Cosco Corp

Kim Eng on 2 Aug 2012

Below expectations, maintain SELL. 2Q12 results were below our expectations. Revenue declined by 2.1% YoY to SGD975.3m while net profit fell by 13.3% YoY to SGD27.6m. While gross margin showed an improvement to 12.0% (7.5% in 2Q10), this was partly bolstered by a SGD15.9m reversal of provisions made earlier for its projects. 1H12 net profit made up 43% of our previous FY12F forecast. With no respite in near term outlook, we maintain our SELL call with target price lowered to SGD0.73, based on 1.3x P/BV.

Expect weaker margins ahead. Contrary to management’s guidance, gross margins for various segments turned out to be higher in the current quarter. Other than better product mix, this was attributed to efficiency gains from cost cutting and favourable exchange rates. Margins were also boosted by the reversal of provision mentioned earlier. However, we believe that margins would be weaker going into the next quarters, given low pricing environment for new built ships, intense competition for ship repair jobs in China and its aggressive price bidding strategy in order to secure offshore projects.

Bleak order win outlook. Cosco has secured about USD1.2b worth of new contracts YTD, of which about USD1.0b were offshore orders. Most of its existing shipbuilding orders would be delivered by mid-2013. There were also no major announced contract wins since May 2012. Orderbook stood at USD5.9b as at 1H12. Given the challenging conditions in the Chinese shipbuilding sector, we reduce our FY12 order win forecasts from USD2.4b to USD2.0b. We maintain our USD2.3b order win assumptions for each of FY13 and FY14.

No sight of turnaround. For now, Cosco can only focus on executing its current projects well and building on its offshore capabilities. We expect macro weakness in the Chinese shipbuilding sector to persist for another two years. We lower our net profit forecasts by 6-10% over FY12-14F. Maintain SELL with lowered target price of SGD0.73, pegged to trough P/BV of 1.3x.