Strategy Delivery & Risks



1. Investing in our fleet

2014 2015
Objectives Strategy delivery and performance Objectives
Further expansion of our dry bulk fleet on a selective basis, albeit at a slower pace.

We stopped buying ships in early 2014 as prices increased without a supporting increase in freight rates.

We assimilated into our fleet seven of the ships we purchased at historically low prices and have taken delivery of all 33 secondhand ships that we committed to purchase between late 2012 and early 2014. They have slotted into our cargo systems well, and have made a positive cash contribution even in the weak market.

We are currently neither buying nor taking ships on long-term charters, but will continue to supplement our core fleet with low-rate short-term chartered ships which contribute to our service and results even in the depressed market. The difficult market will present acquisition opportunities for companies able to access capital.

We will focus on good control of our vessel operating expenses, efficient workflows and minimising administrative costs, and are implementing new ship management and accounting software to facilitate these objectives.

Risk/Impact Risk Reduction Measures

Vessel Investment , Deployment and Operational Risk

Inappropriate vessel investment timing, deployment and operations may lead to an uncompetitive cost structure and reduced margins.

Vessel values vary significantly through shipping cycles, and we need competitively priced, high-quality vessels to provide our services to customers.

Change from last year:
 

We evaluate potential vessel investments and divestments based on relevant market information, estimated future earnings and residual values. We adopt a flexible ownership/leasing strategy that is aligned with shipping cycles, and we maintain an active fleet renewal programme by:

  • securing newbuilding contracts with leading, reputable and financially viable shipbuilders;
  • transacting secondhand deals with creditworthy counterparties; and
  • securing long-term inward charters of modern vessels.

Our technical team and crews operate and maintain our ships under our ISM Code-compliant “Pacific Basin Management System” to assure safety and service reliability.

Market Risk

Adverse financial impacts include:

  • dry bulk and towage vessel earnings volatility
  • cost volatility including fuel prices, interest rates and other operating expenses
  • exchange rate volatility in the currencies we use
Change from last year:
 

Earnings volatility is managed by securing contracts of affreightment of one year or longer for our dry bulk business and long-term charter contracts for our offshore project towage business, which are our main sources of earnings.

Cost volatility of fuel prices on our long-term contracts are passed through to our customers through bunker price adjustment clauses or hedged with bunker swap contracts.

Financial Statements Note 14

See Derivative Assets and Liabilities for our use of derivative financial instruments to manage volatility in freight rates, fuel prices, interest rates and exchange rates.

Hardware & Systems Risk

Unreliable hardware and systems could result in communications breakdown, vessel down-time and service disruption.

Change from last year:
 

Our IT team works closely with the business departments to enhance its understanding of our business needs so it can tailor effective IT systems, support, and preventive and contingency measures.

Our IT Steering Committee chaired by our CEO oversees the Group’s IT policies and procedures and ensures the Group’s IT strategies meet our business needs.

Vessel hardware and systems are reviewed and upgraded periodically to maximise system efficiency and security.

2. Deepening our relationships

2014 2015
Objectives Strategy delivery and performance Objectives
Continue to grow our dry bulk customer and cargo portfolio and enhance customer experience, drawing on our expanding commercial teams and office network.

Serving over 400 customers and growing our cargo volumes to 52 million tonnes to generate full-time employment for our 78,620 ship revenue days (2013: 73,210). We expanded our network to 11 commercial offices to position us close to customers enabling deeper partnerships.

To further improve the customer experience to enhance our access to cargoes, drawing on a global team and office network that is unmatched in the dry bulk sector.

Risk/Impact Risk Reduction Measures

Customer Satisfaction and Reputation Risk

Poor service can lead to loss of customers. Impaired brand value and reputation as a trusted counterparty could restrict our access to customers, cargoes, high-quality vessels, funding and talent.

Change from last year:
 

Our global office network positions us close to our customers enabling frequent customer engagement, a clear understanding of their needs and localised customer service.

A large, modern, uniform fleet and comprehensive in-house technical operations enhance our ability to deliver a high-quality and reliable service.

Customer engagement includes regular customer surveys to see how we can further improve customer satisfaction.

Banking Relationships Risk

Poor relationships with banks may limit our funding sources.

Change from last year:
 

We have a dedicated treasury function that develops and maintains our relationships with a diverse group of reputable banks worldwide. These relationships are enhanced through regular senior management contact and consistent compliance with our loan obligations.

Credit and Counterparty Risk

Default or failure of counterparties to honour their contractual obligations may cause financial losses. Counterparties include:

  • dry bulk and towage customers
  • ship builders, sellers and buyers
  • derivatives counterparties
  • banks and financial institutions
Change from last year:
 

Our global office network enables us to better know our counterparties.

