Order cancellations could torpedo Cosco: Maybank

Competing shipbuilder Yangzijian has suffered eight carrier cancellations, and Cosco's equally vulnerable.

Here's more from Maybank Kim Eng:

With persistent weak outlook in the shipbuilding market, Cosco’s richer valuation relative to peers is simply unjustified. Why should a yard faced with tough domestic competition in China, faltering shipbuilding orders and weak offshore margins, trade at a higher valuation than established Singapore and Korean rig-building yards?

Things could get worse before they get better. Order cancellations could become more prevalent. Fellow shipbuilder Yangzijiang already had eight bulk carrier orders cancelled in 2Q12, mainly due to customer funding difficulties. This could prompt another round of sector-wide de-rating. Due to its strong PRC government links however, Cosco is unlikely to go bust. In the long run, it should emerge stronger from the current industry downturn.

Recovery seen only from 2014. However, we expect the shipping market to recover only from 2014 if ship supply tightens. One sign would be if the current global orderbook-to-fleet ratio falls further towards the 10% level. Currently, it stands at 17.9%, from a peak of above 50% in 2008. Another sign could be more orders for bigger and fuel-efficient ships, as shipping lines combat high bunker prices and prepare for low-emission requirements. AP Maersk-Moller has led the trend with orders placed for 18,000 TEU fuel-efficient containerships.

Offshore orders only help it stay afloat. Orders are not at a complete stop. Cosco recently announced a USD200m harsh environment accommodation semi-sub contract, bringing YTD orders to USD1.55b. However, the majority are offshore orders and Cosco has yet to demonstrate satisfactory profitability on these projects. Nevertheless, they do help to fill yard capacity and support fixed costs, which is the key surviving strategy for many Chinese shipyards currently.

While we are positive on the offshore sector, Cosco is not ready to ride this wave. We cut FY13F-14F net profits by 6-8% on lower margin assumptions.

Reaching the people who run Asia's businesses is harder than it used to be.

Inboxes are crowded. Attention is short. The executives you most want to reach — the founders, CFOs, and operators who actually move budgets — are the hardest to find through the usual channels. If you're building a company, a category, or a reputation, you already know this.

We've spent twenty years building the room they read. Singapore Business Review is where senior decision makers in Singapore and across Southeast Asia come for business coverage they can't get elsewhere — in print, online, and in person at the summits and roundtables we host across seven markets.

If you have something these readers should know about — a point of view worth publishing, a product worth their attention, an event worth their time — we'd like to hear what you're trying to do.

Book a meeting

| Or download the media kit (PDF)

240,000 senior readers quarterly in print Top 1,700 Singapore companies reached

7 markets across Southeast Asia