Pacific Basin Shipping Ltd.

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Pacific Basin Shipping Ltd.

7/F Hutchison House
10 Harcourt Road
Central
Hong Kong
Telephone: (852) 2233-7000
Fax: (852) 2865-2810
Web site: http://www.pacbasin.com

Public Company
Incorporated: 1998
Employees: 175
Sales: $433.7 million
Stock Exchanges: Hong Kong
Ticker Symbol: PCFB F
NAIC: 488320 Marine Cargo Handling; 483111 Deep-Sea Freight Transportation; 551112 Offices of Other Holding Companies

Pacific Basin Shipping Ltd. is a leading international dry bulk shipping and logistics company. In addition to its headquarters in Hong Kong, the company has offices in London, Melbourne, Shanghai, Tokyo, and Vancouver. Pacific Basin owns a very long list of subsidiaries, most of which are wholly owned. Its young fleet of handysize dry bulk carriers are used for the deep-sea transport of various commodities, such as cement, fertilizer, forest products, grain, iron and steel products, and minerals. (Handysize is a marine industry term describing the smallest of the four standard vessel size categories. Next in size is the handymax vessel, followed, in order by pan- amax and capesize vessels. Handysize carriers have traditionally been considered among the most versatile for marine transport of dry goods of many kinds.)

According to Pacific Basin, its vessels are mainly situated in the Asia Pacific region. They range in size from 25,000 to 35,000 metric tons deadweight (dwt), and average five years in age. These ships are fitted with special cranes that enable them to serve ports that, because of size restrictions, other ships cannot.

Pacific Basin’s executive team is well versed in buying, selling, and operating vessels, as well as chartering, matters of finance and insurance, shipbuilding and repair, and technical management and crewing. While the company’s principal business is shipping, it uses its related knowledge base to provide shipping advisory, consultancy, management, and surveying services. The company also is engaged in investment holdings.

ORIGINS

While Pacific Basin Shipping Ltd. was formally established in 1998, its history dates back almost a decade earlier, with the formation of a handysize bulk carrier operator named Pacific Basin Shipping & Trading Co. Ltd. Some of the same executives involved with Pacific Basin Shipping Ltd. were involved with its predecessor. These include CEO Christopher Buttery, former chief operating officer Paul Over, and former chief financial officer Mark Harris.

Pacific Basin Shipping & Trading Co. Ltd. began trading in Hong Kong in 1987. In late 1993 the company placed what Lloyd’s List described as “The biggest shipbuilding order ever placed in China for an overseas account.” The $120 million deal with Guangzhou Shipyard International involved the construction of three 26,700 dwt log/bulk carriers, as well as an option to build three more. In September 1994 Pacific Basin Shipping & Trading was listed on the NASDAQ, and within two years its shares also were trading on the Oslo Stock Exchange and the London Stock Exchange.

By 1996 Pacific Basin Shipping & Trading’s fleet had grown to include more than 30 ships. It was that year that the company was acquired by Hong Kong-based Anglo-Eastern Group. Following the deal, Pacific Basin Shipping & Trading became a privately owned company. Progress continued as the company developed important business connections throughout the industry. Within two years management bought Pacific Basin back and reestablished the company under the name Pacific Basin Shipping Ltd.

PRIVATE OWNERSHIP: 1998–2003

Under the continued leadership of Christopher Buttery and Paul Over, in 1999 Pacific Basin combined its knowledge and expertise with capital provided by outside investors to significantly expand its handysize vessel fleet. Investors included Nassau Capital Real Estate Partners II LP, a fund connected with Princeton University, as well as a group of private equity investors connected with Furman Selz LLC. The company ended the 1990s by establishing a British subsidiary, appointing a North American representative, and purchasing two log-bulkers. At this time Pacific Basin also provided commercial management and consulting services for seven handysize bulk carriers.

In October 2001 Pacific Basin formed a revenue sharing pool named International Handybulk Carriers (IHC). IHC’s membership quickly grew to include BHP Billiton, Funada Kaiun, Intermare, Pacific Basin, Sinotrans, Torm, and Wah Kwong.

In December of the previous year, Pacific Basin had acquired Jardine Matheson’s ship management business. The two companies formed a new holding company called IndoChina Ship Management, with Pacific Basin owning a majority (67%) stake. The deal gave Pacific Basin its own in-house technical management service, responsible for functions such as safety, security, regulatory compliance, quality, and environmental protection.

IndoChina Ship Management grew quickly, acquiring London Shipping Consultants and Lothian Ship Management in 2001 and Bibby-Harrison Management Services in 2003. By this time it served many customers outside of Pacific Basin, providing technical services for gas and chemical carriers, dry bulk carriers, ro-ro ferries (“roll on/roll off” vessels designed to carry vehicles), and product tankers from offices in Manila, Singapore, London, Liverpool, and Hong Kong. Pacific Basin ended 2003 with sales of $54.18 million and a net profit of $22.7 million.

