Last checked at 14 Mar 2022 09:00
1. Letter to Shareholders
Dear Shareholders,
Business Environment
2021 was a year of successes for dry bulk shipping. With the COVID-19 pandemic being slowly brought under control, governments started to encourage spending and investing in order to stimulate economies, which in turn drove up the demand for dry bulk carriers. However, port quarantine and closures as well as delays in crew scheduling amid the pandemic continued to play havoc with ship turnover and logistics. These factors pushed an already tight transport supply further out of equilibrium. Given the construction time required for newbuilding, it would be difficult to increase the transport supply quickly in the short- and medium-term. Therefore, freight rates for dry bulk carriers of different tonnages kept rising as investment and spending activities gradually recovered in many countries. BDI burst through 5500 points at one point in October 2021 and reached its highest point since 2008.
The disequilibrium in dry bulk carriers was rooted in years of market stagnation and a lack of investor confidence. Since 2020, COVID-19 had only been slowing the market down further and making it worse for shipowners. New environmental regulatory requirements also created higher costs and uncertainty for newbuilding specifications. In 2021, while high freight rates in the dry bulk shipping market offered more attractive incentives for investors, container shipowners invested more in building ships, which had higher unit prices. Most builders' still see container carriers and liquefied petroleum gas ships making up the bulk of their new orders at present. Growth in orders for dry bulk carriers is limited. Furthermore, ongoing campaigns for environmental initiatives to fight global warming are making it difficult to map out a clear path for future investments.
The shipping sector has been facing more and more environmental regulatory requirements on ballast water, nitrogen oxides, and sulfur emissions in recent years. The current environmentally friendly energy saving standards for newbuilding are more sophisticated than their past counterparts. As global warming becomes an increasingly urgent issue, the next wave to hit the shipping sector will be carbon emissions. The Energy Efficiency Existing Ship Index (EEXI) and the Carbon Intensity Indicator (CII) to come into effect in 2023 have yet to clarify the responsibilities to be allocated to the supply chain and the response strategies. The lack may lead to vessel speed reduction and further impact on the supply chain. Meanwhile, the world shows no signs of slowing down on its quest to reduce carbon footprint. Current initiatives such as Net Zero by 2050, EU Carbon Border Tax, and carbon tax on fuels all have their supporters. In addition to enhancing energy saving equipments, the shipping sector may need to consider the possibility of switching to alternative fuels to have a chance of achieving net zero. However, the use of liquefied natural gas (LNG) and other alternative fuels also affects ship design. While it is unclear what future standards will be, much uncertainty remains in the direction of newbuilding investment and, to a certain degree, deters investor interest in newbuilding. At the end of 2021, dry bulk newbuilding orders accounted for only 6.5% of the total number of ships. In contrast, the number of old ships aged 20 or more had reached 10.1%. The supply shortage is at the highest point over the last few years. There appears to be no short-term fix for the dry bulk carrier supply shortage.
2021 Business Results
In 2021, we had added 7 newbuild ships and reduced 1 ship under management overall. We also sold 10 ships. The number of ships in our fleet underwent a net decrease of 2, and the total number of ships in our fleet was 134 at the end of the year. The 7 newbuild ships included 2 kamsarmax, 1 supramax, 3 handysize, and 1 LPG carrier. Except one kamsarmax, most of the ships sold were small and older handysize.
In 2021, the dry bulk shipping market continued the upward momentum that started in the second half of 2020. Slowly rising BDI helped us renew a series of contracts and allowed our self-managed fleet to benefit as well. The average operating profit margin increased from 28.0% for the first quarter to 52.0% for the fourth quarter. Given the larger market volatility in 2021, we focused on keeping our business strategies flexible. Besides fixing longer and index-linked contracts with our long term clients, we kept the length of most fixed rate charters to one year or under. The annual revenue reached US$686.1 million, up by 69.3% compared to the previous year. The net operating profit was US$296.2 million, up by nearly six times compared to 2020. Meanwhile, the operating profit margin reached another all-time high at 43.2%.
In terms of nonoperating income, although 10 ships were sold, most were old and in total US$2.36 million were recognized in losses. During the year, the charter of five ships were terminated early by the charterers, who did so out of long-term business considerations and paid the conpensation. Based on the long-term outlook on income, we recognized the impairment at the same time. The associated non-operating income was US$28.9 million. As we maintained sufficient operating cash flow and lowered debts, our asset-to-liability ratio reached 57.9% in 2021, 10% lower compared to the previous year. In addition, total interest expenses for the year fell by US$10 million compared to the previous year. The total net profit before tax reached US$296.4 million in 2021. The EPS was US$11.09, the highest since the company became publicly listed.
2022 Business Plan
We expect to have 6 more newbuild ships delivered in 2022. They include 3 kamsarmax and 3 handysize ships. All are built by first class Japanese builders, such as Imabari, JMU, Tsuneishi, and Onomichi. These newbuild ships include 3 eco-ships that comply with the Tier III NOx emission standards.
We expect market conditions to remain relatively stable in 2022, in which we will be able to continue with more flexible chartering strategies and a combination of mainly shorter terms and indexation. If the price gap between long-term leases and spot rates narrows, we will consider locking in some long-term fixed rate leases. Despite increasing activities in the buying and selling of ships, it is still hard for recent freight to be reflected. Therefore, where prices are below expectations, the focus will remain on continuing operation.
To take advantage of a growing operating cash flow, we will continue to lower the debt ratio. However, given most ship financing is long term debt, our priority remains to repay short-term debts. Meanwhile, regarding necessary investment in equipment in response to carbon reduction after 2023 and other environmental requirements and assessments, we are discussing medium-term solutions with our long-term partners. Our goal is to ensure we will be strong and able to compete financially as well as in environmental compliance in the long term and ready to meet the challenges of the post-COVID-19 era.
Chairman: James Lan
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