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Strategy Delivery & Risks



1. Investing in Our Fleet

2017

Objectives

Manage our business for continued uncertain markets in 2017 and continue to conduct our business efficiently and safely. Having positioned ourselves to capitalise on improving market conditions ahead, we will assess attractive fleet renewal opportunities.

 

Strategy Delivery and Performance

In 2017, we purchased 8 modern ships at still historically low values, and took delivery of our final 7 newbuildings ordered in 2013. All have slotted into our cargo systems well. These acquisitions have increased our owned fleet to 106 ships on the water, grown the proportion of our owned versus chartered ships, and reduced our owned vessel daily break-even levels. We redelivered expiring long-term chartered ships to gradually lower our charter-in costs, relying instead on our growing fleet of owned ships supplemented by shorter-term and index-linked charters.

2018

Objectives

Manage our business for a continued market recovery albeit with some volatility along the way, and continue to conduct our business efficiently and safely. We will continue to look at good quality secondhand Handysize and Supramax ship acquisition opportunities as prices are still historically low, resulting in reasonable breakeven levels and shorter payback times. We do not intend to order newbuildings in the medium term, and will watch technological and regulatory developments closely.

RISK/IMPACT1

Mitigating Measures

Market Risk  

Adverse financial impacts include:

  • 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 partially managed by securing contracts of affreightment of one year or longer. We remain focused on the Handysize and Supramax segments of the dry bulk sector which is where we have a strong competitive edge.

Volatile fuel costs for our long-term cargo contracts are passed through to our customers through bunker price adjustment clauses or hedged with either bunker swap contracts or forward price agreements.

Volatile and sharply reducing fuel prices mean we need to constantly reassess our optimal vessel operating speeds to maximise each voyage’s contribution.

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 International Safety Management (ISM) Code-compliant “Pacific Basin Management System” to assure safety and service reliability.

1The risks, impact and mitigating measures in this Strategy Delivery and Risks section are consistent with the Group’s risk register taking into account the outcome of the annual risk assessment by way of an online questionnaire in collaboration with division heads.



2. Investing in Our People

2017

Objectives

Continue with our objectives of achieving improvements in safety performance, staff retention, productivity, job fulfilment and customer satisfaction.

 

Strategy Delivery and Performance

Despite the challenges of increased global demand for seafarers and ship managers, we successfully managed the delivery of 14 newbuilding and secondhand ships into our owned fleet in 2017. We currently employ approximately 3,400 seafarers and 335 shore-based staff whom we strive to provide with a healthy, safe and supportive work environment and opportunities to develop and advance within the Company. Our investment in our people contributes to enhanced employee engagement and satisfaction, as reflected in 2017 in our highest ever retention figures: 94% for our officers at sea, and 87% for our staff ashore.

2018

Objectives

Continue with our permanent objectives of achieving improvements in safety performance, staff retention, productivity, job fulfilment and customer satisfaction and, more broadly, to achieve our vision to be a leading ship owner/operator in dry bulk shipping and the first choice partner for our stakeholders.

Risk/Impact

Mitigating Measures

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.

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.
CSR Report
Workplace & Safety

Training & Development



3. Deepening Our Relationships

2017

Objectives

To increase customer engagement and partnership at a local level and further improve the customer experience by streamlining systems and processes, thereby enhancing our access to cargoes, drawing on a global team and office network that is unmatched in the dry bulk sector.

 

Strategy Delivery and Performance

In 2017, we carried 66 million tonnes (2016: 57mt) for over 500 customers, generating full-time employment for our 87,870 ship revenue days (2016: 77,180). We established a new office in Rio de Janeiro to help support our many South America customers and, having completed our exit from our non-core towage activities, our management is now fully focused on our core Handysize and Supramax business. Through our global office network, we are connecting with a larger number of customers at a local level.

2018

Objectives

To further improve the customer experience through regular customer engagement and close partnership at a local level, making it easier to do business with us, and drawing on a global team and office network that is unmatched in the dry bulk sector, in return enhancing our access to cargoes.

Risk/Impact

Mitigating Measures

Credit and Counterparty Risk

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

  • our cargo 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;
  • performing sanction checks on counterparties to identify any matches with restricted parties list from the US Office of Foreign Assets Control, the EU Common Foreign and Security Policy and the UK Treasury; and
  • obtaining refund guarantees from newbuilding shipyards.

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.



4. Safeguarding Health, Safety And Environment

2017

Objectives

Through training, continue our objectives of substantially eliminating injury, navigation and pollution incidents, minimising our environmental impact and promoting a healthy and supportive work environment at sea and ashore.

 

Strategy Delivery and Performance

Through our proactive Safety Management System, innovative proprietary initiatives and significant investment in seafarer training, we reduced our Lost Time Injury Frequency by 13% to achieve our lowest ever LTIF result of 0.82, and our external Port State Control inspection deficiency rate improved by 27% to 0.54. These statistics are among the best in the industry and represent the value of a specific focus on staff training.

2018

Objectives

Through continued investment in training, systems, procedures and technology, 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

Mitigating 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.

CSR Report
Workplace & Safety

Health & Safety

Environment Risk

Non-compliance with emissions and other environmental legislation 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. We use types of fuel that comply with the relevant regulations set out by the International Maritime Organization (IMO).

Ballast water treatment equipment will be fitted on our vessels to comply with IMO and coastal states’ Ballast Water Management (BWM) Convention that entered into force on 8 September 2017. We formulate measures to comply with the 2020 global sulphur limits set by the IMO. We have also enhanced our Ship Management System to comply with the Monitoring, Reporting and Verification regulation (MRV) by European Commission.

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. We cover our risk of pollution liability through reputable Protection & Indemnity (P&I) clubs.

