Cosco may rebound on higher steel demand

Shanghai: Reinforced steel bars litter the ground in eastern Shanghai, where migrant workers in blue and orange uniforms are building a UFO-shaped performance centre for the city's 2010 World Expo.

The building will use 20,000 tonnes of steel. In addition, China is constructing the world's larg-est shipbuilding centre, the longest high-speed railway and the biggest port.

That demand may help China Cosco Holdings Co, operator of the world's largest dry-bulk shipping fleet, rebound from a 45 per cent slump. The decline followed the government's July 30 closings of plants and construction sites to clear air pollution for the Olympics. Bulk cargo rates also dropped 41 per cent as the moves reduced imports of iron ore, a key steel ingredient.

Shipments may now surge as Shougang Corp and other steelmakers resume production with the end to restrictions yesterday. Delays in ship deliveries may also support leasing rates for container ships and bulk carriers, which have dropped because of the global econ-omic slowdown.

No slowdown

"There is no slowdown in demand for raw materials in China," said Mona Chung, who manages $2 billion at Daiwa Asset Management Ltd. in Hong Kong. She declined to comment on whether she owns China Cosco stock. "Sentiment on China Cosco will definitely improve as the Baltic Dry Index rebounds." The index is a measure of commodity-shipping rates.

China Cosco rose the most since the shares started trading in Hong Kong in 2005. The stock jumped 26 per cent to HK$9.94 (Dh4.47) on Friday.

The shipping line may almost double to HK$19 in the next 12 months, according to Morgan Stanley analyst Sophie Loh, who rates the shares a buy.

That would contradict four of the five analysts tracked by Bloomberg whose recommendations on China Cosco produced the highest returns for investors in the past year. They rate the company "hold" or "sell".

Overall, 24 of 29 analysts surveyed advise buying the stock, four say hold and one recommends selling.

China Cosco, which also runs the country's largest container line, dropped 60 per cent in the last 12 months. The decline makes it the cheapest stock in the Hang Seng China Enterprises Index relative to this year's estimated earnings.

The shipper is the world's second-biggest by market value after Copenhagen-based A.P. Moller-Maersk. China Cosco is priced at 3.3 times this year's estimated earnings, compared with the average price-earnings ratio of 15.3 for the 42 mainland companies listed in Hong Kong that make up the index.

Among the top five analysts who track China Cosco, Thomas Kim of Goldman Sachs Group Inc. and Kenny Tang of Tung Tai Securities Co. recommend holding the shares. Osbert Tang of ABN Amro Asia Ltd. says sell and Johnson Man Leung of JPMorgan Securities Ltd. advises buying.

"There could be buying opportunities," said Binay Chandgothia, who oversees $2 billion of assets at Principal Asset Management Asia in Hong Kong. "If you look at the market prices, they may be over-pessimistic."

The shipping industry may benefit from tightening credit markets caused by the bankruptcy of Lehman Brothers Holdings Inc. as limited financing for new ships may prevent overcapacity. Roslyn Ji, an analyst at Core Pacific-Yamaichi International Ltd. said in Beijing. The market meltdown will not stop construction in China, she said.

Global shipyards may miss 19 per cent of deliveries scheduled and delays will increase to as much as 39 per cent next year, Citigroup Inc. analyst Lee Sokje said on September 9. The problem will be more severe in China, with more than half of scheduled deliveries late in 2009 because of a lack of skilled workers and key parts, Lee said.