We forecast 2Q09 gross margin at 14% (1Q09: 15%) for the shipyard segment. This is lower than the 20-30% seen in 2007-08. This is mainly due to higher operating costs as the Group procured 400,000 tonnes of steel at Rmb6,000/tonne in 2008 compared with an average Rmb4364/tonne in 2007. This amount of steel can build up to 40 dry bulk vessels and the price has fallen by 33% to an average of Rmb4,000/tonne.
We estimate 2Q09 dry bulk shipping revenue to fall 33% qoq to S$28.6m (1Q09: S$42.9m) in view of a weaker dry bulk shipping market.
In 2Q09, COSCO (S) secured a US$80m FPSO conversion contract awarded by MODEC in May 09 and some shiprepair works. Ytd contract wins amount to US$80m (2008: US$1.1b). In 2Q09, 13 dry bulk carrier orders were postponed and eight were cancelled.
Currently, about 31 dry bulk vessels are under construction. COSCO (S) is targeting to deliver 15 vessels in 2009, one of which was delivered in 1Q09, but none was completed in 2Q09.
To date, 40-50% of COSCO (S)’s dry bulk orderbook has been cancelled or delayed. The Group’s current gross orderbook stands at US$6.7b (we estimate net orderbook at US$4.5b).
We believe COSCO (S)’s share price will continue to underperform in view of: a) poor shipbuilding execution at its shipyards, b) current low level of contract wins, c) potentially more order cancellations and delays and d) an uncertain dry bulk shipping outlook.
COSCO (S) trades at PEs of 22x for 2009 and 25x 2010. In view of its poor prospects, we maintain our SELL call on the stock with a fair price of S$0.95 based on sum-of-the-parts (SOTP) valuation.
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