CSR Report
Environment

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 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. Evolving Management & Governance Practices

2017

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.

 

Strategy Delivery and Performance

Our risk management team continued to raise emerging risk and control awareness amongst staff in 2017.

We received a Gold Award in the medium market capitalisation category at the HKICPA’s Best Corporate Governance Awards. We have adopted the latest ESG reporting guidelines issued by The Stock Exchange of Hong Kong Limited.


2018

Objectives

Understanding our emerging risks in the changing shipping market and establish effective mitigating controls to underpin our commitment to sustainable business. We always seek to refine management decision-making, risk mitigation and board governance procedures and considerations. We strive to continue to uphold our best-in-class levels of board governance, business transparency and stakeholder confidence.

Risk/Impact

Mitigating Measures

IT Security Risk

Our business processes rely on IT Systems particularly for daily communications ashore and at sea. Failure of a key IT systems, targeted attacks on our system, or a breach of security could result in communications breakdown and business disruption.

Change from last year:
 

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.

Our IT team works closely with the business departments to tailor effective IT systems, support, and preventive and contingency measures. We have implemented business continuity arrangements for critical IT systems and activities. We also entered into commercial crime insurance policy to cover financial loss due to cyber-crimes.

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

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 requirements of our business and stakeholders. The Audit Committee and Risk Management Committee proactively ensure the overall corporate governance and risk management framework for the Group.

Internal procedures are in place to ensure compliance with all local and international laws and regulations in the places we trade, including the comprehensive regulations enacted by the International Maritime Organization (and enforced by its member countries) and UN, US, UK and EU sanctions legislation.

The Board and relevant employees receive regular governance training 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.



6. Maximising Efficiencies & Controlling Costs

2017

Objectives

Continue careful costs control and, where possible, cost reduction by leveraging our scale and reputation as a safe counterparty. Explore scope for more efficient scheduling and trading of our fleet and cargo matching. Gradually renew our fleet with ships of modern, efficient designs well suited for our trades.

 

Strategy Delivery and Performance

We reduced further our daily vessel operating expenses to US$3,840 in 2017 without impacting maintenance or safety primarily through scale benefits and other efficiencies. Our total G&A overheads increased by 3% year on year due to increased staffing overheads ashore and at sea as our owned fleet expanded. However, since 2014, we have gradually reduced our daily vessel opex by 12% and our total G&A overheads by 28%.

We relocated our headquarters to Hong Kong’s southern district in May 2017 and now benefit from a better, more productive office with a markedly lower rent.


2018

Objectives

Despite expectations of a stronger freight market, continue careful costs control and, where possible, cost reduction by leveraging our scale and reputation as a safe counterparty. Explore scope for more efficient scheduling and trading of our ships and optimal matching of our large fleet and cargo systems to maximise utilisation, availability and punctuality. Gradually renew our fleet with ships of modern, efficient designs well suited for our trades.

Risk/Impact

Mitigating Measures

Operational Efficiency Risk

Poor internal systems, processes, communications and management could adversely impact our business and undermine our operational efficiency.

Change from last year:
 

The Group’s top down approach ensures our performance and strategic objectives (including efficiency objectives) are communicated to all staff through: regular town-hall meetings and memos to staff; management meetings to evaluate performance, formulate operations and cost management strategy, and optimise performance; and a clear and robust organisation and reporting structure that supports our business needs.

Other key measures to enhance efficiency include:

  • Regular review and upgrade of IT systems, evaluation and procurement of new software, applications and hardware to ensure alignment with the business environment and requirements and promote effective system integrations across our operations;
  • Appropriate documentation of business policies and procedures to ensure process consistency and best practices;
  • Proper vendor vetting procedures to ensure the stable and sustainable supply of services and goods; and
  • Where appropriate, certain operational functions are outsourced to third party providers, allowing our own resources to be more effectively deployed.

Cost Management Risk

Failure to manage costs effectively and sensibly could result in financial losses, misallocation of resources, safety issues, business disruption, customer dissatisfaction, supplier alienation and loss of opportunities.

Change from last year:
 

Active resource planning and costs estimation are carried out by business departments to expedite their work scope and to assess business opportunities. We implement cost management measures that are in line with our strategy to maximise efficiency and reduce cost without jeopardising our stakeholder satisfaction, corporate reputation and operational safety.

Approval mechanisms are in place across business departments to ensure expenditures are scrutinised and approved by authorised persons.

Variances from resource planning and cost estimations are regularly monitored to enable effective optimisation of business performance and cost efficiency.



7. Enhancing Corporate & Financial Profile

2017

Objectives

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

 

Strategy Delivery and Performance

We continue to maintain conservative gearing and benefit from access to capital generated through operations, debt, convertible bonds and equity. This gives comfort to customers and shareholders alike which contributes to the strong corporate profile that makes Pacific Basin a preferred partner for many stakeholders. In August, our simultaneous issue of consideration shares and cash raised through a share placement enabled immediate 80% equity financing for our acquisition of 5 modern dry bulk ships, thus enhancing our operating cash flow, EBITDA and balance sheet.

At year end, our gearing ratio was 35% (net borrowings to net book value of our owned fleet) and we were in compliance with our bank covenants.

2018

Objectives

Continue to manage our financial resources and funding, and to work within our financial gearing targets, maintain the financial health of the Group drawing on our access to capital, and strive for best-in-class reporting, transparency and corporate stewardship.

Risk/Impact

Mitigating 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 to ensure:

  • sufficient funds are available to meet our existing and future commitments;
  • an appropriate level of liquidity is maintained during different stages of the shipping cycle;
  • compliance with covenants relating to our borrowings and convertible bonds; and
  • regular and transparent dialogues with our relationship banks are maintained.

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 dividends to shareholders, where circumstance permits, at a pay out ratio of 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.

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