Brokers' Take

Cosco Corp, Sept 16 close : 90.5 cents

17 September 2004
The Business Times

DBS Vickers Research, Sept 16

BUY
COSCO'S MOU to acquire a 51 per cent stake in Cosco Shipyard Group has progressed to a proposed acquisition stage. The $119 million price tag is in line with our expectations. Cosco Shipyard Group's profit guarantee of at least 200 million yuan (S$41.4 million) for FY04 was slightly ahead of our earlier estimates of $34 million. The deal, when completed, will boost Cosco Corp's net earnings by $21 million (up 29 per cent) to $92.8 million for FY05 and will lead to FY05 PE (price-earnings) falling to 10.2 times. Maintain BUY with adjusted $1.17 price target.

GK Goh Research, Sept 16

BUY
COSCO Corp has entered into a conditional agreement to acquire a 51 per cent stake in sister company Cosco Shipyard Group for $120 million. Assuming the deal, and SembCorp Marine's deal to buy a 30 per cent stake in Cosco Shipyard are completed, Cosco Shipyard Group's shareholding structure will be: Cosco Corp Singapore (51 per cent), SembCorp Marine (30 per cent), Cosco Guangzhou (8 per cent), Cosco Shanghai (8 per cent) and Cosco Tianjin (3 per cent).

Cosco Corp will fund the deal by cash through borrowings, raising net debt to equity ratio from 44 per cent to 82 per cent.

Our forecasts assume Cosco Shipyard to post earnings growth of 26 per cent in FY05 to hit $57 million, on the back of maiden contribution from Cosco Zhoushan and stable contributions from Cosco Dalian and Cosco Nantong as the yards are at maximum capacity. For FY06, growth from Cosco Dalian will resume assuming contribution from the new VLCC dock.

Assuming the acquisition is completed by year-end, the deal will raise Cosco Corp's net earnings by $24.6 million, or 35 per cent, to $94 million in FY05.

The acquisition will lower Cosco Corp's FY05 PE from 13 times to 10 times. Our SOP value for Cosco is $1.23.

Maintain BUY. We like Cosco Corp as a proxy to play the booming ship repair industry in China, given its strong market position as a state-owned shipping company and the largest ship repair company in China. Its shipyards rank among the top 10 by sales in China, and it is drawing fat margins in excess of 20 per cent for the two largest yards under its fold.

Compiled by KENNETH LIM