Cosco Corporation: Bombshell, not bombed out

Despite dropping a bombshell of losses in 4Q08 to take into account provisions for inventory write-downs, doubtful debts and cost overrun at its shipbuilding division, we do not expect an imminent recovery in earnings. The focus in 2009 is on the extent of plunge in rates for its bulk shipping division, which was the shining star last year accounting for 58% of earnings. Meanwhile, execution issues at its shipyard will continue to hamper performance of the stock. Maintain Fully Valued, target price cut to 62cts.

4Q08 plunged into losses of S$24m, due to provisions totaling S$170m at its shipbuilding division for doubtful doubts, inventory write-down for the plunge in the value of steel price and losses on its shipbuilding contracts arising from cost overrun due to weak execution, higher steel prices, sub-contracting cost and additional development cost at Zhoushan. About 29 vessels are under construction and only one delivered in early 2009.

Drastic cut in vessel delivery schedule. The group cut its planned delivery of vessels from 40 to 20 vessels for 2009. This will lead to a 25% drop in our shipbuilding revenue assumptions to S$1.7bn. In the absence of new orders, we estimate its order book has declined to US$6.8bn following recent contract cancellations.

Shipping in doldrums, no recovery in sight yet. We cut our net earnings forecasts for 2009 by 31% to S$189m and 15% for 2010 to S$226m, following the change in delivery schedule for 2009 and cut in freight rate assumptions for bulk carriers. Maintain Fully Valued, the stock is caught in a midst of a cyclical downtrend for both shipping and shipbuilding, which is not expected to turn around in the near term. Concerns over its ability to execute on its order book will put additional pressure on the stock. Target price cut to 62cts.

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