COSCO

COSCO: 2Q14 results were broadly in line. Net profit increased 19% to $14.3m, while top line grew 29% to $1.1b, on increased ship repair, ship building and marine engineering segments. Gross margins slid 2.7ppt to 8% on lower contributions from shipyard operations. Had it not been for lower depreciation charge, gross margin would have been nearer at 7.3%. Nevertheless, bottom line was buoyed by a 122% increase in other income of $35.4m, derived from mostly the sale of scrap materials and interest income. Order book at 31 Jun stood at US$8.1b with progressive deliveries up to 2016. While the order book appears healthy, the wide span in product types presents execution risks, which COSCO can ill afford, given already low margins. On ytd order wins, US$821m (41% of US$2b target) were secured. Maybank-KE reckons that the US$2b target is unlikely and cuts forecast to US$1.5b. Going forward, management expects margins to remain pressured as new projects were continued to be secured at low values. That said, management will narrow focus towards certain product types to mitigate execution risks. IN addition, management expects margins to remain under pressure as new projects were secured at low contract values. Management will be focusing on fewer product types to mitigate execution risks. COSCO currently trades at 1.2x P/B, relative to Yangzijiang at 1.1x P/B. Latest broker ratings: Maybank-KE maintains Sell with TP trimmed to $0.67 (from $0.68) Deutsche Bank maintains Hold with TP $0.75 OCBC maintains Sell with TP $0.61