Very weak set of results, maintain Sell. Big earnings miss in 1Q13 results with reported revenue of SGD733.0m (-25% YoY, -13% QoQ) and PATMI of SGD9.7m (-65% YoY, -59% QoQ). Net profit made up only 9% of our and 10% of consensus’ full-year forecast. Shipbuilding outlook remains bleak with margins expected to deteriorate further into the year. Maintain Sell and TP of SGD0.73 pegged to 1.3x trough P/BV.

Margins under pressure. Cosco expects margins to contract further into the subsequent quarters due to lower-price contracts in its orderbook, rising labour cost and appreciating Chinese Yuan. While the company proclaims that its offshore contracts are profitable, it expects to incur higher cost in execution of new offshore product types. With a mish-mash of offshore order types, Cosco can hardly benefit from any efficiency gains due to lack of repeat execution.

USD2.0b in new orders an uphill task. Net orderbook stood at USD6.4b with only USD254m of orders secured YTD. Management however expects to secure USD2.0b in offshore orders in 2013, which we believe could be an uphill task. We forecast a more conservative USD1.8b in new contract wins. Its parent, Cosco Group, could push more vessels to dock at Cosco’s yards for repair but the net positive effect would be insignificant to offset the negatives.

Still can’t see light. Outlook for the shipbuilding sector remains uninspiring. We believe that the risk of order cancellation or payment default could emerge with rising credit tightness. Offshore contracts would meet with intense competition as other Chinese shipyards adopt the same strategy to combat the downturn.

Earnings cut, Reiterate Sell. We slash our FY13-14F earnings forecasts by 33-43% on the weak 1Q13 results and expect similar aggressive earnings cuts by consensus. Net gearing also trended up to 0.82x from 0.65x in 4Q12 as Cosco took on more borrowings to fund shipyard operations. Rich valuation at current level is unjustified given its declining profits and weak execution. Reiterate Sell with TP of SGD0.73.

Source: Maybank Kim Eng Research - 6 May 2013