Cosco Corp has undergone massive restructuring over the past decade to its
current profile which boasts increasing significance of its shipyard
operations vis-à-vis its bulk shipping operations. The growth potential of
its shipyard operations is, in our view, far superior to bulk shipping due
to strategic success factors of market leadership, labour intensity, labour
cost advantage and location, which are almost tailor-made in its favour. A
play on China's inexorable rise
The stars are aligned for Cosco Corp to succeed given the industry backdrop
in China. Favourable political infrastructure augmenting natural cost
advantages should accelerate China's global maritime market share gain.
Notwithstanding, the industry is a beneficiary of the growth in China's
trade, and businesses like ship repair stand to gain as the concentration
of maritime activity along China's coastline continues to increase.
The shipyard designate within Cosco Group
Given Cosco Group's preference for streamlining separate businesses under
separate entities, Cosco Corp's history of business restructuring, and
discussions with management, we believe that Cosco Corp could be further
rationalised to a pure shipyard play through an asset swap of its 12 bulk
vessels with its parent's, Cosco Group, indirect 19% stake in the yards.
There could be further consolidation of yard assets from Nantong Cosco KHI
as well as China Cosco, given that it is emerging as the parent's shipyard
designate.
A compelling multiyear investment story
We initiate coverage with a BUY and SoTP target price of SGD5.80, which
yields 55% upside. A supporting DCF estimate with 9.3% WACC and 2.5% TGR is
SGD5.52. Like Yangzijiang, which trades at 26.5x FY08 PER, we believe Cosco
(19.2x) should trade closer to its Chinese peers (average 26.6x). Factors
such as Cosco's domestic leadership in ship repair coupled with its
fast-growing engineering and ship-building segment, China's ambition for
the industry, as well as potential asset injections makes for a compelling
multiyear investment.
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