EXPANSION AND GROWTH: 2004–07

On July 14, 2004, Pacific Basin was listed on the Hong Kong Stock Exchange. According to the company, the listing was preceded by an internal reorganization effort. Pacific Basin offered 437 million shares of its stock for sale. Of these shares, 57 percent were new and 47 percent were sold by existing shareholders.

According to the Lloyd’s List, Pacific Basin’s initial public offering raised approximately $80 million. The company quickly used a portion of these funds to expand its fleet. It acquired three vessels from Hong Kong-based Wah Kwong Shipping in July, followed by the $53.3 million purchase of three ships, ranging in age from five to seven years, from Japan’s Libera in August.

In October 2003, growing demand prompted Pacific Basin to invest $35.6 million in two additional ships. First, the company purchased the Ansac Harmony, a 28,527 dwt dry bulk carrier built in 1998, from Second Wave for its Columbia River subsidiary at a cost of $18.02 million. Another dry bulk vessel, the Aqua Venus, was acquired from OLT Marine for Pacific Basin’s Cape Scott subsidiary. Built in 1997, the 28,747 dwt Aqua Venus was purchased for $17.52 million. The two acquisitions pushed the size of Pacific Basin’s fleet to 50 vessels, 34 of which were company owned.

COMPANY PERSPECTIVES

We are one of the world’s leading providers of dry bulk shipping services and logistical solutions to blue chip international commodity groups. We operate a large, modern and uniform fleet of versatile Handysize dry bulk carrier vessels of size 25,000 to 35,000 tons deadweight, primarily in the Asia Pacific region.

A noteworthy development in 2004 was the renaming of IndoChina Ship Management, which began operating under the new label of Meridian Marine Management Ltd. In the August 10, 2004, issue of Lloyd’s List, managing director Alastair Evitt explained that the move was taken in an effort to reflect the company’s desire to project a more global image. While its name changed, Meridian retained the same flag logo used by its previous incarnation.

Driven by strong economic expansion in Asia and related demand for raw materials, Pacific Basin ended 2004 with revenues of $234.2 million. The company’s net profit increased almost fivefold, reaching $103.5 million. According to AFX-Asia, growth was especially strong in China, Japan, and South Korea.

Dry Bulk Shipping and IDB Carriers, two of the venture capitalists that initially funded Pacific Basin, cashed in large portions of their shares in January 2005, selling 320.2 million shares for a combined $1.03 billion. After the transaction, the venture capitalists’ combined stake in Pacific Basin fell from 42 percent to approximately 16.7 percent. Dry Bulk Shipping retained a 7.6 percent interest, while IDB’s ownership totaled 9.1 percent. In September Dry Bulk and IDB sold more of their shares, resulting in a combined ownership stake of less than 1 percent.

At this time Pacific Basin enjoyed continued demand for its services, strong international freight rates, and additional revenue from its growing fleet. This was reflected in the company’s financial performance. According to AFX-Asia, sales for the first half of 2005, which totaled $191.1 million, were up almost 134 percent from the same period in 2004. Net profits for this period increased 96 percent from 2004, reaching $85.5 million. For the entire year, sales increased to $434 million, up from $302 million in 2004, and net profits grew from $104 million to $147 million.

Success prompted Pacific Basin to continue expanding its fleet. However, it did so less aggressively in comparison to previous years. This was because vessel prices had reached record highs, making long-term returns less certain. In addition, the company faced heightened competition from several new publicly traded dry bulk shippers.

Halfway through 2005, Pacific Basin announced that it was placing a cash order for a new, 28,100 dwt handysize bulk carrier, to be constructed in Japan and delivered in 2007. In September, two additional vessels were purchased for $37 million. This was followed by an announcement that the company would sell five vessels for $100 million to third-party carriers, in order to raise cash and pay down debt. However, the vessels were leased back for a period of 12 years. In December an agreement was made with Los Halillos Shipping Co. to purchase a dry bulk carrier named Ocean Bulker, which had been constructed in 2001. Finally, that same month Pacific Basin revealed that it would acquire four new vessels from Jiangmen Nanyang Ship Engineering Co. Ltd. and Guangdong Machinery Import & Export Co. Ltd., which would be delivered between 2008 and 2009.

A number of significant leadership changes occurred at Pacific Basin in 2006. The company began the year by issuing a statement that executive director and CEO Mark Harris, who had been with the company since the days of Pacific Basin Shipping & Trading Co. Ltd., would resign following its annual meeting on April 7. Deputy chairman Richard Hext was named as Harris’s successor. In June Klaus Nyborg, chief financial officer of the Dutch shipping company TORM, joined Pacific Basin as deputy CEO. Three months later the company lost another longtime executive when cofounder Paul Over announced plans to leave in March 2007, but remain as a senior adviser.

Despite a growing number of players in its market, in 2006 Pacific Basin announced that it planned to enter the handymax sector of the industry, applying the same business model used for its handysize business. (Handymax vessels are larger than handysize vessels, ranging in size from 40,000 to 50,000 dwt.)

