The Straits Times / The Business Times News on Cosco

Cosco wins US$202m rig-building job

Second rig order comes even as yard gets mixed reviews for Q1 results

COSCO Corporation, the Singapore-listed shipyard and bulk carrier unit of China's biggest shipping group, has announced its second offshore rig building contract, as analysts give the group mixed reviews after a lacklustre first quarter.

Cosco said yesterday that Cosco Zhoushan Shipyard, a subsidiary of the group's 51 per cent-owned China-based Cosco Shipyard Group, has been awarded a US$202 million contract by Norwegian company Red Flag to build a semi-submersible rig hull.

The GM5000 hull comprises a dynamic positioning system, accommodation and ballast system, and will be outfitted with conventional drilling equipment capable of drilling to 1,500 metres.

The rig, scheduled for delivery by end-2009, is designed to operate and function in the harsh North Sea environment, including the Norwegian continental shelf.

The design is that of a sister rig GM4000 ordered by Marine Accurate Well (Maracc) from the Zhoushan yard earlier this year, which marked the group's first foray into rig building.

This new contract 'is a vote of customer's confidence in the capability of Cosco Zhoushan Shipyard', Cosco said in a statement.

Cosco has attracted mixed reviews after lacklustre Q1 results in which revenues went up 33 per cent to $355.8 million while net income grew only 12 per cent year-on-year.

Describing the results as 'uninspiring', Citigroup called a 'sell' on Cosco shares, noting that if it were not for a 96 per cent surge in miscellaneous gains the group would have likely seen a year-on-year decline in Q1 net earnings.

Cosco attributed the margin decline to a change in product mix as the group began to take on more offshore projects that involved lower economies of scale at early-stage development.

Citigroup also noted the moderating effects of the winter season with its shorter working hours, and offshore marine set-up costs.

The shipyard group's Q2 performance will depend on smooth execution at the Zhoushan yard's new facilities, the investment bank added.

'We continue to believe that the risks to execution are high with their new facilities and arguably even higher with their recent move into offshore construction,' it said. 'With tight delivery of some of the offshore orders and the group's lack of experience, problems could emerge as early as end-2007.'

But issuing 'buy' calls on Cosco shares, two other brokerages - Phillip Securities and Kim Eng - said a changing product mix, the winter slowdown and ramping up for higher-value repair and offshore engineering brought about Cosco's lower-than-expected Q1 results.

Both noted that Cosco is on track in terms of order book, business strategy and expansion plans.

Citigroup rates Cosco shares with a target price of $2.58 while Phillip Securities and Kim Eng see fair value of $3.32 and $3.21 respectively.

Cosco shares closed up 0.7 per cent at $2.79 yesterday.