Cosco Corp

Cosco Corp: HSBC notes Cosco profits fell for 8 straight quarters, by 13%-84% y/y. Although Cosco has been successful in maintaining large order backlog (US$7.8b) from a significant number of offshore orders, the sharp drop in profitability corroborates view that offshore contracts are actually a bigger profit risk as these structures are complex and Cosco has limited experience. Even established offshore yards require at least 2-3 repeat orders to overcome the learning curve involved. Cosco is building over 10 different types of structures, all lacking scale in terms of repeat orders, with most being executed for the first time. These, per HSBC, describes the “very expensive learning curve” Cosco is going through. While Cosco has corrected to HSBC’s 1.1x forward P/B, the house reckons it has not quite corrected enough to factor in further downside risk. HSBC maintains U/W with TP cut to $0.45 from $0.55.