Not vested. From UOB-Kay Hian:-
Gloomy dry bulk market conditions –
SELL into strength. The Baltic Dry Index has plunged to below 3,000 (approx. a breakeven level for CCH) since October. In light of the weakening demand for dry bulk shipments and the credit market has not shown any sign of improvement, we anticipate the BDI and the freight rates will continue to remain weak. As such, China COSCO’s (CCH) 2H08 net profit is expected to decline.
Locked in less than half of 2009 revenue. CCH locked in 20% of 2009 revenue as of 1H08. Although CCH aims to lock in more revenue days, we estimate only less than 50% of 2009 revenue was locked in. Going into 2009, we forecast the average BDI will not exceed 3,000. Therefore, CCH will be struggling to make profit in 2009-10.
Plunging book value. Tradewinds reported that a recent transaction price of a Panamax vessel dropped 70% from the peak. According to Clarksons’ figures, during the shipping down cycle in 1981-83, Capesize vessel prices fell 80% from the peak. As the vessels value had risen more than 5 times between 2003 and Jun 08, there is a possibility that the vessels’ value may continue to fall. If this is the case, CCH’s book value will fall drastically and thus its valuation appears unattractive.
The down cycle just started. The shipping down cycle typically last for 2-5 years. The dry bulk shipping down cycle just started and will not recover before 2010 given the huge vessels deliveries (vessel orderbook accounting for 70% of existing fleets) in the coming years. We
advise investors SELL into strength at this level.
Valuation. The stock is currently trading at 0.53x 2009 P/B (vs its historical average of 1.9x P/B and peers’ 0.49x 2009 P/B).