Cosco Research Report

by UOB Kayhian (24 April)

DURING our visit to its shipyards last week, Cosco showcased the expansion of its yards in Guangdong (shipbuilding), Lianyungang (ship repair and conversion) and Qidong (offshore).

Cosco Guangdong's shipbuilding capacity is expected to grow from about S$200 million in 2009 to S$900 million in 2012, while Cosco Lianyungang's ship repair and conversion capacity is expected to grow from S$90 million in 2008 to S$450 million in 2012.

The new Cosco Qidong site is expected to have new offshore building capacity in excess of S$1.2 billion when completed in 2010.

We see orders for shipbuilding, in particular for dry bulk carriers, slowing in 2008. However, we expect this to be offset by an increase in orders for offshore-related projects, in particular shuttle tankers, given the expected growth in floating production systems in the coming years.

During our visit, we double-checked the steel requirement on a volume (ton) basis for Cosco's major shipbuilding and offshore contracts. We estimate the potential impact on Cosco's shipbuilding projects at 6.6-8 percentage points for shipbuilding projects and 1.5-3.6 percentage points for offshore projects, when factoring in steel prices of US$1,100 per ton versus Cosco's average budgeted steel price of US$800 per ton.

As our earnings forecasts already assume steel prices of US$1,100 per ton versus the current level of US$900 per ton, we are not revising our earnings forecasts. Chinese shipbuilders like Yangzijiang and JES International generally report gross margins of about 25 per cent and up for bulk carrier new builds; and for Cosco's bulk carrier new builds, we are assuming gross margins of about 16 per cent.

We have adjusted our earnings marginally (2008: -2.3 per cent, 2009: -3 per cent, and 2010: +3 per cent) to factor in the cancellation of the GM5000 semi-submersible rig hull contract and increased shiprepair revenue from contributions from new yard capacity.

-Research Report by UOB Kayhian (24 April)