Published December 31, 2008

Cosco warns of lower full-year profits

Doubtful debts and higher shipbuilding, offshore marine costs take toll

By KALPANA RASHIWALA

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COSCO Corporation (Singapore) has warned that the group will post lower profits for the year ending Dec 31, 2008, compared with the previous year, due to doubtful debts and higher costs for shipbuilding and offshore marine contracts.

The major shiprepair, shipbuilding and marine engineering group posted net profit of $336.6 million for the financial year 2007, up 64 per cent from FY2006.

Cosco's FY2008 results will be released on Feb 23, 2009.

In a profit guidance issued yesterday, Cosco said that the company's shipbuilding subsidiaries recently received requests for delays in making payments by several shipowners, in light of the adverse global economic climate and the deteriorating market conditions facing the shipping industry over the past few months.

'Accordingly, provisions will have to be made for doubtful debts,' Cosco said.

In addition, the group has faced increased operational costs for several shipbuilding and offshore marine contracts, as a result of the jobs exceeding their original budgets.

The cost overruns arose from several factors, including the significant jump in steel prices. Also contributing were higher ancillary outsourcing and subcontracting costs, and tighter pre-delivery inspection procedures imposed by shipowners facing current unfavourable market conditions.

Yet another factor was additional operational and development costs incurred due to the unwillingness of some residents to vacate their properties which were originally planned for acquisition by the group for shipbuilding purposes.

'These operational issues have also contributed to some delivery delays. Accordingly, the group will assess the various causes of delay and consider the need for provisions for the payment of penalties under these contracts, if necessary,' Cosco said.

'To address the operational costs issues, the group will, with the increased experience that it has gained in shipbuilding and offshore marine construction, carry out an operational review of the various shipbuilding units to identify areas for improvement and the appropriate actions that need to be implemented to enhance the group's capabilities and efficiencies in these areas,' it added.

In a separate announcement, Cosco said that subsidiary Cosco (Zhoushan) Shipyard Co has agreed to reschedule delivery dates for seven 57,000 deadweight ton (dwt) bulk carriers, following requests from a European shipowner and an Asian shipowner that had contracted for the vessels.

The delivery dates of four of the vessels have been rescheduled from between February 2010 and June 2010 to between February 2011 and November 2011, while the delivery dates of the other three vessels have been changed from between August 2009 and November 2009 to January 2012.

Cosco said that the changes in delivery dates are not expected to have any material impact on the company's net tangible assets and earnings per share for FY2008.

Cosco also announced that Cosco (Zhoushan) has completed the construction of its first 57,000 dwt bulk carrier. The vessel is undergoing test and sea-trials. 'Upon successful completion of the sea-trials, the vessel will be delivered to its owner,' the group said.