SHANGHAI-listed ceramic product manufacturer Songfa is being placed under a delisting risk warning, as it struggles with continued financial losses while pursuing a bold transformation through the acquisition of Hengli Heavy Industries, a fast-growing Chinese shipbuilder.

Despite securing regulatory approval for the backdoor listing, concerns have emerged that Songfa’s fragile finances and Hengli’s high debt levels could pose challenges to the successful completion of the deal.

According to the Shanghai Stock Exchange, Songfa stock will carry an ‘ST’ risk warning prefix from April 29, because it recorded recurring net losses for 2024 while its core revenue fell below Yuan300($41.1m). Companies that meet these criteria for two consecutive fiscal years face mandatory delisting.

Songfa expects a net loss of Yuan62.3m-Yuan87m last year, following consecutive deficits between 2021 and 2023.

The company said it aimed to turn itself around through the asset restructuring, divesting all assets and operational liabilities while acquiring 100% ownership of Hengli, “strategically exiting the daily ceramic tableware manufacturing sector to enter the promising shipbuilding industry”.

If the transaction goes through, Songfa’s 2024 net profit is projected to reach Yuan278m.

“The listed company’s financial condition and operating results will be greatly improved, no longer triggering the mandatory delisting criteria for financial issues,” Songfa stated.

The move comes as the US has announced it will impose port fees on China-built ships, although the final plan, which was scaled back from the initial draft, is seen lowering the impact on the prospects of Chinese shipyards.

In its latest publicly available results, Hengli said that by mid-October 2024, it had secured orders for 140 newbuildings worth around $10.8bn. It is also completing construction on a second $1.5bn shipyard to greatly expand capacity.

However, the aggressive expansion has led to surging debt repayment pressures, warned an analyst from Everbright Securities, cautioning that if Hengli fails to deliver on its newbuilding projects and realise contract liabilities into revenue, its finances could deteriorate.

In a previous disclosure, Songfa said Hengli’s asset-liability ratio reached 93.1% in 2022 and 91.6% in 2023, although an earlier capital injection from Hengli’s controller brought it below 75% by September 2024 to help the yard secure refund guarantees from banks.

Another Shanghai-based Chinese equity analyst said Hengli’s shipbuilding profits are recognised based on the percentage of newbuildings completed, creating uncertainties in future.

Generally, most of a yard’s shipbuilding revenue is received upon delivery. The majority of Hengli’s orderbook involves deliveries scheduled between 2025-2026.