2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

1Citigroup Global Markets Singapore PTE LIMITED; 2Citibank NA

Citigroup Global Markets  Equity Research

Asia Pacific  Singapore

Marine (GICS)  Shipbuilding (Citi)

Company Focus

11 April 2008  18 pages

Cosco Corporation (Singapore) (COSC.SI)

Downgrade to Sell: More Questions than Answers



rising concerns over margin contraction and slowing orderbook momentum.

Our revised target price of S$2.70 implies downside of 2% from current levels.Downgrade to Sell ? We downgrade Cosco from Buy (1L) to Sell (3L) amid



Cosco?s orderbook could be scaled back since management is not able to

clarify if current contracted orderbook are secured with down payment. So far,

7 out of its 115 bulk carriers have not received down payment, but there is a

possibility the actual figure could be higher, in our view. Cosco is now awaiting

its Chinese shipyard to re-confirm its actual orderbook.Key takeaways ? Key takeaways from our conference call raise concerns that



flags on the back of 1) rising contract cancellations due to credit crunch and

slowing economy growth, 2) margin concerns yet to abate since steel prices

continue to overshoot, 3) potential oversupply of bulk carriers in 2009-10.Need to monitor industry risks further ? From a macro perspective, we see red



after the following changes: 1) removed the top-line contribution from the Red

Flag semi-sub hull order, 2) pared down our FY07 ship newbuilding orders by

S$1.0 bn or equal to cancellation of 15 bulk carriers out of total orderbook of

115 bulk carriers (total value S$7.6 bn), 3) moderated our FY10E gross margin

assumptions by 118 basis points in light of rising labor and material costs.Cutting estimates again ? Our new forecasts are 9-16% below consensus ests



established and quality players like Keppel and SembCorp Marine.Flight to quality names ? We believe there will be a switch out of Cosco to more

Figure 1. Cosco Corp ? Statistical Abstract

Yr to Revenue Reported

Profit

Net

Profit

(ex-El)

FD EPS

(ex-El)

% Chg P/E P/CEPS FV/EBITDA P/NTA Net DPS Net

Yield

31-Dec (S$ mn) (S$ mn) (S$ mn) S$ (x) (x) (x) (x) S$ (%)

2006 1,215 181 157 0.071 15% 40.2 19.9 18.3 9.5 0.040 1.4%

2007 2,262 337 337 0.150 112% 19.0 11.4 9.9 6.9 0.070 2.5%

2008E 4,746 504 504 0.225 50% 12.7 7.5 5.8 5.3 0.108 3.8%

2009E 6,089 582 582 0.260 16% 11.0 6.4 4.4 4.4 0.144 5.0%

2010E 6,913 632 632 0.282 9% 10.1 5.8 3.5 3.7 0.164 5.8%

Source: Company Reports and Citi Investment Research estimates

Sell/Low Risk 3L

from Buy/Low Risk

Price (10 Apr 08) S$2.85

Target price S$2.70

from S$4.50

Expected share price return -5.3%

Expected dividend yield 3.8%

Expected total return -1.5%

Market Cap S$6,381M

US$4,702M

Price Performance (RIC: COSC.SI, BB: COS SP)

See Appendix A-1 for Analyst Certification and important disclosures.

Jit Soon Lim, CFA1

+65-6432-1168

jit.soon.lim@citi.com

Horng Han Low1

+65-6432-1161

horng.han.low@citi.com

Rigan Wong2

rigan.wong@citi.com

Change in opinion 

Rating change 

Target price change 

Estimate change 

Cosco Corporation (Singapore)

(COSC.SI)

11 April 2008

Citigroup Global 2 obal Markets  Equity Research

Fiscal year end 31-Dec

Valuation Ratios2006 2007 2008E 2009E 2010E

P/E adjusted (x) 33.9 20.0 12.7 11.0 10.1

EV/EBITDA adjusted (x) 19.1 11.3 6.6 5.4 4.7

P/BV (x) 9.4 6.8 5.3 4.3 3.7

Dividend yield (%) 1.4 2.5 3.8 5.0 5.8

Per Share Data (S$)

EPS adjusted 0.08 0.14 0.23 0.26 0.28

EPS reported 0.09 0.14 0.23 0.26 0.28

BVPS 0.30 0.42 0.54 0.66 0.78

DPS 0.04 0.07 0.11 0.14 0.16

Profit & Loss (S$M)