We take measures to limit our credit exposure by:

  • transacting with a diverse range of counterparties with successful track records and sound credit ratings;
  • actively assessing the creditworthiness of counterparties; and
  • obtaining refund guarantees from newbuilding shipyards.
Financial Statements Note 15

Trade and Other Receivables

3. Investing in our people

2014 2015
Objectives Strategy delivery and performance Objectives
Continue to expand, train and motivate our teams in tandem with growth of our fleet on the water.

Despite increasing global demand for seafarers and ship managers, we recruited more ships’ crews and shore-based ship management staff in early 2014 in preparation for the delivery of more owned ships into our dry bulk fleet. After the sale of our harbour towage business, we now have 3,000 seafarers and 340 shore-based staff.

We recruited 13 fleet management staff and 11 dry bulk graduate trainees, expanded our 360° feedback programme, hosted five officer training seminars ashore, launched a leadership development programme for our staff at sea, and increased the number of training superintendents we deploy across our fleet from six to eight. These contributed to enhanced employee engagement and satisfaction.

Continue to develop and motivate our teams to enhance safety, productivity, customer satisfaction and job fulfilment.

Risk/Impact Risk Reduction Measures

Employee Engagement Risk

We are only as good as our people and so our ability to achieve our vision depends on the effectiveness of our staff both ashore and at sea. Loss of key staff or an inability to attract, train or retain staff could affect our ability to grow our business and achieve our long-term goals.

Change from last year:
 

Our Group HR and crewing departments are tasked with recruiting, developing and maximising engagement of staff ashore and at sea by:

  • maintaining regular contact with talent representing a wide cross-section of the shipping industry, and we use diversified manning sources for seafarers;
  • regularly reviewing our salary structure to ensure that it remains adequate to attract and retain the best talent;
  • offering regular training for staff ashore and at sea; and
  • implementing annual staff performance appraisals, incentives and other initiatives to encourage, retain and otherwise engage staff. This includes a 360 degree feedback process for certain executive directors and senior staff to further promote professional and personal development.
Workplace

Recruitment, Training & Development

Succession Risk

Inadequate succession planning could lead to prolonged executive searches, disruption to our strategic momentum and the business, and undermine stakeholder confidence in the Group.

Change from last year:
 

Our Group has a dedicated HR department which oversees organisational design, talent management, hiring and remuneration. Succession plans for senior management are regularly reviewed.

The Nomination Committee closely monitors the Board succession planning process to ensure Board continuity and diversity. We have a clear vision, mission and business principles with which to equip any potential successors to lead the business forward.

4. Safeguarding health, safety and environment

2014 2015
Objectives Strategy delivery and performance Objectives
Focus on efforts to substantially eliminate injury, navigation and pollution incidents, minimise our environmental impact and promote a healthy and supportive work environment at sea and ashore.

We reduced our lost time injury frequency by another 31% and our inspection deficiency rate decreased 13% in 2014. This industry-leading performance was marred by one fatality resulting from a fall suffered by a crew member when engaged in a routine work on deck (see. for health and safety commentary). The expansion of our owned fleet in 2014 presented us with the challenge of training many new crew in our operational and safety practices.

Through a continued focus on training, to substantially eliminate injury, navigation and pollution incidents, minimise our environmental impact and promote a healthy and supportive work environment at sea and ashore.

Risk/Impact Risk Reduction Measures

Safety Risk

Inadequate safety and operational standards, piracy and other causes of accidents may lead to loss of life, severe damage to property and our vessels, and impact the Group’s reputation among seafarers, customers and other stakeholders.

Change from last year:
 

Our commitment to the safe operation of our ships is manifested through a proactive system ashore and at sea – the Pacific Basin Management System – enhanced by well-conceived training and maintenance programmes and innovative initiatives to ensure our vessels are in good condition and in all respects safe to trade.

The high quality of our attention to safety is evidenced by an excellent safety record and our several safety-related awards in recent years.

Workplace

Health & Safety

Environment Risk

Non-compliance with environmental emissions and standards may result in financial loss and significant damage to our brand and the long-term sustainability of our business.

Change from last year:
 

We are at the forefront of efforts in our sector to mitigate emissions through initiatives to improve engine performance and hull and propulsion hydrodynamics, and to adopt fuel-efficient operational measures such as our home-grown Right Speed Programme.

Commercial pressure to increase vessel speed as the market recovers may increase our emissions but with no change in risk to our compliance status and financial performance.

We promote a proactive safety culture across our fleet involving safety risk assessments to mitigate risk in critical tasks on board. Through our safety training, we seek to eradicate the risk of accidents that lead to pollution and related penalties, costs and adverse publicity. In addition, we cover our risk of liability for pollution through membership of reputable Protection & Indemnity (P&I) clubs.

