Cosco Corporation - Soaring on the powerful wings of its parent

􀂾 Story: Cosco Corp has secured its largest shipbuilding order todate,
worth a total of US$1.2bn from Cosco International Ship
Trading, its sister company, as well as third party shipowners. The
vessels will be delivered between Dec 2008 and Mar 2010.
􀂾 Point: With these contracts, Cosco Corp is now in the lead
among SGX-listed firms, in terms of contract wins this year. This
will boost its forward order book(excluding 1Q07 sales) by 70% to
US$2.9bn. As delivery of the US$1.2bn shipbuilding orders are
staggered over Dec 2008 to 2010, we expect the bulk of these
contracts to contribute in FY09. With this order, earnings visibility
for the group is further strengthened into FY09.
􀂾 Relevance: The stock is trading at P/E of 23.7x(FY07F) and
15.4x(FY08F), undemanding vs industry peers in China trading at
>25x on FY08 earnings, and against its 3-year EPS CAGR of 38%.
Maintain BUY, target price maintained at $3.45.
13% rise in vessel price over the last order. Based on our estimates, the
latest bulk carriers were concluded at US$38.5m for Cosco International
Ship Trading Co Ltd and US$37.5m for external parties The
variance(although the vessels are of similar sizes) is caused by different
specifications and requirements by the shipowners. The latest contract
prices represent an increase of 13% in the vessel prices over the last bulk
carrier order from the Cosco Group at US$34m. This is due to adjustment
for higher steel prices and higher cost arising from IMO requirements for
additional protective coatings on these vessels for building orders signed
after Dec 2006.
Riding on its strong parentage – potential replacement orders from
parent. The Cosco group owns a fleet of 650 vessels, of which 250 are
bulk carriers. With an average age of 10 to 15 years for the bulk carrier
fleet, there is potential for more replacement and new orders from its
sister companies, in the region of 10 to 20 vessels per year. Cosco Corp
has a total of 46 vessels under construction, of which more than half or
26 are from the Cosco group, the balance from external parties.
Shipyard business growing firmly on 3 legs. Based on its current order
book of US$2.9bn, 60% are for shipbuilding and the balance for offshore
projects. On the back of this, Cosco Shipyard Group’s revenue profile will
be transformed from primarily a shiprepair group into one with a
diversified mix of 40% in shiprepair, 30% in shipbuilding and 30% in
offshore projects. While most shipyards in China are either shipbuilding or
shiprepair yards, Cosco Corp, which owns seven shipyards along the coast
of China, offers investors a unique play into shiprepair, shipbuilding and
rigbuilding. The new shipbuilding, offshore conversions and rigbuilding
businesses provides an additional platform for growth, while shiprepair
provides a growing recurrent base of earnings.