Net sales 1,215 2,262 4,746 6,089 6,913

Operating expenses -921 -1,785 -3,962 -5,162 -5,890

EBIT 294 477 785 927 1,022

Net interest expense -12 3 19 29 42

Non-operating/exceptionals 1 1 1 1 1

Pre-tax profit 283 480 804 957 1,065

Tax -23 -20 -51 -63 -72

Extraord./Min.Int./Pref.div. -50 -142 -249 -312 -361

Reported net income 210 319 504 583 632

Adjusted earnings 186 319 504 583 632

Adjusted EBITDA 356 557 879 1,025 1,123

Growth Rates (%)

Sales 39.2 86.1 109.9 28.3 13.5

EBIT adjusted 30.5 62.2 64.5 18.1 10.3

EBITDA adjusted 26.7 56.7 57.7 16.6 9.6

EPS adjusted 23.2 69.3 58.3 15.5 8.5

Cash Flow (S$M)

Operating cash flow 414 1,569 784 1,086 1,057

Depreciation/amortization 62 81 94 98 101

Net working capital 47 1,027 -64 94 -36

Investing cash flow -251 -447 -175 -142 -143

Capital expenditure -313 -471 -175 -142 -143

Acquisitions/disposals 56 10 0 0 0

Financing cash flow -20 -334 -242 -320 -367

Borrowings 23 -230 0 0 0

Dividends paid -49 -119 -242 -320 -367

Change in cash 144 787 367 623 547

Balance Sheet (S$M)

Total assets 1,884 3,967 5,088 6,435 7,481

Cash & cash equivalent 278 1,083 1,450 2,072 2,619

Accounts receivable 267 828 1,214 1,641 1,958

Net fixed assets 1,122 1,490 1,570 1,614 1,657

Total liabilities 964 2,664 3,274 4,047 4,466

Accounts payable 530 2,416 3,026 3,799 4,218

Total Debt 412 176 176 176 176

Shareholders' funds 920 1,303 1,814 2,388 3,015

Profitability/Solvency Ratios (%)

EBITDA margin adjusted 29.3 24.6 18.5 16.8 16.2

ROE adjusted 31.3 39.6 47.1 43.7 39.6

ROIC adjusted 27.1 61.3 144.1 155.3 166.4

Net debt to equity 14.6 -69.6 -70.2 -79.4 -81.0

Total debt to capital 30.9 11.9 8.9 6.9 5.5

For further data queries on Citi's full coverage universe

please contact CIR Data Services Asia Pacific at

CIRDataServicesAsiaPacific@citi.com or +852-2501-

2791

Cosco Corporation (Singapore)

(COSC.SI)

11 April 2008

Citigroup Global 3 obal Markets  Equity Research

Concerns arising over quality of orderbook and earnings

We hosted a conference call with Cosco management on the back of a semi

sub rig hull order cancellation by Red Flag (Norway) as a result of this

customer's inability to secure credit financing and also to obtain more colour

on the strength of the orderbook momentum.

We are less concerned over the contract cancellation as we believe Red Flag is

a weak player in the O&M space (i.e. speculator) and fell victim to the credit

crunch. Thus, the cancellation should not be reflective of the industry strength.

However, key takeaways from our conference call raises concerns that Cosco

orderbook could be scaled back since management is not able to re-confirm its

contracted orderbook are secured with down payment. Industry practice

requires a 20-25% minimum down payment in order to secure the contract.

Although management did clarify 7 out of its 115 bulk carriers have not

received down payment, we do not discount the possibility that the actual

figure could be higher. Cosco is awaiting its Chinese shipyards to revert if there

are any changes to its orderbook.

On the back of this inconsistent datapoint, credibility issues are raised and

increases uncertainty over its earnings growth prospects. In our view, the

inconsistent flow of information from the company could be attributed to the

rapid expansion of the company, thus warranting greater need for control and

reporting procedures.

At the same time, margin issues were raised again during the conference call,

but management is upbeat as it has hedged the raw material requirements for

this year.

Cutting reduced estimates by another 1-12%

We have made the following changes to our assumptions: 1) removed the topline

contribution from the Red Flag semi-sub hull order, 2) pared down our

FY07 ship newbuilding orders by S$1.0 bn or equal to cancellation of 15 bulk

carriers out of total orderbook of 115 bulk carriers (total value S$7.6 bn), 3)

moderated our FY10E gross margin assumptions by 118 basis points in the

light of rising labor and material costs.

We reduced our target PER to 12x from 18.5x to factor in negative headwinds

arising from risk of further order cancellations, and rising cost pressures (pls

see page 6-13 detailing our sector analysis). Our FY08-10E net profit estimates

are revised downwards by 1-12% and our target price reduced to S$2.70 from

S$4.50. Our target price of S$2.70 implies downside of 2% from current levels.

