• Significantly leveraged
• Industry restructuring ongoing
• Waiting for clarity on future plans

Tough time for yards

With the overcapacity in the industry, it has been a tough time for yards in general, including COSCO Corporation (Singapore) Ltd. New orders have dwindled for the group, and the past few years have seen it executing its order book with cost overruns as it attempts to scale the offshore learning curve.

Along with continued bank borrowings, this has resulted in the group ending up with a significantly leveraged position during a period of industry downturn – hardly an enviable position. Indeed, for the past seven years, the group had been reporting negative operating cash flow each year – the business has essentially been propped up by bank loans.

From a net cash position in FY09, the group’s net gearing has increased to 3.9x as at end 1Q16. However, the group is part of a larger stateowned entity, which is probably a major reason why operations are still ongoing.

Controlling shareholder restructuring

Last month, it was announced that the Stateowned Assets Supervision and Administration Commission of the State Council of the People’s Republic of China (SASAC) had transferred its entire interest in China Ocean Shipping (Group) Singapore (COSCO Corp Singapore’s controlling shareholder) to China COSCO Shipping Corporation (COSCO Shipping) Ltd at nil consideration.

COSCO Shipping is a state-owned enterprise wholly owned and controlled by SASAC, and will indirectly hold 53.35% of COSCO Corp Singapore upon completion of the transfer. This is part of a larger plan to streamline and reorganise China’s shipping and shipbuilding industry – in Dec last year, China COSCO Holdings Company Ltd, China Shipping Development Co Ltd, China Shipping Container Lines Co Ltd and COSCO Pacific Ltd signed a series of asset restructuring and service agreements, and this was billed as one of the most complicated restructuring efforts in the history of China’s capital markets.

Ceasing coverage

Restructuring efforts are underway, and though there could be asset injections and transferals impacting COSCO Corp Singapore, it could still take some time before more clarity emerges regarding the future plans for this listed entity. With a reallocation of resources, we are CEASING COVERAGE on the stock.

Source: OCBC Research - 1 Jun 2016