Insurance Risk

Any vessel incident could endanger our crew, adversely affect the strength of our brand and reputation and result in service disruption and significant costs.

Change from last year:
 

Despite best efforts to ensure safe operations, incidents do happen. We therefore place insurance cover at competitive rates through marine insurance products, including hull and machinery, war risk, protection and indemnity, freight demurrage and defense cover. Sufficiency of insurance cover is regularly evaluated and adjusted in line with prevailing asset values and in compliance with loan covenants and internal policies.

5. Enhancing corporate & financial profile

2014 2015
Objectives Strategy delivery and performance Objectives
Work within our financial gearing targets, maintain the financial health of the Group, and strive for best-in-class reporting, transparency and corporate stewardship.

Despite significant recent investment in our fleet, we still benefit from conservative gearing and access to attractive financing leaving us with a healthy balance sheet. This financial health gives comfort to customers and shareholders alike which contributes to the strong corporate profile that makes Pacific Basin a preferred partner for many stakeholders.

We accessed attractive Japanese export credit and bank loans despite one of the weakest markets since 1985 in which the availability of debt finance to the shipping industry has been challenging.

Continue to work within our financial gearing targets, maintain the financial health of the Group, and strive for best-in- class reporting, transparency and corporate stewardship.

Risk/Impact Risk Reduction Measures

Liquidity Risk

Insufficient financial resources (such as bank borrowing facilities) may negatively impact the Group’s ability to meet its payment obligations as they fall due.

Change from last year:
 

Our Group’s Treasury function actively manages the cash and borrowings of the Group within the scope of the Treasury policy to ensure:

  • sufficient funds are available to meet our existing and future commitments;
  • compliance with covenants relating to bank loans, finance leases and convertible bonds;
  • an appropriate level of liquid investment is maintained during different stages of the shipping cycle; and
  • the Treasury policy is reviewed and in line with business requirements.
Financial Statements Note 33

Financial Liabilities Summary

Capital Management Risk

Weakness in our financial management capability and insufficient capital could impact (i) our ability to operate as a going concern, (ii) our ability to provide adequate returns to shareholders, and (iii) other stakeholders’ ability and willingness to support the Group.

Change from last year:
 

We conduct regular reviews to ensure an optimal capital structure taking into account:

  • future capital requirements and capital efficiency;
  • prevailing and projected profitability;
  • projected operating cash flows; and
  • projected capital expenditure and expectations for strategic investment opportunities.

Our dividend policy is to distribute regular dividends to shareholders and to pay out a minimum of 50% of eligible profits for the year, with the remainder of the profits retained as capital for future use.

Our Board of Directors monitors closely the ratio of net borrowings to net book value of property, plant and equipment, and the ratio of net borrowings to shareholders’ equity.

6. Evolving management &
    governance practices

2014 2015
Objectives Strategy delivery and performance Objectives
Refine management decision-making, risk mitigation and board governance procedures and considerations. Ensure all new recruits are trained to fully observe our risk management and governance procedures. Uphold best-in-class levels of transparency and stakeholder confidence.

We emphasised our governance initiatives by formalising the role of Director of Risk. The internal audit function assisted communication of risk awareness and identified areas for improved controls. The Group complied with all relevant requirements under HK Listing Rules and Securities and Futures Ordinance. The Corporate Governance work has been recognised through various external awards.

News & Achievements

Our awards in 2014

Refine management decision-making, risk mitigation and board governance procedures and considerations. Ensure new recruits are trained to fully observe our risk management and governance procedures. Uphold best-in-class levels of transparency and stakeholder confidence.

Risk/Impact Risk Reduction Measures

Corporate Governance Risk

Inadequate corporate governance measures may adversely impact the diligence, integrity and transparency of our risk assessment, decision-making and reporting processes and undermine stakeholder confidence.

Change from last year:
 

Our Group is committed to good corporate governance to meet the needs and requirements of the business and its stakeholders. The Audit Committee and the Risk Management Committee proactively ensure the overall corporate governance and risk management framework for the Group.

The Board and relevant employees receive regular training on corporate governance matters to ensure a high standard of corporate governance.

Investor Relations Risk

An ineffective investor relations function or inadequate transparency in our external communications could undermine stakeholder confidence in our Group.

Change from last year:
 

We have a dedicated investor relations function as well as policies and guidelines on information disclosure and communication with the public.

We report half-yearly with quarterly trading updates, we keep the public informed of material developments guided by Corporate Governance Code best practices, and our website is updated regularly with company news and financial information.

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