Cosco Corporation (Singapore)

(COSC.SI)

11 April 2008

Citigroup Global 4 obal Markets  Equity Research

Figure 2. Cosco Corp ? Earnings Revisions

Net Profit (S$ mn) Change EPS (S$) Change DPS (S$) Change

New Old (%) New Old (%) New Old (%)

FY2008E 504.3 509.6 -1% 0.23 0.23 -1% 0.11 0.11 -1%

FY2009E 582.5 610.7 -5% 0.26 0.27 -5% 0.14 0.15 -5%

FY2010E 632.2 719.1 -12% 0.28 0.32 -12% 0.16 0.19 -12%

Source: Citi Investment Research

Cosco Corporation (Singapore)

(COSC.SI)

11 April 2008

Citigroup Global 5 obal Markets  Equity Research

Figure 3. Global Yard Valuation Comparisons

Company RIC Rating Curr Price Target FY Ends Mkt Cap P/E P/B EV/EBITDA Div. Yld

10-Apr-08 Price (USD mn) 2007 2008E 2009E 2007 2008E 2009E 2007 2008E 2009E 2007 2008E 2009E

Cosco Corp (Singapore) COSC.SI 3L SGD 2.85 2.70 Dec 4,702 20.0 12.7 11.0 6.8 5.3 4.3 9.8 5.8 4.4 2.5% 3.8% 5.0%

Yangzijiang YAZG.SI NR SGD 0.945 NA Dec 2,299 16.9 11.8 10.5 4.8 3.4 2.7 13.7 7.7 5.5 1.7% 2.0% 3.6%

Guangzhou Shipyard Intl Ltd-H 0317.HK NR HKD 24.75 NA Dec 2,027 14.0 10.7 8.1 5.8 3.8 2.7 14.6 13.7 12.9 2.1% 3.1% 3.8%

Guangzhou Shipyard Intl Ltd-A 600685.SS NR CNY 42.02 NA Dec 2,027 22.8 16.9 13.6 10.8 7.6 5.4 12.7 12.1 9.7 0.5% 1.3% 2.2%

China State Shipbuilding Co. Ltd. 600150.SS NR CNY 121.89 NA Dec 11,550 24.3 14.7 10.4 8.8 5.3 3.9 13.9 10.3 7.5 0.4% 1.6% 2.7%

China Average 4,521 19.6 13.3 10.7 7.4 5.1 3.8 13.0 9.9 8.0 1.4% 2.3% 3.5%

Daewoo Shipbuilding & Marine

Engineering

042660.KS 1L KRW 41350 96000 Dec 8,113 24.8 10.4 6.4 4.5 3.5 2.4 16.2 6.9 4.0 1.0% 2.9% 3.6%

Hyundai Heavy Industries 009540.KS 1M KRW 381500 760000 Dec 29,722 16.7 11.4 8.6 5.3 4.1 3.0 13.2 9.5 7.2 2.0% 3.1% 3.1%

Hyundai Mipo Dockyard 010620.KS 1M KRW 230500 610000 Dec 4,726 8.7 8.8 7.2 1.5 1.3 1.2 10.9 7.5 5.5 3.3% 3.5% 4.3%

Samsung Heavy Industries 010140.KS 1L KRW 35000 80000 Dec 8,284 16.6 10.4 6.4 4.5 3.4 2.4 11.9 7.0 4.2 1.4% 2.9% 3.6%

Hanjin Heavy Industries 003480.KS NR KRW 36350 NA Dec 1,100 13.6 8.5 6.6 1.3 1.4 1.1 2.6 2.0 1.9 1.4% 1.5% 1.5%

STX Shipbuilding 067250.KS NR KRW 37600 NA Dec 2,775 12.7 7.2 5.6 3.5 2.5 1.8 20.2 9.6 6.3 1.4% 1.2% 1.3%

Korea Average 9,120 15.5 9.5 6.8 3.4 2.7 2.0 12.5 7.1 4.8 1.7% 2.5% 2.9%

Keppel Corp KPLM.SI 1L SGD 10.14 15.70 Dec 11,805 14.2 12.9 11.3 3.1 3.2 2.7 13.7 9.9 7.7 6.3% 3.6% 4.2%

SembCorp Marine SCMN.SI 1L SGD 3.55 5.10 Dec 5,419 20.4 14.7 13.3 4.4 3.9 3.6 16.9 12.6 11.7 2.5% 4.9% 5.6%

Jaya Holdings JAYA.SI NR SGD 1.4 NA Jun 794 8.4 7.5 6.8 2.8 2.5 2.2 7.0 5.9 5.5 7.7% 8.2% 9.3%

