Cosco has announced three more delays

Cosco has announced three more delays to its bulk carriers on order. It has agreed with the ship owner to reschedule the delivery dates of three 57,000 dwt bulk carriers, which were contracted in June 2007. The delivery dates for the three vessels will now take place between six and eight months after their original delivery dates, the last of which will now take place by May 2010 instead of September 2009.

These re-schedulings follow the previously disclosed cancellation of 4 bulk carriers and rescheduling of another 21. This latest delay is in line with our expectation that the challenging market environment will cause more order cancellations and/or customer requests for delivery delay. We have built these into our assumptions. Our SOTP fair value of Cosco stands at S$1.35, but despite the implied 31% upside, we are maintaining Hold recommendation, with even more delays being announced and provisioning.

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China Sport - Expansion looks like coming to a halt

China Sports FY08 earnings were 8% below our expectation due to weaker-than-expected revenue and a decline in 4Q08 earnings. The poor 4Q08 showing was caused by weak gross margins (fell from 22.4% to 16%) and hefty operating expenses led by higher A&P expenditure. The group recommended a first & final dividend of RMB0.0275 per share. However, the dividend payout is a modest 10%.

Both gross margins and pre-tax margins fell sharply in 4Q08. Gross margins of the Yeli footwear (down from 21% to 14%) and OEM footwear (down from 19% to 7%) saw the steepest decline. Lower margins from Yeli footwear were attributable to higher subcontracting costs while lower margins from its accessories products were due to initial start up and development cost. Pre-tax margins were also dragged down by hefty A&P expenses. Going forward, we expect margins to stay depress as competition intensifies and A&P expenditure remains high.

Store expansion seems to have come to a halt as there is only a slight increase in POS from 2250 to 2260 during the quarter. Growth will be challenging into the next 2 years as expansion slows and margin pressure looms. The group may also face rising competition as bigger sportswear brand players move into 2nd, third and fourth tier cities in China to target mass market demand to cope with the downturn.

We have lowered our earnings estimates for FY08 and FY09 by 30-40% to reflect lower margins. Our target price is lowered accordingly from 18 cents to 11 cents based on 4x FY09 PER. The lack of earnings catalysts and rising business risks ahead offer little upside for the share price. As such, we are ceasing coverage on the stock.

HSBC: Possible 2-for-5 rights issue

According to media in the UK and US, HSBC will announce a 2-for-5 rights issue today upon the announcement of its 2008 results. Assuming the subscription price for the rights issue is HK$27.50/share, representing c. 50% discount to last Friday's closing in Hong Kong. The rights issue plan should enable the Group to raise as much as US$17bn (Pound12bn). The offering is said being underwritten by Goldman Sachs and JP Morgan Cazenove.

The media also mentioned that HSBC will make Pound17bn (US$24.3bn) total provision for the Group in 2008 (similar to our forecast of US$23.7bn). It is also said about two-third of the provision charge (i.e. US$16bn) is expected to come from HSBC Finance (formerly Household International), which is similar to our forecast of US$15.3bn. In addition, HSBC is said to make Pound7bn (US$10bn) goodwill write-off on HSBC Finance and that large parts of HSBC Finance's operations will be closed and almost all the value attributed to the business will be wiped out. The sources also said HSBC will cut its DPS by 30% (not mentioned about if 2008 and/or 2009), compared with our forecasts of 28% y-o-y decline in DPS to US$0.65/share for 2008 and 17% y-o-y decline in DPS to US$0.54/share for 2009.

Assuming the above details are correct, we estimate that the rights issue will be earnings and book value dilutive. BVPS (Dec-09F) will be reduced by 20% to HK$69.80/share from HK$86.80/share while its EPS for 2009 will also be decreased by c. 20% to HK$4.64/share from HK$5.98/share. Its tier I CAR (Dec-09F) will be raised to 10.2% from 8.9%. This will put HSBC's tier I CAR at the higher end of global bank peers (ranging from 7.3-11.9%) from the middle of global bank peers' range.

We believe the rights issue will remove the short-term overhang about the rights issue concern by investors. While the rights issue can strengthen its capital positions, we believe HSBC's earnings outlook remains uncertain and earnings visibility remains low. Not only earnings from developed countries are slowing down but also the earnings momentum of emerging markets are seeing challenges ahead. With more banks peers being nationalized or injected capital from governments, privately owned banks like HSBC may still be marginalized although it strengthens its capital base. Moreover, HSBC is difficult to be re-rated, given its P/B is already at decent premium to peers (57% to UK banks, 30% premium to US banks and 55% to European). HSBC's share price will continue to be dragged by their weak price performances of those global banking peers on deepening of the financial tsunami and the looming risks in Eastern Europe.

Subject to further details of the rights issue and 2008 results, we temporarily peg our 2009 target P/B at 0.75x which translates into a 12-month target price of only HK$52.30/share (original: HK$60.00). Hence, we believe there may be some "short-term" rise in HSBC's share price on covering of short positions by some investors while the overhang about rights issue is removed. However, after the "short-term" rise, HSBC's share price may still be under pressure.