Cosco

Cosco: weak 1Q12 results, below consensus. Revenues declined 3% yoy to $979m, while net profit declined 25% yoy to $28m. Gross margins declined from 11.1% in 1Q11 to 10.1% in 1Q12. The results were mainly impacted by lower dry bulk shipping revenues (due to poor charter rates), weak ship repair (135 ships repaired in 1Q12 vs 148 in 4Q11), and provisions of $13.8m due to cost overruns on O&M projects (losses in 1Q11: $20.3m, 4Q11 $74.7m). Mgt did not rule out more provisions ahead. Net debt to equity is 41% in 1Q12 from 29% in 4Q11. Cosco has an order book of US$5.8b with visibility to 2014. The group has won US$1.2b in contracts YTD - US$970m in offshore contracts and US$190m in shipbuilding contracts. Mgt expects operating margins on shipbuilding projects to remain under pressure this year (due to low margin contracts secured in 2010). As the remaining 47 units of bulk carriers on order should be delivered by 1H13, their revenue mix will increasingly shift to offshore. Cosco indicated that shipbuilding gross margins are at ~ 5%, while offshore is averaging ~ 10%. For new offshore contracts, the group is targeting 10-15% gross margins. Deutsche keeps at Hold with TP $1.10. Says conditions in the Chinese shipbuilding sector remain challenging, with vessel oversupply, tight credit conditions, yard over-capacity, declines in vessel prices, lack of orders and aggressive competition plaguing the space. Expects Cosco to be range bound in the near to medium term due to lack of stock price drivers. JPM remains Neutral with TP $1. BOA-ML maintains Underperform with TP lowered to $0.87 from $0.89. Says stock is expensive at 18x FY12e P/E and 20x FY13e P/E, given earnings headwinds. Goldman reiterates Sell with TP $0.65. Expects shipbuilding gross margins will decline in coming quarters and mgt expects borrowings (and hence interest cost) to further increase as its orderbook is increasingly made up of orders with lower margins and weaker cash payment terms.