COSCO Corp (Singapore)’s share price has fallen by about 14% since our last update (“Downgrade to Sell – Missed Expectations”, 6/5/2013) such that it is close to our previous S$0.76 FV. However, we do not think it is time to upgrade our call. The macro environment is looking increasingly gloomy. In China, an unexpected credit squeeze in the Chinese interbank market raised concerns over the fragility of the Chinese banking system. The surprise was that the PBOC took an unusually tough line by refusing to inject liquidity, at least for a few days. Should the credit conditions deteriorate, we think that COSCO, with its large debt burden, will be vulnerable. The group’s net gearing climbed to 131% as of end 1Q13, from just 10% as of end FY10. We estimate about half of its existing debt (S$3.4b) would need to be refinanced within the next 12 months. Considering the risks, we cut our PBR peg to 1.0x (or 2 std dev below) and FV to S$0.60 (previously S$0.76). Maintain SELL.
Not time to upgrade yet
COSCO Corp (Singapore)’s share price has fallen by about 14% since our last update (“Downgrade to Sell – Missed Expectations”, 6/5/2013) such that it is close to our previous S$0.76 FV. However, we do not think it is time to upgrade our call. The macro environment is looking increasingly gloomy. China’s official PMI and the HSBC flash number have been hovering for several quarters around the 50-mark separating expansion from contraction for the manufacturing sector. This implies that the growth trajectory is uncertain. The IMF and OECD recently lowered their 2013 China growth forecasts to 7.75% and 7.8%, down from 8% and 8.5% respectively.
Susceptible to a credit squeeze
Meanwhile, an unexpected credit squeeze in the Chinese interbank market raised concerns over the fragility of the Chinese banking system. On 20th June 2013, the seven-day repo rate shot up to a record 12%. The surprise was that the PBOC took an unusually tough line in refusing to inject liquidity, at least for a few days. Should the credit conditions deteriorate, we think that COSCO, with its large debt burden, will be vulnerable. The group’s net gearing climbed to 131% as of end 1Q13, from just 10% as of end FY10. We estimate about half of its existing debt (S$3.4b) would need to be refinanced within the next 12 months. COSCO’s free cashflow is also likely to remain negative for the next few years, due to its low net profit margin and increasingly back-end loaded contracts in its order-book.
Lower FV to S$0.60
Considering the above mentioned risks, we cut our PBR peg to 1.0x (or 2 std dev below) and FV to S$0.60 (previously S$0.76). Maintain SELL.
COSCO Corp (Singapore)’s share price has fallen by about 14% since our last update (“Downgrade to Sell – Missed Expectations”, 6/5/2013) such that it is close to our previous S$0.76 FV. However, we do not think it is time to upgrade our call. The macro environment is looking increasingly gloomy. China’s official PMI and the HSBC flash number have been hovering for several quarters around the 50-mark separating expansion from contraction for the manufacturing sector. This implies that the growth trajectory is uncertain. The IMF and OECD recently lowered their 2013 China growth forecasts to 7.75% and 7.8%, down from 8% and 8.5% respectively.
Susceptible to a credit squeeze
Meanwhile, an unexpected credit squeeze in the Chinese interbank market raised concerns over the fragility of the Chinese banking system. On 20th June 2013, the seven-day repo rate shot up to a record 12%. The surprise was that the PBOC took an unusually tough line in refusing to inject liquidity, at least for a few days. Should the credit conditions deteriorate, we think that COSCO, with its large debt burden, will be vulnerable. The group’s net gearing climbed to 131% as of end 1Q13, from just 10% as of end FY10. We estimate about half of its existing debt (S$3.4b) would need to be refinanced within the next 12 months. COSCO’s free cashflow is also likely to remain negative for the next few years, due to its low net profit margin and increasingly back-end loaded contracts in its order-book.
Lower FV to S$0.60
Considering the above mentioned risks, we cut our PBR peg to 1.0x (or 2 std dev below) and FV to S$0.60 (previously S$0.76). Maintain SELL.
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