Bull stocks: Cosco 0 comments

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Another stock that has benefited tremendously from the rise of China over these last few years has been Cosco Corporation (Singapore), formerly known as Cosco Investments (Singapore). Once a thinly traded stock during the dot-com boom years of 1999-2000, today it is an STI, FTSE and MSCI component stock and THE blue-chip China play following the collapse of CAO.

Although it was a subsidiary of China Ocean Shipping Company (Cosco Group), one of the world's top 10 shipping conglomerates and a China state-owned enterprise, in the late years of the last millenium and the early years of this current one Cosco was trading within a range of 20 to 30 cents with relatively thin liquidity. Shipping (in SEA and China region) formed about 60% of its revenue base, with the balance being in miscellaneous investments (hence its name Cosco Investments then).

The turning point, in terms of both fundamentals and stock price performance, came with a group restructuring that commenced in 2001 with a new management under Ji Hai Sheng. Non-core investments including its property and trading divisions were divested to allow it to concentrate on its shipping business. More importantly, it branched into ship repair with a series of acquisitions in various shipyards. In this respect its linkages with its parent Cosco Group played a big part, as most of the shipyard acquisitions were transfers of ownership from parent to subsidiary. These included stakes in Cosco Nantong Shipyard, Cosco Dalian Shipyard and sister company Cosco Shipyard Group.

The recovery in the bulk shipping sector notwithstanding, it was the ship repair division of Cosco Corp that provided the shot in the arm in terms of the group's share price performance. With the widely publicised rise of China since mid-2003, the China ship repair sector became increasingly recognised as a sunrise industry, due mainly to two reasons: on the demand side, China's burgeoning world trade implies a growing volume of vessel maintenance and repair, while on the supply side, the competitive cost structures of China's ship repair industry provide a major advantage against regional competitors such as those from Singapore. Through its various acquisitions from its parent, Cosco Corp acquired a 20% share of this market, which were positioned strategically in nine cities along the eastern coastline from north to south.

The building up of the highly promising ship repair division from a standing start of nearly 0% ignited a share price charge from mid-2003 onwards. The initial push was with the market tide that swept all stocks, but the price continued rising even as others sagged in the small-to-mid cap correction in 2004. Within two years the price rose from a stagnant 20-30 cents in mid-2003 to 2.30 today, a near eight-bagger (and that is excluding its 1-for-5 bonus issue in 2004). In terms of earnings performance, it is expected to earn >S$100M profit on >S$700M turnover in FY05. Compare this with its S$5M profit on S$200M turnover (on a low-margin shipping and investments business) in 1999. This implies over 60% CAGR (cumulative growth rate) in annual earnings over the last six years.

Of course, the FY05 figure is just a projection and in terms of share price I had expressed some doubts about overvaluation in another blog (see Hot Singapore Stocks-Not! --> Cosco). The fact remains, however, that the transformation of Cosco into a major global ship repair player these past hour years has been extraordinary, and its rise clearly illustrates two things: firstly, the advantages of having a strong parentage (tremendous help in its restructuring), and secondly, how a long-term trend (rise of China and its cost competitiveness) can lead to multi-year price gains.

References:
(1) GK Goh's analyst report 30 May 05