar” effect after the pandemic, the vulnerability of the global economy has further increased. The wave of artificial intelligence represented by Chart-GPT has attracted global attention. The rapid changes in digital intelligence innovation are both exciting and likely to cause people to lose their way. Therefore, 2023, which is full of uncertainty, is probably just the beginning of change. Learning to adapt to management uncertainty, save strength in the midst of difficulties, and explore opportunities in the midst of complexity is an important issue that all industries need to face.

As a Hong Kong-listed company with the strategic goal of “a world-class ship leasing and investment and operation enterprise”, China Ship Leasing (03877) adheres to the general policy of steady operation, actively carries out the mission of “integrating industry and finance to promote production and serve the main business”, and jointly follows the core values of “professionalism, focus, innovation and efficiency”, maintained steady growth in business performance at a high level, and achieved the “14th Five-Year Plan” business goals proposed in 2020 two years ahead of schedule. In 2023, the company achieved operating income of HK$3,728 billion, up 17% year on year; achieved total profit of HK$1,935 billion, up 10% year on year, and achieved the main operating targets set by the company's “14th Five-Year Plan” two years ahead of schedule.

In 2022, on the occasion of the 10th anniversary of the company's establishment, we summarized our core values as “professionalism, focus, innovation and efficiency”, and summarized our business path as “specialization, marketization, and internationalization”. In the “2022 Letter to Shareholders”, we shared the meaning of our core values with all investors. This year, we also shared the company's views, investment strategies and responses to the current situation around the company's business route.

1. Specialization is the cornerstone of the company's long-term steady development

“Professional” is a core concept of modern enterprise management, as well as one of the company's core values and business lines. At the micro level, specialization refers to professional business quality, work skills, and responsible conduct; from a macro perspective, we believe that specialization means in-depth understanding of industry rules, accurate grasp of the environment and trends, a clear understanding of oneself, and a focus on the company's business direction and investment priorities.

(1) How to maintain steady profits in a changing industry

In the “2022 Letter to Shareholders”, we mentioned that the shipping industry is a field rich in its own characteristics and has high professional barriers. We summarized its characteristics as: significant industry cycle, drastic market fluctuations, a wide range of influencing factors, rich product types, and huge capital requirements. Therefore, in such an industry, our primary goal is to control cycle fluctuations from a longer cycle perspective and maintain steady long-term operations. More bluntly, at the height of a relatively short cycle, we need to reserve sufficient resources to support the company to obtain ideal market benefits, and also maintain sufficient sobriety and fear the strength of the cycle; at the bottom of a long cycle, we must be firm in our strategic strength, support each other with all parties in the market, respond calmly, wait for the right time, and buck the trend. In other words, Buffett said, “Fear when others are greedy, greedy when others are afraid.”

In order to deal with cyclical risks, we have formulated a cross-cycle strategy of “countercyclical investment and procyclical operation”, using the “fixed+flexible return” business model to calm cyclical fluctuations; allocate assets of various ship types in a balanced manner to spread the risk of the overall asset portfolio. Overall, we mainly use long-term leases to guarantee long-term stability of income. At the same time, we will dynamically adjust the lease term structure based on our forward-looking judgment on market trends: in the upward cycle, we will moderately increase the share of short-term and immediate rental projects; at a high level of the cycle, we will seize market opportunities and sign medium- to long-term lease contracts for short-term operating assets to solidify future income. For example, in the fall of 2023, we grasped the trend of a sharp rise in VLGC and signed a 5-year lease for a VLGC that was originally rented. Although some short-term excess income was sacrificed, the earnings for the next 5 years were locked at an ideal level. In terms of capital cost control, the US dollar interest rate fell to a low level in 2021. We removed the interference of the epidemic and promptly issued US$500 million bonds to control interest costs at 2.1%; carried out a series of interest rate swaps in conjunction with leasing projects to lock the average long-term fixed interest rate of the US dollar at 1.48%; and launched cross-currency financing in 2023 to reduce the share of US dollar debt and appropriately increase the RMB and Euro debt currencies. Multiple measures have been taken to keep capital costs low. This is also the reason why the company's 2022 and 2023 results were not greatly affected by the Federal Reserve's interest rate hike. All of the above are the “good years” for the company to prepare for the difficulties it may face in the future.