By entering the handymax sector, the company explained that it would be able to meet demands of customers who needed to transport heavier goods such as iron ore, coke, and cement. Still, in the March 7, 2006, issue of the South China Morning Post, Richard Hext, then still deputy chairman, suggested that the firm would enter this new area cautiously.

KEY DATES

1987:: Pacific Basin Shipping & Trading Co. Ltd. begins trading in Hong Kong.
1996:: The company is acquired by Hong Kong-based Anglo-Eastern Group and becomes a privately owned company.
1998:: Management buys Pacific Basin back and reestablishes the company under the name Pacific Basin Shipping Ltd.
2004:: Pacific Basin is listed on the Stock Exchange of Hong Kong on July 14. The company’s initial public offering raises approximately $80 million.

One indication of Pacific Basin’s conservative approach was a smaller ownership stake in the company’s managed fleet. The South China Morning Post reported that Pacific Basin owned 73 percent of its 45-vessel fleet in 2004. While Pacific Basin’s fleet grew to include 50 vessels in 2005, only 34 percent were company-owned that year. In 2006 the Pacific Basin fleet grew to 60 vessels, of which the company owned approximately 38 percent.

In order to increase vessel revenue days and boost earnings and shareholder value, Pacific Basin made a number of vessel acquisitions in 2006. In April the company announced that it had entered into a $35.1 million agreement to purchase two handysize vessels from Hawk Inlet Ltd. and Ocean Falls Ltd., as well as a deal for three secondhand handysize ships. In keeping with Pacific Basin’s plans to enter the handymax sector, in June a $59.32 million agreement was signed for the acquisition of two handymax vessels, to be delivered by October.

In September the Ocean Melody was acquired from Lead Dynasty Ltd. and the Aries Forest was acquired from Forever Forest Ltd. The total price for these two handysize vessels was $55.4 million. Pacific Basin also sold two handysize vessels—the Ocean Logger and the Patagonia —to K/S Danskib, but leased the vessels back for a 3.5-year period. In November the company agreed to purchase another new handysize vessel. By this time Pacific Basin’s annual commitment to acquisitions exceeded $300 million.

By the end of 2006 Pacific Basin had entered the supply chain management business, in order to offset the cyclical nature of shipping-related earnings. In the December 14, 2006, issue of Lloyd’s List, CEO Richard Hext commented on this development and what it meant for the company’s customers, explaining: “The strategy makes sense. It grows our skill sets and helps us understand what they want but it is mainly opportunistic. There is no map next door shaded pink in all the areas we are going to storm into.”

Heading into the last half of the first decade of the 2000s, Pacific Basin was positioned to benefit from the burgeoning economies of China and India, where heavy consumption of energy, steel, iron ore, and other goods was expected to continue for the foreseeable future.

Paul R. Greenland

PRINCIPAL SUBSIDIARIES

Abbot Point, Ltd.; Beckley, Ltd.; Bernard, Ltd. (British Virgin Islands); Bright Cove, Ltd.; Cape Knox, Ltd.; Crescent Harbour, Ltd.; Delphic Shipping, Ltd. (British Virgin Islands); Eaglehill Trading, Ltd.; Eastern Venture Corp. (Liberia); Everclear Shipping, Ltd. (British Virgin Islands); Famous Time Group, Ltd.; Flinders Island, Ltd.; Foreview, Ltd.; Foreview Holdings, Ltd.; Future Sea, Ltd.; Gold River Shipping, Ltd.; Good Shape, Ltd.; Gwenyth Shipping, Ltd. (British Virgin Islands); IHC Chertering, Ltd. (United Kingdom); International Handybulk Carriers Management, Ltd. (British Virgin Islands); Judith Shipping, Ltd. (British Virgin Islands); Lake Joy, Ltd.; Lake Stevens, Ltd.; Mount Rainier, Ltd.; Oak Harbour, Ltd.; Pacific Basin Agencies, Ltd.; Pacific Basin Bulk Chartering, Ltd.; Pacific Basin Chartering, Ltd. (British Virgin Islands); Pacific Basin Ship Management, Ltd.; Pacific Basic Shipping GmbH (Germany); Pacific Basin Shipping, Ltd.; Pacific Basin Shipping Pty. Ltd. (Australia); Pacific Basin, Ltd. (United Kingdom); Pacific Basin Shipping Inc. (United States); Pacific Basin Shipping Consulting, Ltd. (China); PacMarine Services, Ltd.; PacMarine Services Pte Ltd. (Singapore); PB Management Holding, Ltd. (British Virgin Islands); PB Markets, Ltd. (British Virgin Islands); PB Vessels Holding, Ltd. (British Virgin Islands); PMS Services Co., Ltd. (South Korea); Taylor Shipping, Ltd. (British Virgin Islands); Union Bay, Ltd.; Verner Shipping, Ltd. (British Virgin Islands); Wharton Shipping, Ltd. (British Virgin Islands); Widen Holdings, Ltd.