Annual Financial Report

1. Letter to Shareholders

Dear Shareholders,

External Environment

In 2020, the coronavirus spread across the globe, and wreaked havoc on both supply and demand sides of shipping. Before the scope of the pandemic became clear, governments imposed traffic restrictions in an attempt to keep the virus at bay. Most trading and shipping company owners opted to wait and see, while the demand for dry bulk shipping sustained a greater impact. Therefore, the dry bulk shipping market stagnated in the first half year, which in turn affected chartering and ship purchases and sales. However, a shrinking global economy and low oil prices made it easier to switch relatively smoothly to low sulphur fuels.

In the second half year, the countries became able to counter more effectively the effects of the pandemic on economic activities. Previously suspended investing and manufacturing activities started to resume. Therefore, the dry bulk shipping market started recovering in the second half year, especially in time charters and freight futures. The overall Baltic Dry Index (BDI) has not returned to the level in 2019. However, a steadily recovering market sends a positive signal to dry bulk shipping companies. The rising demand for container transportation in the fourth quarter can be considered a sign of economic activities recovering from the shock of the pandemic. Meanwhile, more ship purchases and sales were showing up in the market.

While the dry bulk shipping market had started recovering in the second half of 2020, newbuilding investment remained relatively low. The total number of newbuilding orders was below the level in 2019 for all types of ships. Given the pressure to replace old ships aged 20 years or more, the possibility of a supply shortage remains in the dry bulk shipping market. Moreover, the United Nations is not putting any hold on shipping related environmental regulations because of the pandemic. Carbon reduction requirements may raise the operating costs for old ships even higher in the next three to five years. Therefore, supply and demand of dry bulk shipping will continue to provide basic support for freight in the medium term.

2020 Business Results

In 2020, we had 8 newbuild ships and 1 fewer ship under management. The number of ships in our fleet underwent a net increase of 7, and the total number of ships in our fleet was 136 at the end of the year.

We had intended to take advantage of the supply-demand mismatch to increase profits in 2020. Therefore, the number of ships with contract renewal and index linked rent was higher in the first quarter compared to previous years. However, COVID-19 created unanticipated volatility in the market. Having sustained larger market volatility, neither of our revenue and profit performed well in the first half year. Fortunately, the average gross profit margin on newbuilding stayed close to 40%, which was a significant contribution to the overall profit margin. The economy started to recover in the second half year, and we adopted more conservative business strategies. As a result, profits showed slight increases, and the gross profit margin rose from 7.64% in the first half year to 19.13% in the second half year. The gross profit margin was 13.92% for the year. The total revenue was US$405.1 million, 9.47% lower compared to the previous year.

In terms of nonoperating income, we had little nonoperating income in 2020. However, the interest expenses fell by US$16.1 million compared to the previous year, and the foreign exchange loss was recognized at US$8.3 million due to appreciation of the Japanese yen. The net operating profit was US$51 million for the year, and the net income after tax was US$4 million.

Furthermore, to counter the uncertainties created by the coronavirus and the cash flow pressure created by suspension of asset disposal, we were fortunate to have the support of several major banks with whom we had a business relationship and been granted suspension of repayments, change of interest rates, and cash issues in mid-year. These measures were intended to strengthen our financial stability amid market changes.

2021 Business Plan

We expect to have 7 more newbuild ships delivered in 2021. They include 2 kamsarmax, 1 supramax, 3 handysize, and 1 liquefied petroleum gas ship. All are built by first class Japanese builders, such as Imabari, JMU, Namura, Tsuneishi, Onomichi, and Murahide. These newbuild ships include 3 environmentally friendly vessels that comply with the Tier III NOx emission standards.

Given the market is on track for a steady recovery, a reasonable profit margin is still ensured for most time charters. We will continue to seek opportunities in working with long-term customers gradually in newbuild ships and contract renewal. The goal is to increase profits steadily as the market recovers. In addition, we will lock in index linked rents at appropriate timing to ensure stable cash flows.

Furthermore, the ship disposal plans suspended due to the pandemic in 2020 can be expected to resume in 2021 in order to increase efficiency for the entire fleet and keep improving our financial structure. Meanwhile, we will follow changes in the laws and regulations closely in order to re-evaluate our capital expenditure plans and ensure we have an environmentally friendly and energy saving fleet that is healthy and competitive.

Chairman: James Lan

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