In terms of investment goals, we generally focus more on absolute returns. For long-term rental projects, we will set matching yield requirements according to the project risk level; for short-term rental projects, we will strive to obtain excess returns superior to market benchmarks, but we will control the overall fluctuation scale, and the ideal price will solidify the return over a long period of time. Therefore, in terms of investment strategies, we will rely more on beta, which is return from asset allocation, and we will not pursue alpha too much in the short term. In terms of risk control, we will pay more attention to the safety of asset values against outstanding principal and interest. We can tolerate tight cash flow and poor financial conditions of tenants under special circumstances, and help tenants overcome difficulties through delayed interest payments and debt restructuring, but we will pay great attention to asset liquidity and full coverage of outstanding principal and interest by leased asset values to ensure that losses are recovered through asset disposal when the lessee is no longer able to perform.

(2) Learn to adapt and manage uncertainty and grasp the main trend of shipping decarbonization in the midst of changes

The overall characteristics of the current external environment are rapidly accumulating uncertainty, and short- and medium-term prospects and trends are uncertain. Therefore, we need to be more careful, pay attention to tail risks, strengthen bottom-line thinking, and prepare countermeasures in all kinds of extreme situations. As for the ship leasing business, due to high ship prices and narrowing interest spreads, blind expansion in the current period is not only not beneficial to profit growth, but may also accumulate a large amount of back-up risks. Therefore, at this stage, we will place more importance on risk diversification and profit stability, prioritize stability over scale expansion, and focus more on projects with clear returns.

One important trend in a changing world is a green and low-carbon transition, particularly for the shipping industry. In December 2022, a preliminary agreement was reached within the EU. One of them required the shipping industry to be included in EU carbon market control, and shipping companies were required to pay compliance costs for carbon emissions from their ships. In 2023, the CII and EEXI policies officially came into effect, and the IMO adjusted its emission reduction target from the previous 50% reduction in emissions by 2050 (compared to 2008) to reach net zero emissions by around 2050. Shipping decarbonization will first bring about the transformation and upgrading of marine power and technological changes, accelerate the withdrawal of old ship models, stimulate new ship orders, and push the new shipbuilding market to remain high. Furthermore, since carbon emissions accounting is based on a fleet rather than a single ship, it will also have a more profound impact on the fleet organization and management model. As a company focusing on ship leasing and operation management, we began entering the clean energy industry as early as 2015, providing financial leasing services for an FLNG ship. In 2019, we also invested in 4 174,000 square meter LNG carriers in one fell swoop, and made the clean energy industry strategy one of the core strategies of the company's current business investment. Regarding CII and EEXI policies, in 2021, we carried out compliance assessments on more than 30 ships managed by the company, and formulated modification or disposal plans in advance for ships with poor assessments, maximizing the negative impact. In 2023, we implemented the environmental requirements of “green water and green mountains”, cooperated to invest in 4 pure electric yachts, and made a wonderful appearance in the Qiantang River during the Hangzhou Asian Games last year; we also continued to launch a 120TEU pure electric container inland waterway carrier with a customer.

Determined trends are also fraught with uncertainty. Although shipping decarbonization is imperative, the rigid requirements, punitive measures, illegal costs, technical paths, etc. of policy implementation are not clear, and many variables make it difficult to arrive at a forward-looking forecast with guiding significance. Forced modeling is not only unhelpful in predicting the market, but may also cause unreal reality, leading to greater prediction bias. We only seek an overall understanding of trend trends, without making overly accurate estimates, sorting out important variables, clarifying the influence relationships between variables, results and variables, proposing an analytical framework, carrying out application scenario analysis, formulating countermeasures for important application scenarios, and strengthening market and policy tracking. Once an iconic event occurs, we can act quickly to seize the opportunity.

(3) Cycle of awe, accurate self-perception

The shipbuilding and shipping industries have significant and lengthy cycles. Being in this industry, we must always keep a clear mind, not regard the power of cycles as our own ability, and not regard momentary success as a long-term guarantee. After the company went public in 2019, it maintained an annual profit growth of nearly 20% for 4 consecutive years. The root cause can be attributed to two factors: it invested in a large number of ships at low prices before the cycle went up, and a reasonable allocation of “fixed+flexible” earnings. Since the beginning of 2021, the shipping industry has maintained a high level of prosperity for many years. Although the shipbuilding industry continues to be enthusiastic, it will eventually decline. In this cycle, we have no enthusiasm. In order to scale up and relax the control of future risks, we have faced the difficulties of increasing repurchases and reducing interest spreads, actively coping with the fierce competition of financial leasing companies, improving our ability to operate and manage assets, and making all reserves for the downturn of the cycle. Therefore, for the future, our revenue growth rate is likely to slow down, but we are pursuing improvements in the asset value, quality, and technological content of our fleet, and continue to maintain steady and reasonable growth.

