ST Engg to book S$61m charge on China venture

Singapore

ST Engineering is to make a significant S$61 million writedown in the third quarter on an investment in China, as it fears that this joint venture with a Chinese state-owned enterprise will soon run out of cash.

This comes amid an ongoing review of its Chinese business for more than two years now - with the Chinese business hurt by the severe oversupply in various industries in China.

The engineering group said Jiangsu Huatong Kinetics and Jiangsu Huaran Kinetics - collectively known as JHK - had proposed on Tuesday to cease production to cut operating losses. JHK is the joint venture between ST Kinetics and China's state-owned enterprise Jiangsu Huatong Machinery (JHM). It is in the road construction equipment business in China.

ST Engineering said the cash at JHK "will soon run out", and that the decision comes after "months of engagement between the two shareholders to evaluate various courses of actions for JHK". It did not state how soon the cash will run out. The JHK board will have 15 days from Tuesday to decide.

ST Kinetics is the majority owner of JHK, holding 75.3 per cent of the venture, while JHM owns the balance 24.7 per cent. As it is likely that production will cease at the end of the 15-day period, ST Kinetics will record a one-off charge of about S$61 million in Q3 2016. This charge comprises an impairment of ST Kinetics' net carrying value in JHK, and closure costs including staff compensation. ST Engineering said this writedown is prudent.

One analyst said the writedown was more significant than had been expected. "We knew they were going to dispose of it, we just didn't expect the large impairment."

The analyst added this latest writedown reflects the structural oversupply in specialist vehicles in China, noting ST Engineering has been reviewing its struggling China business.

The trail of divestments by ST Engineering in recent times shows of the company's move to review the business. In 2014, ST Engineering sold off its 50 per cent equity stake in a Beijing subsidiary, Beijing Zhonghuan Kinetics Heavy Vehicles, to its joint venture partner for S$3.28 million.

And in May this year, it sold its 60 per cent equity stake in Guizhou Jonyang Kinetics to its joint venture partner for about 200 million yuan (S$41 million). In the May announcement, it said this was part of its "continuous review of its specialty vehicle business in China", and that the business segment "increasingly requires scale to gain competitive advantage".

Total assets in China stood at 8 per cent, its 2015 annual report showed.

ST Engineering is holding its 2016 guidance for higher revenue and lower pre-tax profit compared to 2015. It will release its third-quarter results on Nov 10, 2016.

Shares of ST Engineering gained one cent to finish at S$3.19 on Tuesday.