Cosco

Cosco: very poor 2Q11 results, 60% below consensus forecast.
Revenue was up 3% yoy, but net profit dived 53% yoy to $31.9m. Sequentially, 2Q11 net profit was even lower than 1Q’s already weak quarter of $37.1m.

Gross profit declined 38% yoy due to lower profit from ship repair and conversion, and marine engrg projects, as well as lower dry bulk charter rates.
Despite a guided 8% gross margin for its yard operations, mgt said it booked additional costs on expected losses for certain offshore/shipbuilding projects. The co estimated the offshore gross margin also at about 8% vs previously guided double-digit percentage margin, due to higher R&D costs and cost overruns arising from a steep learning curve.
The bulk shipping was impacted by weaker rates, with the business just barely profitable.
The poor operating performance was aggravated by a higher tax rate due to lower tax-exempt shipping profits and lower deferred benefits.

Outlook is poor, with mgt warning of many uncertainties in 2H11 and possible client requests to delay deliveries due to the poor financial market outlook (note that one bulker order was cancelled in 1H).
The outstanding order book stands at US$7b, with dry bulk making up over 50% of vessels on order. Although Cosco says it will continue to secure new orders to keep the shipyard running beyond 1Q13 at the expense of potential poorer margins, new order outlook looks dismal.
Mgt expects interest rates to increase further in 2H11, RMB to appreciate further against the USD, and labour costs to keep rising. While the key initiative now is to reduce the number of inefficient contract workers, Cosco’s SOE status may reduce its flexibility to do so.


Seeing a number of significant downward earnings revisions from the Street. Accordingly, ratings and target prices have also been cut. The majority of TP now cluster around the $1.20-1.50 levels.
Deutsche, Citi downgrade to Sell from buy, halve TP to $1.25, $1.50 rptvly.
CIMB downgrades to Underperform from neutral, slashes TP to $1.40 from $2.30.
BNP keeps at Reduce, lowers TP to $1.30 from $1.54.
Credit Suisse maintains Underperform, lowers TP to $1.20 from $1.60.