Negative news flow is gaining momentum for Cosco

Another delivery re-scheduling for newbuild contracts. Cosco Corp has just made another announcement (on 28 Jan 2009) on the re-scheduling of another batch of its newbuild dry bulk carrier contracts, at the request of an European customer. This will result in the delayed deliveries of four 57,000 dwt dry bulk carriers by 4-18 months. The last of these four vessels is now expected to be delivered in May 2011, instead of December 2009. This latest update came on the back of Cosco Corp'sannouncement last Friday (23 Jan 2009) on the rescheduling of delivery dates for four 57,000 dwt dry bulk carriers and three 80,000 dwt vessels, with yet another European customer.

We estimate that these two latest vessel delivery re-scheduling exercises would involve combined contracts value equivalent to about 7.0-7.5% of Cosco Corp's order book of about US$7b. Too early to buy into Cosco Corp. As argued in our roadshows to HK/Spore investors, Cosco Corp's share price would continue to be plagued by negative news flow on orders delay/cancellation, which can only gather momentum in the months ahead. This is due to macro issues like the supply-led dry bulk shipping industry's cyclical downturn and our expectation of an 80% collapse in secondhand vessel prices, and Cosco's own operational issues with the non-delivery of 9 dry bulk carriers originally scheduled by end 2008 and cost overruns resulting in potential losses in 4Q08.

We estimate that Cosco Corp has 4 dry bulk carrier orders cancelled to-date, and another 21 vessels re-scheduled to later delivery dates. These collectively represent about 20% of Cosco Corp’s order book. Cosco Corp is expected to deliver less than 30 newbuild vessels this year, vs. an initial target of about 40 dry bulk carriers as per previous contract win announcements.

Recap on last Friday's re-scheduling announcement. As a recap, Cosco Corp announced last Friday (23 Jan 2009) that it has agreed to another European ship owner's request to reschedule the delivery dates of four 57,000 dwt bulk carriers and three 80,000 dwt vessels, including two vessels supposedly to be delivered by end last year. The new delivery dates for these seven vessels will now occur between three and thirteen months after their original delivery dates, in which the last vessel will be delivered in October 2011. We maintain Fully Valued and our TP at S$0.76.

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