Why it's not smart to invest in Cosco yet

The US$1.4bn worth of offshore contracts YTD aren't sufficient to erase skepticism.

Cosco Qidong has secured a US$200m harsh-environment semi-sub accommodation rig for delivery in 2Q15.

The contract was awarded by a joint venture between Danish shipowner, J. Lauritzen and a Norwegian private
equity fund, HitecVision.

The vessel will be built to GM500A design with a capacity of 500 POB, DP3 system, to operate in the North Sea.

The contract will be made effective three months from the date of singing.

The development sounds appealing but CIMB said it's not time to switch camp. "Stick with established Singapore rig builders," it advised.

Here's from CIMB analyst Lim Siew Khee

This is the second semi-sub accommodation that Cosco has secured this year. The first (also valued at US$200m) was for Mexican Cotemar in May 12.

Cosco’s order momentum has not abated with US$1.4bn of orders secured YTD, but profitability from these contracts remains questionable.

These semi-sub accommodation rigs are priced 30-35% lower than similar units being built by Sembcorp Marine (US$292m) and Keppel Corp (US$315m) for more established players, Prosafe and Floatel. Customers’ specifications and equipment could be the main variances but so are lower margins, we believe.

Apart from execution risks, cancellation risks arising from customers’ inability to secure financing could be another obstacle for Cosco. Other than Seadrill, SapuraCrest and Tidewater, most of Cosco’s offshore customers are
venture capitalists, private equity funds or owners without established operating records.

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