Cosco Corporation

Maybank Kim Eng Research, Nov 6

Q3 2013 was another disappointing quarter with net profit of only US$4.2 million on US$989.4 million revenue. Cosco's performance still fell short despite our aggressive earnings cuts post previous quarterly results. Q3 2013 gross margins sank to 7.4 per cent with an S$15.8 million in inventory write-down and an S$33.9 million provision for losses. Maintain "sell", with unchanged target price of S$0.65 pegged to 1.1 times FY2014 BVPS.

Despite showing sequential orderbook growth, and exceeding its order win target of US$2.0 billion for FY2013, Cosco has yet to demonstrate improvements in execution as margins continued decline. While this was partly due to lower value contracts secured previously, we believe that its varied offshore product types may also hinder its ability to benefit from efficiency gains from repeat execution. Cosco has guided for continued pressure on margins, citing wage and raw material price increases, competition, higher financing costs and Chinese yuan strengthening as negative factors.

We maintain our pessimistic view on the shipbuilding market as we do not see an easing of the vessel oversupply situation yet. Furthermore, we believe that new shipbuilding prices would still remain suppressed despite recent market optimism following a surge in the Baltic Dry Index, which we view as seasonal and temporary.

We cut FY2013 forecast by further 22 per cent, but raise FY2014-2015 earnings by about 15 per cent to account for the pick-up in new order wins recently, which exceeded our initial forecast. We raise FY2013 order win assumptions to US$2.5 billion.

SELL