Why Cosco should be alarmed by Rongsheng's financial downfall

USD17.3m profits forecast may drop further.

According to Maybank Kim Eng, Cosco could face more margin pressures in the coming quarters after disappointing majorly in 1Q13 with a 65% YoY decline in PATMI. The company reports on 1 August 2013. Maybank sees downside risks to its PATMI estimate of USD17.3m (-38% YoY, +77% QoQ) for 2Q13.

Maybank also noted that Rongsheng’s downfall puts a negative pall on the Chinese shipbuilding sector which makes re-rating of the stock unlikely in the near term. Instead, Maybank sees possible further stock price downside given the potential of a sector de-rating.

It can be recalled that China’s largest private shipbuilder, China Rongsheng recently sought financial aid from the government after facing difficulties paying suppliers and had to cut its workforce by 40%.

Rongsheng’s woes reflect the difficult times Chinese shipbuilders are facing with a drought in shipbuilding orders.

Here's more from Maybank Kim Eng:

The company (Sembcorp) has secured a slew of new contracts recently, bringing YTD contracts secure to an estimated USD743m (excl. potential exercise of options for about USD260m more), but execution remains a big uncertainty.

Our expectation is for USD1.8b of new orders this year against management’s target of USD2.0b.

We lower our TP to SGD0.65 (from SGD0.73) as we now peg our valuations to a 1.1x P/B (from 1.3x P/B), which is 1 std dev below mean, given the downside risks.

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