In our initiation note, 3 December 2008, we noted that Cosco’s risk of

doubtful debts was high. According to the company, at the end of 3Q08,

it had cash advances of SGD2.9b. But, compared to cash levels, there

was a shortfall of SGD1.3b, which primarily consisted of increases in

inventory and accounts receivables. We had estimated that receivables

increased by about SGD600m more than usual. In other words, while

cash advances were up, we believe Cosco was extending longer credit

terms to customers for further milestone payments. We noted that the

risk of doubtful debts was high, which ultimately materialized.

Cut earnings

We assume 40% of orders will get cancelled now (previously 20%) with

20% increase in receivables. We are accordingly reducing reported

estimates by 36%, 60% and 63% for each year in FY08-10.

Downgrade to REDUCE from Hold

The risk of more receivables being written off is still high. We believe

that the risks are skewed to the downside now that Cosco’s cash

position is compromised. Following our earnings cuts, our TP is now

We expect further order cancellations and delay tactics by ship-owners, as the

shipping industry’s collective appetite for new vessels looks poor for the

foreseeable future, given the weak charter rate environment. The situation has

worsened to the extent Cosco thought it necessary to warn the market it

expected 2008 net profit to be lower than the 2007 net profit of S$337m. This

implies a shortfall of at least S$83m, from current consensus estimates of

S$420m. We cut our 2008, 2009 and 2010 earnings estimates by 30%, 26% and

13%, respectively.

We downgrade our rating for Cosco from Buy to Sell, but maintain our price