Below expectations, maintain Sell. Cosco reported 2Q13 revenue of 890.3m (-9% YoY, +21% QoQ), with PATMI of SGD12.0m (-56% YoY, +24% QoQ). Results were weaker than our below-consensus forecasts. We highlighted downside risks to our estimates in our results preview. 1H13 net profit makes up only 35% of our previous FY13F forecast. The weak set of results was attributed to a decline in shipbuilding and ship repair activities which more than offset the revenue growth from the marine engineering segment. Cosco continues to paint a weak outlook on near term prospects as Chinese shipbuilding sector remains in doldrums. Maintain Sell, with TP of SGD0.65, pegged to 1.1x P/B.

Margins under further pressure. Operating margins continue to be under pressure, trending lower sequentially to 4.1% (1Q13:5.7%). We believe that yard underutilisation in the next few quarters would cap any meaningful margin upside even if Cosco turns in better execution for individual projects. Yuan appreciation against USD, wage increases, raw material cost increases and higher finance cost would further suppress overall margins.

Orderbook catching up but execution still uncertain. Offshore order win momentum however has been strong lately pushing YTD order wins to about USD1.2b. Our forecast is for USD1.8m in new orders this year. Net orderbook is seeing an upward trend and now stands at USD6.7b. However, order win momentum is unlikely to fuel any share price upside as execution remains a key uncertainty.

High gearing is another key concern. We flag the rising debt level which has pushed net gearing higher to 0.86x (1Q13:0.82x) as Cosco took on more borrowings to fund its shipyard operations. About SGD1.3b out of total debt of SGD3.7b are current and refinancing would likely be at higher cost.

Maintain Sell, TP SGD0.65. We see consensus earnings cut following this set of weak results, which would weigh down on the stock. We cut FY13F-15F net profits by by 27-36%. Our TP of SGD0.65 is pegged to 1.1x P/B, which is one standard deviation below its mean.

Source: Maybank Kim Eng Research - 2 Aug 2013