Cosco Corporation: Not out of the woods yet

Friday, August 7, 2009

Cosco Shipyard Group disappointed again. Group sales dropped 31% yoy to RMB 719m due largely to 40%-50% yoy dip in offshore, ship-repair and conversion revenue. Coupled with lower margins across shipping and shipyard operations, net profit plunged 71% yoy to S$37m. Stripping out the write back of receivables amounting to S$13m (after MI), bottomline would have been even lower at S$24m (-81% yoy). While offshore, ship-repair and conversion business maintained its gross margins, newbuild operations remained in the red. The only saving grace was the better-than-expected shipping earnings on stronger charter rates in 1H09.

No sign of recovery in 2H09. We have previously expected Cosco¨s newbuild segment to turn profitable in 2H09. However, we now believe it would remain in the red due to: (i) delivery on its lower-priced contracts for parent company; and (ii) weak margins for current projects on poor execution. Gross margins of 1% is unlikely to improve and shipbuilding will continue to incur losses in 2H09. Outlook for shipping, shiprepair and conversion remain weak.

Cut 2009/2010 earnings by 25%. We cut our 2009 earnings by 25% to adjust for higher shipping day rates (up from US$18k per day to US$20k), but offset by lower contributions and margins from shipbuilding and shiprepair. We have also rolled over our valuation to FY10F, our target price raised to 96cts, based on 13x its shiprepair/conversions profits, 9x its shipbuilding/offshore profits. However, stock remains expensive, at 17.3x FY10F, its PE is the highest in the sector for a company suffering from order book vulnerability and execution problems at its yard.


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