Cosco Corp (KE)

Event

Cosco has undergone some routine management changes, with a new president and executive director installed due to its group-wide rotation policy. We see no positive or negative implications from the new appointment. The focus remains Cosco’s muted prospects and the negative sentiment towards the stock. We are cutting our target price to $0.72 on our lowered SOTP valuation, given the weak market outlook. Reiterate SELL.

Our View

Mr Jiang Li Jun has relinquished his position as Cosco’s president and has been replaced by Mr Wu Zi Heng. Mr Wu has been with the Cosco China group since 1982, but mainly in shipping operations. While Mr Jiang was successful in steadying the business at his appointment in 2008, Cosco has not taken any significant leaps forward during his tenure. We do not expect Mr Wu to be able to make any immediate impact, especially in the current weak market environment.

Cosco will continue to execute on its sizeable US$6b orderbook. However, margins will still be depressed due to learning curve issues on the offshore sector. Bulk shipping newbuilds are still dogged by execution issues and low pricing. Our outlook for new order wins is also not positive, and even if there are new contracts, they may be secured at the expense of margins just to utilise capacity.

Our revised sum-of-the-parts valuation of Cosco indicates a lower fair value of $0.72. Key assumptions include an earnings multiple of just 10x for its core FY12F shipyard earnings, while the market value of its bulk shipping fleet is calculated by applying a 50% discount to its book value.

Action & Recommendation

Cosco’s stock price has declined by 13% since we cut our recommendation to SELL. With shipyard multiples set to head lower in the current market environment, we further reduce our target price to $0.72, based on our new SOTP valuation. Our forecasts remain unchanged, supported by the group’s current US$6b orderbook. However, the outlook for bulk carrier newbuilds appears bleak and the offshore market is dead quiet. Reiterate SELL.