Restructuring plan finally released
Major transactions include:
1) CSD to sell its dry bulk business to Cosco Group and purchase Cosco Dalian from Cosco Group.
2) China Cosco to dispose of its dry bulk to parent and acquire container operations from CSCL.
3) CSCL to dispose of its terminals stakes to Cosco Pacific and purchase box leasing from Cosco Pacific.
Post the restructuring, CSD to become a pure tanker and China Cosco to evolve into a pure container shipping. CSCL will focus on vessel/box leasing while Cosco Pacific will change into a pure port company. The three Chinese carriers’ H shares are likely to be relisted on Monday (14 December). We suggest investors buy CSD-H while avoiding the other names.
CSD – deserves a substantial re-rating post asset swap
CSD’s dry bulk operations will be disposed of at 0.99x P/B, which we regard as a big positive surprise. We estimate that CSD’s dry bulk vessels, if marked to market, are probably at a 15-20% discount to their book value. We notice that the tanker assets (i.e., Cosco Dalian) to be acquired are priced at 1.26x P/B, but this does not look excessive on Cosco Dalian’s 16.5% ROE and encouraging tanker outlook. Importantly, CSD’s earnings outlook should be significantly enhanced post the asset swap. CSD’s existing tanker made RMB1.2bn core net profit (dry bulk lost RMB0.5bn) while Cosco Dalian posted RMB0.6bn earnings for 9M15. With annualized earnings potentially reaching RMB2.5bn (or 10% ROE), we think the stock should justify a P/B above 1x (vs. 0.6x currently). The asset swap would result in cash inflow of more than RMB5bn, which would enable CSD to reduce its net earnings as well as interest costs.
China Cosco – top line softness likely to outweigh merger synergies
Yes, the disposal of dry bulk at 1.15x P/B is a positive and there might be some synergies after it acquires CSCL’s agencies and charters in its container vessels. However, the major problem lies in the container shipping outlook, which has substantially deteriorated recently. Demand is likely to surprise on the downside per our latest channel checks. Along with continued deliveries of mega vessels, its top-line weakness is highly likely to outweigh the positives from the restructuring. Moreover, the whole container sector has massively derated in the past few months, with Maersk now trading at 0.8x P/B vs. ROE of 11% and OOIL at 0.6x vs. ROE of 5%. China Cosco was suspended at 2.0x.
CSCL – leasing outlook remains challenging
The soft leasing rates coupled with China Cosco’s strong bargaining power suggest that CSCL is unlikely to receive lucrative returns for its container vessels. While most of Florens’ boxes are under long-term contracts, downside risk to earnings exists when new boxes are contracted and existing boxes are renewed at lower rates. The stock was suspended 1.2x P/B vs. Seaspan’s 0.8x. Textainer, the largest box lessor globally, is trading at 0.7x P/B.
Cosco Pacific – no obvious synergies
While the disposal of box leasing might help to narrow its valuation discount to China Merchants, the latter has traded down to 12x P/E lately from 16x in early August on deteriorating export outlook. Moreover, the overlap of Cosco Pacific’s existing port and ports to be acquired is also limited, hence we do not expect to see obvious synergies. Along with lower earnings resulting from this asset swap, the stock might fail to move up when trading resumes. (Read Report)
Read Related Report
1) COSCO Pacific - Strategic Restructuring to Increase Focus on Container Terminals by Morgan Stanley Research, published on 14 December 2015
Source : Deutsche Bank Markets Research