Brokers' Take

Cosco Corporation

May 7 close: S$2.70
CITIGROUP RESEARCH, May 4

CONTRACT from Jinhui: According to a recent article from Tradewinds, Asian Bulker owner Jinhui Shipping & Transportation Ltd has contracted eight 57,000-dwt bulkers to be built at Shanghai Shipyard. Jinhui will pay a high price of around US$41 million per ship because of early delivery - two are due at the end of 2008, four in 2009, and two in 2010.

The article stated that such vessels for delivery in 2010 are currently going for around US$36 million-US$37 million each.

Contract from parent: Recall that Cosco Corp (COS) recently announced a contract for 10 bulk carriers of 57,000 dwt each from Qingdao Ocean Shipping and Cosco Bulk Carrier, both subsidiaries of China Ocean Shipping (Group) Company, for a total contract value of about US$338.9 million (or about US$33.9 million per ship) and to be delivered between June and December 2008.

Best interest for shareholders? Apart from utilising space at Cosco's yard, which arguably could be used for other higher-margin projects, investors may question the pricing of this related transaction.

Although Jinhui is paying a higher US$41 million per ship, their delivery will be spread up to 2010. Cosco, on the other hand, will deliver all 10 ships to their parent by 2008 at 17 per cent cheaper. Note that recently Jinhui paid US$40.5 million (resale) for a smaller 53,000-dwt bulker.

Still a 'sell': In their quest to build up the order book, our fear is that COS may be over-promising on delivery dates, which could hurt them at a later stage. While one may overlook this for an experienced yard, COS is new to the game with their new facilities, lack of offshore experience and take-up.

SELL

Compiled by UMA SHANKARI