Cosco Singapore - Expect weak shipping earnings and high material cost

According to the management, there is practically no enquiry for dry bulk newbuilds but there are interests in ship repairs and conversions. The Group’s gross orderbook currently stands at US$7.0b (we estimate net orderbook at US$4.7b) with progressive deliveries through 1H12. Out of which, US$4.5b are shipbuilding contracts, US$2.0b are offshore and marine projects and US$0.5b are conversion works.

Sevan Driller 2 will likely be the first order clinched in 2009. Ytd, there are no new orders for shipbuilding. The Group, however, has secured some repair works and the US$80m FPSO conversion contract awarded by MODEC in May 09. Construction has begun for 31 dry bulk vessels out 110 vessels in the orderbook. COSCO (S) expects to deliver 15, 30 and 49 ships in 2009, 2010 and 2011 respectively. The hull of Sevan Driller 1 that was contracted in Mar 07 at US$170m will be delivered to Sevan Marine in Oct 09. COSCO (S) has also received US$10.0m for Sevan Driller 2. The contract is pending finalisation. If this contract materialises, it will be COSCO (S)’s first contract clinched in 2009.

Shipping earnings to fall by 35-50% yoy in 2009. COSCO (S) expects dry bulk shipping revenue to fall by 35-50% yoy in 2009 (2008: S$257.4m). Should the Baltic Dry Index (BDI) remain at around the current level of 3,874, two of its dry bulk shipping vessels that were fixed at BDI level of 8,000 previously will be put on voyage charter when their time charter contracts expire in Jun 09 and Aug 09 respectively. The other 10 vessels are on voyage charter at an average charter rate of US$17,000 per vessel day. Management expects BDI to average 3,000-3,500 for 2009 (Ytd average: 2,045). We, however, maintain our average forecast of 2,500 for 2009.


Order execution risk. While the gross orderbook of US$7.0b will keep COSCO (S)’s shipyards busy until 2012, the Group is currently facing a steep learning curve. Execution risk is still one of the key concerns.

Expect lower dry bulk shipping earnings. We forecast BDI to average 2,500 and 1,500 for 2009 and 2010, respectively in view of the huge capacity of dry bulk vessels that will hit the waters from 2H09 onwards. As such, dry bulk freight rates are expected to remain soft. COSCO (S)’s dry bulk shipping earnings could be worse in 2010.

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