COSCO - Pricing in potential headwinds - valuations remain

(JP Morgan - Overwgt $4.20) 24 Mar 08

• Pricing in higher raw materials and labor costs: On the back of
potential headwinds – rising steel prices and labor costs, we are
moving away from our previously assumed blue-sky scenario and
pricing in more realistic assumptions.

• Raising steel prices remain a major concern: According to
management, its steel input cost has increased by 20% Y/Y in
FY07. While management has budgeted 20% increase in steel
input prices for all its contracts secured since Oct-07, it remains
exposed to any further increase in steel plate prices beyond the
budgeted level and margins could be impacted on further price
increases. YTD, medium steel plates prices have already increased
19% which signifies that Cosco is likely to suffer from margin
pressure for its outstanding orders as it has yet to procure its steel
supply for projects slated for FY09 delivery and beyond.

• Price catalysts going forward: Possible share price catalysts
include (1) stronger offshore contract momentum; (2) completion
of the acquisition of 19% stake in Cosco Shipyard Group at
attractive valuations; and (3) clearer management strategy on
input cost management.

• Revising Dec-08 PT to S$4.20: We are reducing our SOTP price
target to S$4.20 factoring in more conservative net margin
estimates of 10% for newbuilding, 21% for ship repair, 16% for
conversion and 19% for offshore projects secured from FY07.