Brokers' Take

Cosco Corp

August 3 close: $2.47

DBS VICKERS SECURITIES, Aug 3

COSCO has delivered strong 2Q05 results that exceeded expectations. Net profit surged 109 per cent y-o-y to $39.4 million, fuelled by robust contribution from CSG as well as higher shipping earnings from higher charter rate renewals.

Turnover in 2Q05 surged by 665 per cent y-o-y to $210.7 million following the consolidation of CSG effective this year. Gross profit surged 532 per cent to $71.4 million. Gross margins, not unexpectedly, narrowed from 41 per cent to 34 per cent y-o-y as shiprepair now makes up a larger proportion. Sequentially, margins improved, underpinned by higher shiprepair yields and full impact of three charter renewals in Q1. Contribution from shiprepair is around 49.5 per cent of total net profits compared with 45 per cent in 1Q05.

Two new berths (200 metres and 300 metres in length) in Zhoushan were completed in May 2005, bringing the total number of berths to three. There are plans to extend the dock from 300 metres to 520 metres, so it can undertake repairs of two vessels simultaneously from May 2006. Dalian will have a new 300,000-dwt floating dock that should be operational in October.

At Nantong, a new platform with an additional 23,000 sq metre workspace was completed, and a berth was leased from a related company. Nantong can now handle 18 vessels (from 14) simultaneously. Cosco also added two new bulkers to its fleet.

We expect Cosco to announce the award of more higher value added projects such as conversions. We believe that Cosco is exploring the possibility of acquiring a Panama-based shiprepair yard targeting the VLCC (very large crude carrier) market. We believe that Cosco may expand capacity at its other China yards and possibly increase its presence in China through mergers and acquisitions.

We have revised our FY05-07 estimates to account for higher yields from CSG, and consequently our target price to $2.76, based on 5 times PE for shipping and 18 times FY07 shipyard earnings. This works out to 21.3, 16.8 and 14.4 times based on earnings for FY05-07, respectively.
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- Compiled by JOYCE KOH