Cosco Corporation Ltd: Offshore aspirant

Secured US$113m shipbuilding contract
Maintain Outperform and target price of S$2.63, still based on 18x CY12 P/E. Cosco has announced shipbuilding contracts worth over US$113m (S$145m) to build four special-purpose carriers. Deliveries are scheduled between Feb 013 and Feb 14. We keep our US$2.5bn order-win target for 2011. We believe Cosco is bidding aggressively in the offshore space against Singapore yards as seen in recent bids for Maersk CJ70 harsh-environment rigs. We believe Cosco will benefit from the recent rush in O&M orders given its capacity and long-time aspiration to move into the offshore space. Catalysts are further order wins, in our view.

The news
US$113m shipbuilding contracts; delivery of 80,000dwt bulk carrier. Cosco Guangdong has secured three firm contracts plus an option worth over US$113m to build special-purpose carriers for a European ship owner. Separately, Cosco Dalian has delivered a bulk carrier of 80,000dwt, "Mega Star", to its Asian buyer.

Comments
Delivery time shortened to 14 months. Management recently highlighted that its yards have been making good progress by shortening bulk-carrier delivery time to 14 months (from 16-18 months in 2010). We believe Cosco can achieve its target of 12-month deliveries by end-2011, bridging the gap with its peer, Yangzijiang (10-11 months).

Aggressive bidding for offshore contracts. Cosco is bidding aggressively in the offshore space against Singapore yards as seen in recent bids for Maersk CJ70 harsh-environment rigs (that were awarded to Keppel Corp). We believe Cosco will benefit from the recent rush in premium jack-up rig orders given its long-time ambition to establish a track record in the offshore space. We believe that as Singapore yards get booked out progressively, rig owners may start to source from second-tier yards such as Cosco with some prior experience in rig-building.

4Q10 preview. Cosco is due to announce 4Q10 results on 22 Feb. We forecast a net profit of S$50m (+260% yoy, -10% qoq). Consensus is also expecting S$50m. The qoq dip would be due to lower revenue from fewer vessel deliveries. We believe shipbuilding gross margins could continue to inch up to 6.5-7%.

Source