Cosco Corp: insufficient offshore track record

Cosco has seen a raft of bad news in the past year, with the cancellation of 4 bulk carrier orders and rescheduling of another 21. This has led to its share price falling to just 15% of its all time high. Furthermore, it had to make provisions for trade receivables and delays of S$89.1m in FY08. We believe Cosco could announce more order cancellations and/or delays as the business climate remains dismal, with the Sevan 650 project possibly being a high-profile candidate – we estimate that around US$70m of the outstanding contract value could be at risk.

We maintain fair price at 1.1x book value, or S$0.57 per share, in line with trough valuations for the marine sector. We still expect Cosco to be profitable on its US$7.3bn orderbook, but forecasts are at risk from more cancellations and provisions. Management will also need time to get its house in order, having expanded too quickly and with insufficient risk controls, which have exacerbated the current situation, in our opinion.

Despite having strong offshore ambitions, highlighted by its establishment of a dedicated offshore yard in Qidong, Cosco is still way behind on the learning curve for complex newbuildings such as jack-ups and semisubmersibles. Cosco therefore will not be the first yard of choice for international customers, especially if there is available capacity at more established offshore players such as SMM and Keppel.

However, we note that Cosco could be a beneficiary of the Chinese government’s efforts to bolster the economy, where it is mulling providing enhanced credit support to shipbuilders and promoting self-innovation in ship building.

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