Cosco

Cosco: Weak set of results which was in-line, although improved gross margins could catch the eyes of investors, although note that higher margins could be a once-off event. Rev at $975.3m, -2% yoy and flat qoq, while net profit at $27.6m, -13% yoy and flat qoq. Gross margins improved at 12% vs 7.5% yoy and 10.1% qoq, due to the reversal of prior loss provisions and higher profit contributions from higher margin ship repair & conversion and marine engineering projects. Overall drop in earnings was due to lower profit contributions from its dry bulk shipping operations and a decline in rev from its shipyards, mainly from the ship building segment. Grp’s other income also fell 45% to 33.9m mainly due to lower sale value of scrap materials and a one-off net gain on disposal of subsidiaries in 2Q11. Going forward, grp expect operating margins on new shipbuilding projects secured in 2010 to be under great pressure as they were secured at low contract values. In its offshore marine engineering operations, Cosco expressed its intention to enhance its offerings and expects to meet with higher costs during the execution of the new products. We note that grp has an order book value of US$5.9b, with progressive deliveries up to 2014, while Ytd grp has secured orders worth apprx US$1b, while balance sheet is deteriorating with borrowings now at 1.2x Debt/Equity and 0.3x Debt/Assets vs 0.6x Debt/equity and 0.16x debt/assets yoy. At current price, grp trades at an annualized 17x FY12E P/E. Ratings as follow: Deutsche maintains Hold with $0.95 TP Maybank KE maintains Sell with $0.73 TP Nomura maintains Reduce with $0.69 TP OCBC maintains Sell with $0.84 TP UOB Kay Hian maintains Sell with $0.84 TP