Brokers' Take

Cosco Corporation

Aug 25 close: S$1.54
KIM ENG RESEARCH, Aug 24

FROM our recent meeting with management we understand that Cosco's 51 per cent-owned marine services arm Cosco Shipyard Group (CSG) is on track to enter the rig-building market. Cosco reckons that the yard will be able to offer new rigbuilds within the next six months, which is ahead of our expectations. Cosco plans to source rig-building contracts from the Chinese national oil companies before expanding its marketing reach to international customers, likely in conjunction with SembCorp Marine.

CSG is also progressing well in its drive into the offshore sector, led by Cosco Dalian. It is completing work on its new onshore sites and workshops for conversions and new building projects. However, given its physical capacity constraints, its mega Zhoushan shipyard will be CSG's main centre for offshore sector work. Earlier this month, Cosco announced it had secured new building and conversion contracts totalling US$74.8 million for its first floating storage and offloading Unit (FSO). These works will be carried out in Zhoushan.

CSG's massive Zhoushan shipyard expansion is largely on track. Specifically, CSG is lengthening an existing dock from 292m to 540m (300,000 dwt); the addition of two dry docks of 80,000 dwt and 300,000 dwt; three new berths; and a new hull workshop by mid-2007. CSG is also scouting for a new yard site along China's southern coast to supplement its yard in Guangzhou. Cosco sees good opportunities in the south due to its proximity to Hong Kong, and is likely to confirm any such acquisition by early 2007.

Cosco has clarified its stance on the possible disposal of its bulk carrier business. The company is willing to divest the business to its parent in order to focus on its core marine services business. However, it is concerned about the income gap that such a divestment would create.

Although management acknowledges that the purchase of a 19 per cent stake in CSG not held by itself or SembCorp Marine would help offset the income loss, such an asset swap is unlikely to occur this year as Cosco sorts out these issues.

Hence, we maintain our 'buy' recommendation and forecasts. Cosco's cost structure enables CSG yards to be among the most competitive internationally, while ties to SembCorp Marine provide a technical edge. Its entry into the buoyant offshore sector will likely accelerate earnings over the medium term. We maintain our target price at S$1.86.

BUY