Cosco Corporation Ltd: Restructuring?

- Cosco announced that there was currently no restructuring
- We think that there is the possibility of restructuring that benefits Cosco
- We increase our net profit estimates
- Maintain buy recommendation and raise fair value from S$2.32 to S$2.68

Announcement by Cosco
Cosco Corporation (S) Ltd (“Cosco”) referred to the Business Times article "Talk of asset injection boosts Cosco." The article mentioned the possibility of a restructuring by its parent company, Cosco Group, which would inject 19% interest in Cosco Shipyard Group and 100% stake in Cosco Shipbuilding Industry Company, that owned two shipbuilding yards in Nantong and Dalian, into Cosco. Cosco announced that it had not received any proposal nor was it currently in any discussions in relation to the proposed asset injection. Cosco would make further announcements of relevant developments (if any) at the appropriate junctures.

Our views
We think that there is the possibility of a restructuring that benefits Cosco despite the announcement by Cosco. Cosco will be bigger in size and will be in a better position to compete with the other shipyards globally for new shipbuilding and rig building orders. The time is also appropriate as Cosco has been reporting better quarterly financial results in FY2010. Moreover, it has won contracts of S$2.7 billion in 2010 for dry bulk vessels and oil rigs.

Expectations in 2011
We expect Cosco to win new orders of S$3.8 billion in 2011. At the same, it has been working to reduce the time required to build new vessels, which should improve its gross profit margin. Nevertheless, as most of its contracts are in USD, it faces the problem of an appreciation of the RMB against the USD. Labour and steel costs have also increased. We think that Cosco will overcome the challenges and report better results. Therefore, we have raised our net profit estimates by 4.0%, 40.4% and 40.6% to S$210.9m, S$300.1m and S$316.3m in FY2010E, FY2011E and FY2012E respectively.

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