“Combining industry and finance, promoting production through finance, and serving the main business” is the company's mission. We are not only a link between shipyards and shipowners, but also a supporter of shipyards and shipowners. At the low end of the cycle, the company's role is even more prominent. At the time, shipyard orders were insufficient, and shipowners' financing capacity was poor. With the company's credit support, shipowners could maintain a reasonable fleet size and age structure, shipyards could also obtain valuable orders, and companies could also achieve higher interest spreads at lower ship prices.

The stages of the cycle are different, and the roles and strategies adopted by the company will also be adjusted accordingly. The most important thing is for the company to maintain a clear and professional mindset for a long time, not only to understand its competitive advantages, but also to be more aware of its own limitations, change with the times and the situation, and follow the trend in order to stand invincible.

2. Marketization and internationalization are the reasons and manifestations of specialization

If specialization is the foundation of a company's operation, then marketization and internationalization are both a reason for specialization and a reflection of specialization.

(1) Market-oriented approach is a prerequisite for improving core competitiveness

Keen perception of market dynamics. The shipping market and ship leasing market are highly competitive markets. We pursue the market-based concept of “full staff management”. The company's business personnel have been active on the front line of the market for a long time, have a quick and sensitive grasp of market information, and can keep abreast of market changes, shipowners' ideas, and shipyard resources, so as to match the needs of all parties and provide integrated solutions. The company was able to grasp the low-carbon transformation trend of shipping earlier, and has continuously invested heavily in hot ship models since 2019, investing more than 1 billion US dollars every year, all confirming the company's grasp of the market.

Adapt to market changes with a flexible business model. In order to maintain stable launch in an environment of high ship prices, we formed a joint venture with large cargo owners (transportation demand side) and shipping management parties to jointly invest in 2+2 LNG carriers to guarantee investment returns with stable long-term leases, reduce the risk of asset depreciation and subsequent placement, and achieve a win-win situation for all parties. We are not excluded from large-scale early repurchases of stock projects. Instead, we actively negotiate with tenants in accordance with the principle of marketization to ensure the overall stability of credit assets through leased property replacements, etc., while appropriately increasing the scale of second-hand ship investment, so as to strictly control risks while increasing short- and medium-term returns. In short, the company's operating strategy is never set in stone; it will make timely adjustments in line with market changes. At the same time, because we focus on the ship leasing market, we can analyze the specific problems of each project and best match customer needs through customized services.

Market-based management and incentive mechanisms. Although judging from our business performance, we have achieved remarkable results in recent years, we are well aware that we are far from targeting world-class companies in various segments. Since our listing, we have been deepening management system reforms in a market-based direction to contribute management efficiency to long-term development. In recent years, we have successfully completed the reform of professional managers, achieved market-based selection and assessment of management teams, implemented equity incentives for 23 management and business executives, and established a relatively complete medium- to long-term incentive mechanism. We invited external professional institutions to conduct special consultations on comprehensive risk management, internal control management, and management informatization, etc., improving management efficiency.

(2) Taking internationalization as an important support for business development

Has a broad international perspective and extensive international contacts. More than 70% of our employees had overseas work or study experience before entering the company, and have rich academic backgrounds and work experience, forming a high-level, young, complex and international talent structure. We closely follow international cutting-edge hot issues and regularly provide training for employees on macroeconomic conditions, industry development, risk compliance, etc. In 2023, a total of 47 training sessions of various types will be held. As far as the number of projects is concerned, most of our project partners are overseas customers, and our ships sail all over the world. We have established close partnerships with a large number of international maritime and financial institutions, and have regular exchanges and cooperation. Extensive international contacts also help us quickly grasp industry information and seize market opportunities.

With first-class international reputation, the company's long-term goal. The shipping industry is a classical and modern industry with its own unique industry culture and business ethics. Market reputation is extremely important for participants in the shipping industry. With the long-term goal of becoming a world-class ship leasing, investment and operation company, we have always been committed to building trusting and mutually beneficial partnerships with shipowners and shipyards. For shipowners, we hope to help them meet their investment needs by providing credit support; for shipyards, we hope to help them lead the industry position and achieve stable production and operation through order support; for the industry, we want to promote the transformation and upgrading of the industry to low-carbon and intelligent through high-quality orders; for shareholders, we hope to provide investors with a definitive guarantee in an environment where expectations are uncertain through our steady performance and stable dividend returns; for society, we will actively carry out the mission of “integrating industry and finance to promote production and serve the main business”, while firmly serving the development of the industry Feed back society and participate in various social causes!

In 2024, the world situation is uncertain, and various fields are full of variables. People are always used to seeking development in stability, but change contains greater opportunities. As long as we stick to our strategic strength, observe calmly, and keep an eye out, we can save strength in the face of difficulties and take the lead when the clouds clear up. At that point, looking back at the place where it was always bleak, there was no wind, rain, or clear weather!