Brokers' Take

Cosco Corp Singapore

May 4 close: $1.79

MERRILL LYNCH, May 3

STEADY as she goes: We maintain our 'buy' recommendation and raise our price objective to $2.04 from $1.83 following Q1 FY05 results. We raise FY06 earnings by 7 per cent as previous estimates were too conservative.

Net profit of $25.8 million in line: Both ship repair and shipping met expectations. Cosco reaped the twin benefits of having a higher number of vessels in its yards for repairs, as well as higher yields. Shipping revenue was strong thanks to higher renewals secured in Q4 FY04.

On track to meet our full year forecasts of $121 million: The first quarter is typically the weakest for Cosco Corp.

Ship repair stronger in 2H05: By June 2005, two new berths will be completed and operational at Cosco Zhoushan and a new 300,000 dwt (deadweight tonne) floating dock will come onstream at Dalian in mid-October.

Shipping - higher rates for vessels: Cosco renewed three vessels, all at significantly higher levels in Q1 FY05. We are confident our average charter rate assumption of US$15,307 per day (up 40 per cent year-on-year) is achievable.

Risks: Orders executed poorly, key management depart, China undergoes a hard landing, shipyard labour strikes, dry bulk rates correct sharply, Cosco's vessels are targets of terrorism or piracy, revaluation of renminbi (Chinese yuan).
BUY

KIM ENG RESEARCH, May 4

COSCO Corp posted a 127 per cent year-on-year rise in Q1 FY05 net profits to $25.8 million, marginally ahead of our estimate of $23 million. Group sales rose 567 per cent year-on-year to $165 million, led by the first-time consolidation of earnings from 51 per cent owned Cosco Shipyard Group (CSG), acquired in January.

Ship repair formed bulk of group revenue on account of CSG acquisition. Ship repair accounted for 81 per cent of sales, shipping for 16 per cent. At the net profit level, ship repair accounted for 43.4 per cent of earnings (after minorities), while shipping for 51 per cent. Repair PBT (profit before tax) was lifted by a $10.7 million gain from scrap metal sales, which management expects to remain part and parcel of the group's ship repair business. Old metal parts, derived from FPSO (floating production, storage and offloading unit) conversions and major repairs, are removed from ships and sold as scrap.

Ship repair earnings were expectedly lower in Q1 FY05 compared with Q4 FY04, as winter months in the north impacted Cosco Dalian's operations. Still, CSG posted revenue of 676 million yuan (S$134 million) in Q1 FY05, up 43 per cent year-on-year from Q1 FY04, with 141 ships repaired at an average revenue per ship of 4.8 million yuan (104 ships at average revenue per ship of 4.5 million yuan in Q1 FY04). CSG is estimated to have a 26 per cent share of the China ship repair market in 2004, with its yards ranked as overall No. 1.

Outlook robust on increased repair capacity and new charters. We remain positive on the group's earnings outlook given the increased capacity at its Dalian and Zhoushan shipyards. Shipping income is expected to remain firm on higher renewal rates this year, with the group's 13 ships fully chartered out.

'Buy' maintained on strong earnings growth outlook. We are maintaining our forecasts at this point, with fair value unchanged at $1.92, based on blended PE (price-earnings) valuation of the group's ship repair and shipping businesses. Cosco trades at FY05/06 PEs of 16 times and 13 times, or an undemanding PEGR (PE-to-growth ratio) of 0.48 times.
BUY

Compiled by JOYCE KOH