Cosco - Many Negatives Priced In

Despite recent announcements of cancellations and delays of newbuilds, we reiterate our HOLD recommendation on COSCO Corporation (Singapore) (COSCO (S)) as its current share price has already factored in many negatives. To date, COSCO (S) has received notification of four dry bulk carrier cancellations and 10 delays from its clients. Construction has not begun for these supramax bulk carriers, each costing US$37m-42m, but COSCO (S)'s clients have paid compensation for the expenses incurred.

Share price has factored in many negatives. In view of the present global trade finance crunch and weak dry bulk shipping environment, we foresee more cancellations and delays. This may result in a knee-jerk sell-down of COSCO (S)'s shares as witnessed in previous order cancellations. That said, the current share price has factored in many negatives.

Assumption of low contract wins. We value COSCO (S)'s shipyard business at a low and sustainable level of annual contract wins of S$2.0b (2007: S$9.0b), implying a sustainable net profit of S$230m p.a. This is equivalent to a 50% reduction from the current orderbook. Should shipyard contract wins surpass our assumption for 2009, COSCO (S)'s share price could receive a boost.

Weak dry bulk shipping environment. According to our estimates, shipping earnings made up 40% of COSCO (S)'s 3Q08 net profit. Its earnings will also be affected by the current weak dry bulk shipping freight rates. If the Baltic Dry Index (BDI) continues to stay below 1,000, COSCO (S) would be making losses in its shipping business. We value COSCO (S)'s dry bulk shipping business based on the shipping sector's trough valuation of 0.4x P/B.

Share price and earnings catalysts. The catalysts that will trigger a rally in COSCO (S)'s share price and earnings include the following: a) substantial contract wins, b) improvement in the current credit crunch situation, c) contained order cancellations in its orderbook, and d) rebound of the BDI to more than 1,000.

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