Share Price S$0.73
Target Price S$0.85
Poised For A Comeback In 2014?
We estimate ytd contract wins at US$3b, surpassing our projection of US$2.5b. We raise our 2014-15 net profit forecasts by 7-13% on higher contract win assumptions of US$3.0b each for 2013 and 2014 (previously US$2.5b). Improved dry-bulk shipping sentiments, if they continue throughout 2014, could spark a new dry-bulk shipbuilding cycle. Poor earnings (as a result of cost provisions) are currently dampening share price upside. Maintain HOLD. Target price: S$0.85. Entry price: S$0.70.
• Better-than-expected contract wins. We estimate COSCO Corp (S)’s (COSCO (S)) contract wins ytd at $3b (2012 estimate: US$2.1b), of which S$2.5b are offshore-related projects and the balance S$0.5b shipbuilding contracts. Contract wins have exceeded our projection of US$2.5b (S$2.0b offshore and S$0.5b shipbuilding) for 2013.
• Improved dry-bulk shipping sentiments. Dry-bulk shipping rates appear to have emerged from their cyclical bottom. While 4Q is typically a seasonally high period for dry-bulk shipping, the Baltic Dry Index (BDI) - currently at 2,156 after its recent peak of 2,337 on 12 Dec 13 - is three-fold of its level of 720 a year ago. If dry-bulk shipping rates continue to improve throughout 2014 (notwithstanding a seasonal low in 1Q14), shipyards are likely to see a new dry-bulk shipbuilding cycle. Traditionally, Chinese shipyards dominate in the global building of dry-bulk carriers.
• A new dry-bulk shipbuilding cycle is likely to unfold after a 3-year lull. Global dry bulk shipbuilding orderbook - which 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 142.2m dwt (18% of trading fleet) – is returning to normal levels. 2014 could see the beginning of a new dry-bulk shipbuilding cycle.
• Range-bound for the time being. We believe COSCO’s share price is seeing support from improved dry-bulk shipping sentiments, but its upside is capped by poor earnings which are affected by resumption in provisions for project cost over-run. The group is still on a learning curve for certain offshore projects. Another share price dampener is its DP3 Deepwater Drillship legal dispute. The customer of this vessel has terminated the order and requested for a refund of US$110m plus other payments. COSCO (S) is in contact with several potential buyers (international customers) to acquire the drillship.
• But emerging from the woods. Nevertheless, COSCO (S) continues to gain traction in offshore engineering while an earnest new dry-bulk shipbuilding cycle could unfold in 2014. COSCO (S)’s P/B of 1.3x for 2013 is near the cyclical trough level of 1.1x, but with a mere ROE of 4-6% for 2014-15, it is still more expensive than Yangzijiang Shipbuilding (YZJ) which is trading at 1.2x 2013F P/B but commands a higher ROE of 13-14% for 2014-15.
• Raise 2014-15 net profit forecasts by 7-13%. We raise our annual contract win projections for 2013 and 2014 from US$2.5b to US$3.0b each but maintain our projection of US$3.5b for 2015. As a result, our net profit forecasts for 2014 and 2015 are increased by 13% and 7% to S$63.0m and S$93.0m respectively, but our forecast for 2013 is relatively unchanged.
• Maintain HOLD. We raise our target price marginally from S$0.84 to S$0.85, based on 1.3x 2014F P/B. COSCO (S)’s 1-year forward P/B mean since 2009 (excluding the pre- 2009 meteoric P/B) is 2.2x. We continue to prefer YZJ (YZJ SP/ BUY/Target: S$1.39) over COSCO (S) as the beginning of a new shipbuilding cycle is expected to benefit stronger Chinese yards first. YZJ has an excellent track record in execution.
• Accumulate on dips. For COSCO (S), we recommend an entry level of S$0.70 and below. Current share price is partially buoyed by positive sentiments on dry-bulk shippingrelated stocks on the back of a seasonally high BDI. We expect a seasonal correction in the BDI in the near term to a trough level in end-January/early-February during the Chinese New Year holidays.
Publish date: 20/12/13