Share Price S$0.800
Target Price S$0.84
Emerging From The Woods; Upgrade To HOLD
COSCO (S) is poised to secure two drilling jack-up orders with an estimated value of US$200m. This will raise its contract wins to US$2.3b ytd, on track to meet our projection of US$2.5b for 2013. Given a likely new dry-bulk shipbuilding cycle from 2014 onwards, we upgrade the stock to HOLD. We expect better yards like YZJ to benefit first. Our target price is raised from S$0.70 to S$0.84. Entry price: S$0.75 and below.
On track to meet our 2013 contract win projection. COSCO Corp (S)’s (COSCO (S)) shipyard arm is poised to clinch two LeTourneau C240- design drilling jack-up rig orders from ICE, a 50:50 joint venture between KS Energy and Mexican infrastructure and engineering conglomerate ICA. We estimate the shipyard contract value of these rigs at US$400m (US$200m apiece). This will raise COSCO (S)’s contract wins ytd to US$2.3b, on track to meet our contract win projection of US$2.5b for 2013 (2012: US$2.1b; 2011: US$1.9b). We estimate offshore projects account for 80% of its ytd contract wins. While COSCO (S) is still on a learning curve, it was among the few Chinese shipyards that ventured into the offshore segment in the last oil cycle.
A new dry-bulk shipbuilding cycle to unfold after a 3-year lull. Notwithstanding a seasonal upturn in July-October, the trend of the Baltic Dry Index (the BDI is a barometer of dry-bulk ship earnings) thus far in 2013 suggests dry-bulk ship earnings have bottomed. The BDI averaged 1,037 ytd, marginally higher than 2012’s 919 (2011: 1,548; 2010: 2,749). Dry bulk orderbook - peaked at 323.2m dwt (or at an enormous 76% of dry bulk trading fleet) in 2008 - has gradually shrunk on vessel deliveries and cancellations over the last five years. Orderbook - currently at 129.4m dwt (18% of trading fleet) – is returning to normal level. 2014 could see the beginning of a new dry-bulk shipbuilding cycle.
Emerging from the woods. COSCO (S) continues to gain traction in offshore engineering. Coupled with a potential new dry-bulk shipbuilding cycle from 2014 onwards, COSCO (S)’s P/B of 1.3x for 2013 valuation is near cyclical trough level of 1.1x, but with a mere ROE of 4%, it is still more expensive than Yangzijiang Shipbuilding which is also trading at 1.3x 2013F P/B but it commands a higher ROE of 16%.
No change in our earnings forecasts. We maintain our contract win projections of US$2.5b each for 2013 and 2014, and US$3.5b for 2015. Gross orderbook as of end-Jun 13 stood at US$6.7b, higher than 1Q13’s US$6.4b.
Upgrade to HOLD. We raise our target price from S$0.70 to S$0.84 which is premised on 1.3x 2014F P/B. COSCO (S)’s 1-year forward P/B mean since 2009 (excluding the pre-2009’s meteoric P/B) is 2.2x. We prefer YZJ (YZJ SP/BUY/Target: S$1.32) over COSCO (S) as the beginning of a new cycle is expected to benefit stronger yards first. YZJ has an excellent track record in execution.
Accumulate on dips. For COSCO (S), we recommend an entry level below S$0.75. Current share price is partially buoyed by positive sentiments on dry-bulk shipping-related stocks on the back of a seasonally high BDI. We expect a seasonal correction in the BDI from November onwards to a trough level in end-January/early-February during the Chinese New Year period.
Share Price Catalysts
Margins and contract wins.
Publish date: 11/10/13