Singapore Average 6,006 14.3 11.7 10.5 3.4 3.2 2.8 12.6 9.4 8.3 5.5% 5.6% 6.4%

Aker Kvaerner ASA AKSO.OL 1M NOK 126.25 171 Dec 6,906 13.8 11.8 9.2 4.7 3.9 3.1 7.9 6.1 4.5 2.9% 3.4% 4.4%

Bharati Shipyard^ BHAR.BO 1M INR 469 790 Mar 324 14.8 9.7 6.1 4.3 3.0 2.1 11.4 10.8 7.6 0.6% 0.6% 0.7%

Others Average 3,615 14.3 10.7 7.6 4.5 3.4 2.6 9.6 8.4 6.1 1.8% 2.0% 2.5%

Global Average 6,411 16.4 11.3 8.8 4.8 3.6 2.8 12.3 8.6 6.6 2.3% 3.0% 3.7%

^ EPS and DPS are calendarized.

Source: Citi Investment Research. IBES and Bloomberg for Non-Rated (NR) Companies.

Cosco Corporation (Singapore)

(COSC.SI)

11 April 2008

Citigroup Global 6 obal Markets  Equity Research

Operating conditions have already peaked

Although Cosco Shipyard (COS) is better positioned than peers since it is

supported by its strong parent with a large ageing fleet that should be able to

keep COS's yards busy in the event of a downturn, operating conditions in the

shipbuilding industry has recently turned more cautious, impacted by order

cancellations due to credit fallout, slower economic growth, as well as margin

concerns arising due to increase in raw material prices.

We highlight the macro challenges ahead.

1) Contract cancellations starting to flow

Tightening credit markets have started to affect customers in the ship building

industry, where potential new build contracts have been dropped due to

difficulty in obtaining financing.

The impact is particularly acute for small and medium-size shipping companies

as they face a tougher time in getting shipping loans, as banks scale back

because of the US subprime crisis.

According to South Korea?s

German freight shipping operator, abruptly dropped negotiations last quarter

with Hyundai Heavy Industries Co. to build nine container ships worth US$1.5

billion, citing inability to get financing for the deal. Fortunately, the market was

strong and, according to Hyundai Heavy, these slots have since been taken up

by other shippers.

However, the outlook from Istanbul-based Horizon Shipping suggest the

situation has turned more severe. It recently cancelled its $222m order for up

to eight bulkers from Daesun Shipbuilding & Engineering in South Korea due to

its inability to make its first payment. The contract involves six firms and two

optional 32,000-dwt ships at the end of last year for delivery by May 2011. The

vessels were priced at $37m each with five 20% instalments. The $44.4m for

the ships' first payment was due 60 days after the contract signing date.Maeil Business Newspaper, Claus-Peter Offen, a

Figure 4. Shipbuilding Industry Cancellations

Date Customer Order Cancellations Shipbuilder Contract value Remarks

Jan-08 Jinhui Holdings

(China)

2 VLOCs Dalian Shipbuilding

Industry Co. (China)

US$245m Inability to obtain financing; cost of

cancellation is only US$2m per ship

Jan-08 Medcare (Greece) 2 bulk carriers (92500

dwt)

Kouan Shipyard (China) Est. US$100m "Unacceptable hike in the price to provide

replacement engines with lower quality"

Feb-08 Odfjell Tankers

(Norway)

12 chemical carriers Sevmash Shipyard

(Russia)

US$500m but

increased to

US$544m

subsequently

"Serious delays in the construction process"

and "demands for further price increases" by

Sevmash

Mar-08 Horizon Shipping

(Istanbul)

6 bulk carriers (32000

dwt) with 2 on option

Daesun Shipbuilding &

Engineering (South Korea)

US$222m Inability to obtain financing

Mar-08 China Energy

Shipping (CESC)

Cut 80 bulk ship order

down to just 20

Split between China State

Shipbuilding Corp (CSSC)

and China Shipbuilding

Industry Corp (CSIC)

Undisclosed Reduced shipping ambitions

Source: Company Reports, Bloomberg

Cosco Corporation (Singapore)

(COSC.SI)

11 April 2008

Citigroup Global 7 obal Markets  Equity Research

Chinese yards have also not been spared from the recent credit fallout. Hong

Kong-listed shipping firm Jinhui Holdings terminated an order for two Very

Large Ore Carriers (VLOCs) with two Chinese yards, as borrowing costs surged

amid the global credit crunch. The ships were scheduled for delivery in 2011

and worth US$122.6mn each. The cost of cancellation to Jinhui was reported

to be US$2mn per ship, or a mere 1.6% of the contract value (source:

Bloomberg).

