Monday, June 24, 2013
Cosco: Continues the trend of Chinese shipyards winning contracts for offshore rigs and floating units, as it secured contracts from a Singapore entity for two high-end floating accommodation units valued at over US$170m each. Cosco (Nantong) would be converting two semi-completed hulls to complete the floating units. The units are scheduled for delivery 24 mths after the contracts are declared effective. Cosco has won ~US$700m worth of contracts YTD, CIMB think Cosco is able to meet house expectations as Upstream recently reported that the yard had signed a contract to build two deep-water drillships for US-based newcomer X-Drill, costing US$650m-700m each. Expect this contract to be formally announced soon, pending customer’s deposits and deposits and financing arrangements. House however note that the offshore segment is barely profitable with gross margin at 8-10%, with very little room for error. Cost overruns and provisions are likely to wipe out any profits from these contracts. As a state-owned enterprise, Cosco may be obligated to keep its current scale of operations and workforce, sacrificing profitability. CIMB maintains U/p with $0.46 TP. House note that until Cosco achieves stronger-than-expected earnings for several quarters, think the stock is not worth the punt despite its recent weakness.