Cosco

Cosco: Weak set of 1Q13 results which were below estimates. Revenue at $733m, -25% y/y, while net profit at $9.4m, -65% y/y. Cosco’s bottom-line was also largely impacted by a decline in other income, at $10.9m -75.4% y/y, mainly due to lower sale value of scrap materials and a currency exchange loss of $4m vs a profit of $15.3m y/y. Weak performance was attributed to a decrease in shipyard revenue, as turnover from shipyard operations -25.5% y/y due to lower revenue contribution from the ship repair and ship building segment. The group however saw better performances from its dry bulk shipping and other businesses, which recovered 7.8% y/y to $13.8m for the quarter, as the BDI registered modest gains of 212 pts during the period to end at 910 pts by 1Q13. Going forward, Cosco expects a difficult year for its shipbuilding business, noting that the group will continue construction in 2013 on new shipbuilding contracts that were secured in 2010 to 2012 at low contract values due to the slumping bulk carrier shipping market then. Also expect operating margins on new shipbuilding projects to be under pressure, due to the appreciation of Chinese yuan, higher financing costs, higher raw material costs and heightened competition from offshore marine entrants. We note that Cosco’s total order book currently stands at US$6.4b, which underpins earnings visibility till 2015. We caution however that YTD, Cosco has only secured US$254m worth of orders and management expects to secured US$2b in offshore orders for 2013, which could prove to be a daunting task, in light of the weak industry outlook. At current price, Cosco trades at 1.5x P/N and 32x forward P/E. Various broker ratings as follows: Deutsche maintains Hold with $0.90 TP CIMB downgrades to U/p and slashes TP to $0.46 from $0.98 Maybank-KE reiterate Sell with $0.73 TP UOB Kay Hian maintains Sell with $0.88 TP