According to Jinhui, ?since the subprime mortgage financial crisis unfolded

during the past few months, financial institutions have reduced their

willingness to loan funds to other financial institutions and to corporations in

general, resulting in a global credit crunch. Despite receiving a number of

financing proposals from a number of banks with regards to the financing of

the two VLOCs, proposed terms and conditions from the banks were found to

be much less flexible than those previously enjoyed by the Group, coupled with

a significant increase in cost of borrowing even when a fifteen-year time

charter contract with a first class Chinese steel mill was in place. The riskreturn

profile of completing the contracts has thus changed drastically due to

persistent negative sentiment clouding the global financial markets.?

Recent order cancellations cited by locally-listed Yangzijiang already indicate

the slowing global economic growth has started to hurt the industry.

Management has also recently announced that they have yet to secure any

contract in the month of March.

With current high new build prices and operating costs, break-even levels for

new ships have become higher, and owners may become more cautious about

taking delivery of ships in uncertain market conditions unless they have firm

charters with reliable charterers in place.

If outlook appears negative, owners may decide to cancel their orders, even if it

entails sacrificing the initial payment, or delay taking delivery even at the cost

of penalty payments.

2) Margin concerns yet to abate

Supply-side cost pressures particularly over the cost of steel, engines/other

equipment, and labor pose threat to margins. We believe rising steel prices is

one of the largest threats that Cosco faces. As a gauge, flat steel prices have

reached US$853/ton after rising 27% ytd (+20% in 07) and has already

overshot consensus forecast of a 10-15% YoY increase.

As a group, steel related raw materials (including engines and shafts)

contribute ~30-40% of COGS but the margin impact varies across various

divisions due to the project duration since Cosco does not entirely hedge its

raw material costs for projects more than 12 months ahead.

Among various business segments, rise in steel plates poses the highest risks

for ship building since its order book stretches till 2010 and has little room for

negotiation. We also see cost pressure arising for offshore (~10% of sales) but

is less intense as most contracts secured last year are due for delivery soon,

and raw materials costs are largely locked in.

Cosco Corporation (Singapore)

(COSC.SI)

11 April 2008

Citigroup Global 8 obal Markets  Equity Research

Will Chinese steel plate prices peak in 2008?

According to a recent article by

on the rise, despite recent downward corrections in prices for other steel

products. As of 15 Jan 2008, using the 20mm plate steel price set by Yingkou

Steel as benchmark, average price of commercial 20mm HR plate will reach

RMB 6620/ton (vs 5120/ton in Jan 08), representing a 30% increase according

to Mysteel.net. Steel plate demand from multiple sources ? construction,

mechanical production, and shipbuilding ? is likely to surpass plate production

capacity in China.

Chinese steel plate producers have shifted towards ship plate production in

2007, with ship plates making up 14% of steel plate output in November 2007,

up from 3.8% in the beginning of 2007, and mainly driven by robust demand

from Chinese shipbuilders. In the first 11 months of 2007, ship plate output by

major Chinese plate producers increased 82.3% yoy to reach 10.71mn tons.

While Chinese ship plate production has increased substantially, prices remain

sustained by strong domestic demand and, increasingly, robust exports

especially to South Korea.Mysteel.net, Chinese steel plate prices are still

Figure 6. Prices of Thick Steel Plate for Shipbuilding (¥/MT)

Note: Prices for 2008 and 2009 are estimates.

Source: Nikko Citigroup Limited based on newspaper reports and company discussions.

According to our Steel analysts Toshiyuki Johno and Mariko Asao, Asian steel

prices are on an uptrend, driven by tight supply against strong demand and

forecasts of rising raw material prices. They foresee a high probability of major

price hikes for thick steel plates in particular, as they forecast tight

supply/demand for the time being on growing demand for shipbuilding,

machinery, and pipeline applications.

Figure 5. Steel Price Benchmarks (Rmb/t)

2007E 2008E 2009E 2010E

Plate 20mm 3,794 4,059 3,865 3,479

Source: CIR estimates and CRU

Cosco Corporation (Singapore)

(COSC.SI)

11 April 2008

Citigroup Global 9 obal Markets  Equity Research

JFE recently succeeded in raising prices of steel plate for a South Korean

shipbuilder (for April- September 2008) to $880/MT from $650/MT. At the

same time, Nippon Steel raised the price to over ¥95,000/MT from $650/MT

I've been wondering about this kind of last miinute sell down.  Whatz the purpose? 
Can't be for desperate profit taking?  Can't be for shortists -- too early to use such tactic?
Trying to give a false dropping image?  Trying to accumulate more?