Cosco Corporation Ltd: Cancellation of a bulk carrier

Downgrade to Trading Sell from Outperform. Cosco has announced the cancellation of an order for a 79,500 dwt bulk carrier by an unnamed Asian ship-owner. We deduce from Clarksons that the ship owner could be Hong Kong-based Vanship Holdings, which had ordered such a vessel for delivery in Mar 12. If we are right, about 20-30% of the work has been completed, starting from project steel-cutting in Nov 10. We downgrade Cosco on fears of a resurgence of order-cancellation risks as owners react to weaker global-market sentiment as well as near-term downward pressure on steel prices. Our earnings estimates are unchanged, pending clarification with management. However, we now peg Cosco at 11x CY12 P/E (from 18x) to reflect its average trading band during the last crisis given the near-term headwinds, with a lower target price of S$1.74 (from S$2.85). We expect knee-jerk selling following this order cancellation.

The news
One bulk-carrier cancellation. Cosco Dalian has announced the cancellation of a shipbuilding contract for a bulk carrier of 79,500 dwt by an Asian ship owner. Work has commenced and Cosco Dalian will be compensated for the cancellation.

Comments
Asian owner could be Hong Kong-based Vanship Holdings. According to Clarksons, the only Asian-based ship owner is Vanship Holdings with orders for two 79,500 dwt bulk carriers in Cosco’s order book (contracted in 2008). The first unit could have been delivered recently as naming ceremony for the vessel took place in Dec 10. The second unit is due for delivery in Mar 12. Steel cutting had started in Nov 10, representing 20-30% of project completion.

Is this the beginning of another wave of cancellations? Pending clarification with management, we conservatively categorise vessels ordered before the crisis with deliveries scheduled for 2012 as risky projects subject to cancellations. We deem 2011 deliveries as safe as much work would have been completed with significant progress payments, too much for ship owners to forego. We fear that more owners could cancel orders citing current weak global-market sentiment as the reason.

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