Triyards Holdings

[d.o.g.]

Hi d.o.g

Curious what are the key markets that you examine on the Singapore scene?

When I say "key market" I mean the stock market. SGX is one of my key markets, so I look through all the companies listed on SGX at least once. It's not as hard as it sounds, start with "A" and go from there. Only about 700 companies. Even working at the rate of 10 companies a day you'll be done in less than 3 months. Other stock markets have many more listings e.g. HK has 1,500, Shanghai 1,300, Japan 3,500 etc.

[weijian]

As a full-time professional investor, I would be remiss if I did not look through every company in my key markets at least once. When I see problems I just stay away and make notes to check back once in a while to see if the company has blown up yet. Usually it only takes a couple of years for the problems to sink the company. They also make for good teaching points when I write about them in my newsletters.

Regarding Triyards' auditors, only they have the answer. Our job as investors is not to ask for changes in accounting standards, but to recognize when such standards are being applied to distort reality, and to make our own adjustments accordingly. Of course, for some investors, this is too much work, which is why I am still in business 

I am reminded of an old quote:

Question: "How many legs does a dog have if you call the tail a leg?"
Answer: "Four. Calling the tail a leg, doesn't make it a leg"

[d.o.g.]

With regards to Triyards, how can their auditors be satisfied that revenues were booked when there is no invoice issued to customer?

I went through the FY2016 annual report again. Under Note 2.16 "Construction Contracts" it is disclosed that:

"Contract revenue and contract costs are recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the end of the reporting period (the percentage of completion method), when the outcome of a construction contract can be estimated reliably."

In other words, Triyards' revenue depends on the speed of its construction work, and has nothing to do with customer invoicing. It is easy to imagine scenarios where this revenue recognition policy fails miserably at approximating reality e.g. the contract is a "1+99" arrangement where the customer puts up 1% as a deposit, with 99% due upon completion. Don't laugh, many Chinese yards did this in order to secure orders.

So what happens is that Triyards can take the 1% deposit, then merrily build the vessel, bleeding cash but recognizing revenue and profits along the way, until the vessel is complete, and then finally hand over the vessel and invoice the client for the balance 99% payment. But it should be obvious to anyone with half a brain that the "1+99" customer is actually just gambling on vessel values. If the vessel has gone up in value, the customer takes delivery and re-sells for a profit. If the vessel has fallen in value, the customer abandons the deposit, leaving Triyards stuck with the vessel and having to reverse out the entire contract.

If Triyards wants to avoid facing up to reality it can slow down the pace of work, delaying the day when the vessel is finished and it has to invoice the customer. So the vessel could be 99% finished and the customer has not been invoiced, but 99% of the revenue and profit has already been recognized. In today's poor market for offshore oil and gas vessels, there is no incentive to complete the vessel. So in the extreme case, Triyards could stop construction one screw short of completion, to avoid having to ever invoice the client and thus write off the whole contract when the client refuses to pay.

Again, YMMV.

[brattzz]

"In other words, Triyards' revenue depends on the speed of its construction work, and has nothing to do with customer invoicing. It is easy to imagine scenarios where this revenue recognition policy fails miserably at approximating reality e.g. the contract is a "1+99" arrangement where the customer puts up 1% as a deposit, with 99% due upon completion. Don't laugh, many Chinese yards did this in order to secure orders."

exactly what happened to ALL Chinese yards!!

[wsreader]

...... They also make for good teaching points when I write about them in my newsletters......

Hi d.o.g.
Curious whether your newsletters are available to the investment community, like those from Howard Marks. Maybe?

[weijian]

Actually not restricted to the Chinese yards, SG shipyards Keppel FELS and SembMarine recognizes their revenue in the same "% of completion" as well. That's why they had to take the losses from Sete Brasil when it defaulted on its obligations.

The differences are in (1) how much capitalized you are for the working capital changes, (2) the deposit/payment ratio - The standard in the good years was 20/80. If customer defaulted, not too hard to find someone to buy it for the same price (no need to wait for a ~1.5yr lead time since daily rig rental prices were so high then). Towards the race to the bottom, it was rumored that SembMarine took 5/95 ratio for their first drillship orders from Transocean. (3) The pedigree of your customer - Speculators (Marco Polo Marine) or the real rig boys.

[dydx]

I guess the real differences lie in how different shipbuilders select and manage their customers and new shipbuilding orders, including the percentage of down-payment or advance-payment required, and the payment terms for the balance sums. Rationally speaking, a normal shipbuilding contract should include a decent advance-payment (say 10 to 20% of the total contract sum), and various progressive payments tied to milestones in the build-up of the ship during its construction, and a final payment on delivery or on transfer of legal title.

Another relevant difference lies with the different types of vessels including their relative specialised nature or usage. E.g. a container vessel or an oil tanker when offered at a discounted price should be able to attract other interested buyers . In the O&G sphere, a multi-role aluminium crew boat which cost say USD5.0m when new should find more potential buyers than say a more specialised AHTS (anchor handling tug supply) vessel which cost say at least USD20.0m when new.

[yeokiwi]

...... They also make for good teaching points when I write about them in my newsletters......

Hi d.o.g.
Curious whether your newsletters are available to the investment community, like those from Howard Marks. Maybe?

http://www.lighthouse-advisors.com/index.htm

[donmihaihai]

With regards to Triyards, how can their auditors be satisfied that revenues were booked when there is no invoice issued to customer?

I went through the FY2016 annual report again. Under Note 2.16 "Construction Contracts" it is disclosed that:

"Contract revenue and contract costs are recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the end of the reporting period (the percentage of completion method), when the outcome of a construction contract can be estimated reliably."

In other words, Triyards' revenue depends on the speed of its construction work, and has nothing to do with customer invoicing. It is easy to imagine scenarios where this revenue recognition policy fails miserably at approximating reality e.g. the contract is a "1+99" arrangement where the customer puts up 1% as a deposit, with 99% due upon completion. Don't laugh, many Chinese yards did this in order to secure orders.

So what happens is that Triyards can take the 1% deposit, then merrily build the vessel, bleeding cash but recognizing revenue and profits along the way, until the vessel is complete, and then finally hand over the vessel and invoice the client for the balance 99% payment. But it should be obvious to anyone with half a brain that the "1+99" customer is actually just gambling on vessel values. If the vessel has gone up in value, the customer takes delivery and re-sells for a profit. If the vessel has fallen in value, the customer abandons the deposit, leaving Triyards stuck with the vessel and having to reverse out the entire contract.

If Triyards wants to avoid facing up to reality it can slow down the pace of work, delaying the day when the vessel is finished and it has to invoice the customer. So the vessel could be 99% finished and the customer has not been invoiced, but 99% of the revenue and profit has already been recognized. In today's poor market for offshore oil and gas vessels, there is no incentive to complete the vessel. So in the extreme case, Triyards could stop construction one screw short of completion, to avoid having to ever invoice the client and thus write off the whole contract when the client refuses to pay.

Again, YMMV.

Precisely and unlikely to be imaginary unless fraud.

[specuvestor]

Actually usually there will be milestone payments progressively. But with the aggressive Chinese yards, the credit management in the industry deteriorated in face of competition

So shipbuilders are exposed to the risk of 1) in between progressive payments that their working capital had been tied up 2) they usually hedge their material cost when they get an order. Hence if they get an order of $100m with $80m projected material cost but material price and hence ship price collapse, they will be in trouble if counterparty defaulted and they can't sell in market quick enough

Problem is all these variables from counterparty risk to resale market risk are related to the shipping cycle

I recall Semb Marine managed to resell rigs 2 years back when buyer defaulted