Strategy Delivery & Risks

1. Investing in Our Fleet

2018

Objectives

Manage our business for a continued market recovery in 2018, continue to conduct our business efficiently and safely, and assess attractive secondhand ship acquisition opportunities.

 

Strategy Delivery and Performance

In 2018, we purchased seven modern ships, five of which have already delivered into our fleet. These acquisitions (and the sale of 1 older vessel) have increased our owned fleet to 111 ships on the water, grown the proportion of our owned versus chartered ships, and helped to maintain our competitive owned vessel daily break-even levels. We have reduced our chartered in fleet to about 50% of our total fleet, relying more on our growing fleet of owned ships supplemented by short-term and index-linked charters.

2019

Objectives

We will continue to look at good quality secondhand Handysize and Supramax ship acquisition opportunities as prices are still low, resulting in reasonable break-even levels and shorter payback times. We do not intend to order newbuildings in the medium term, and will continue to prepare our fleet to comply with upcoming environmental regulations.

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.

We have also used bunker swap contracts to lock in the prevailing future fuel price spread between low and high sulphur fuel for a portion of the estimated fuel consumption on some Supramax vessels that will be fitted with scrubbers.

The Group constantly reviews 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 a uncompetitive cost structure and reduced margins. Vessel values vary significantly through shipping cycles, and we need competitively priced, highquality vessels to provide our services to customers.

Failure to adequately maintain vessels could jeopardise crew safety and lead to vessel down-time, impacting vessel schedules and service disruption.

Change from last year:
 

The Group evaluates 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 pursue an active fleet growth and/or renewal programme by:

  • acquiring secondhand vessels from quality shipowners;
  • securing newbuilding contracts with leading, reputable and financially viable shipbuilders; 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

2018

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 five modern ships into our owned fleet in 2018. We currently employ over 3,800 seafarers and 336 shorebased 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 2018 in our highest ever retention figures: 95% for our officers at sea, and 90% for our staff ashore.

CSR Report
Workplace & Safety

Diversity & Equal Opportunity

2019

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 may 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’s dedicated HR department oversees organisational design, talent management, recruitment 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 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

2018

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 2018, we carried 62 million tonnes (2017: 66mt) for over 500 customers, generating full-time employment for our 80,100 ship revenue days (2017: 87,870). Through our global network of 12 regional offices and an expansive customer engagement programme, we are connecting with a larger number of customers at a local level.

2019

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 owners
  • 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, including a selfdeveloped mobile search tool and systematic daily screening, to ensure the Group complies with international sanctions legislation; and
  • obtaining refund guarantees from newbuilding shipyards.

Customer Satisfaction and Reputation Risk

Poor service may lead to impaired brand value and reputation as a trusted counterparty, which 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 direct and 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 surveys and regular telephone or face-toface contact to see how we can further improve customer satisfaction.

Banking Relationships Risk

Poor loan administration and 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 through regular senior management contact.

4. Safeguarding Health, Safety And Environment

2018

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 maintained our Lost Time Injury Frequency of 0.82 to equal our best LTIF result in 13 years, and our external Port State Control inspection deficiency rate improved by 2% to 0.53. These statistics are among the best in the industry and represent the value of a specific focus on staff training.

CSR Report
Workplace & Safety
Health & Safety Performance in 2018

2019

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.

Our high quality 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 the types of fuel that comply with the relevant regulations set out by the International Maritime Organization (IMO).

All our vessels comply with regulations set out by the IMO and coastal states, including Ballast Water Management (BWM) Convention and 2020 Global Sulphur Limits, EU CO2 MRV regulations, etc.

We promote a proactive safety culture by way of safety risk assessments to mitigate risk in critical tasks on board. Through our 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.

Insurance Risk

Vessel incidents 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

2018

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 2018.

We received a Special Mention 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.


2019

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-inclass levels of board governance, business transparency and stakeholder confidence.

Risk/Impact

Mitigating Measures

IT Security Risk

Our business processes rely heavily on IT systems (including cloud based) and daily communications ashore and at sea. Failure of a key IT system, 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 appropriate and effective IT solutions, support, and preventive and contingency measures. We have formalised business continuity arrangements for critical IT systems and arrange drills to manage a total IT systems shut down. We also carry commercial crime insurance to cover financial loss due to cyber-crimes. We regularly evaluate cloud-service providers’ internal controls and request them to provide independent assurance reports.

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:
 

The 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 comprehensive regulations enacted by the International Maritime Organization (and enforced by its member countries) and international sanctions legislation. Our commitment to anti-bribery practices and high standards of corporate governance has been certified by TRACE, and is underscored by our admission as a member of the Maritime Anti-Corruption Network (MACN).

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 publish financial reports or trading updates quarterly and 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

2018

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 maintained competitive daily vessel operating expenses of US$3,850 in 2018 without impacting maintenance or safety primarily through scale benefits and other efficiencies. Our total G&A overheads increased by 10% 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 21%.


2019

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 its performance and strategic objectives (including efficiency objectives) are communicated to all staff through organisation-wide staff meetings, information dissemination via intranet and seasonal team building events. We have also established a clear and robust organisation 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
  • Outsourcing certain operational functions where appropriate 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 assess business opportunities. Our 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

2018

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 June, we closed a US$325 million 7-year reducing revolving credit facility secured over 50 of our owned ships and in November we closed a US$40 million term loan facility, thus enhancing our operating cash flow, EBITDA and balance sheet.

At year end, our gearing ratio was 34% (net borrowings to net book value of our owned fleet) and we were in compliance with our bank covenants.

2019

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-inclass 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:

 

To ensure an optimal capital structure taking into account, we conduct regular reviews on:

  • 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, at a pay out ratio of 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 interest cover, net borrowings to net book value of owned vessels, and the ratio of net borrowings to shareholders’ equity.

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