Tuesday, June 05, 2007
It was a Good Show
All good things have to come to an end. I can see my days with China COSCO is limited. In fact I've been reducing my exposure for some time.
Capitalization is now $67b, about 35% attributable to COSCO Pacific the port operator and 65% to the shipping division. COSCO's vessels are thus valued at $43.6b, or 54% more than that of COSL (2866), which despite a 100%+ rise this year still trails behind at $28.3b. There's no need to compare to OOIL (316) because the discrepancy will be even bigger. Bear in mind shipping profit last year was less than $1b and my best estimate for a normal year was $3b. Either way I look at it the price is steep.
The last time I wrote the cause of the premium was due to the potential injection of dry bulk fleet and A-share listing, the latter has become a reality. The capital will be enlarged by about 20% after listing, which to me is a relatively small scale offering. The proceed will be funding mostly expansion of container fleet. So any injection will come at a later stage. Let's just assume the new container fleet will generate the same rate of return as present so we need not worry about the dilution from A-shares for now.
With the A-share listing factor gone, the premium of $15.3b (over COSL) is based entirely on injection hope, which makes up 1/4 of the current capitalization. It's common ground that share price tend to precede facts and market consensus now seems that China COSCO will be dished $15.3b worth of favor in the coming asset injection.
How big is a favor of $15.3b? For benchmark I use China Shipping Development (1138) which is trading at 19x p/e. I calculate the market valuation for each $1b of dry bulk earnings injected, then how much discount is needed and the injection p/e in order to give $15.3b favor to China COSCO.
1b; 19b; 81%; 3.61x
2b; 38b; 40%; 11.4x
3b; 57b; 27%; 13.9x
4b; 76b; 20%; 15.2x
5b; 95b; 16%; 16x
I don't think the discount to market comparable can be too great so it'll have to be assets with more than $2b earnings at least. With China COSCO's capitalizaiton of $67b, unless the injection is of a grand scale (like that of Dongfang Electric (1072)) the market is likely to be disappointed.
It's not my principle to invest on hope nor ride on speculation too much. So to me it's time to reduce and watch the development.
DISCLOSURE: I hold 1919 at time of writing.
Capitalization is now $67b, about 35% attributable to COSCO Pacific the port operator and 65% to the shipping division. COSCO's vessels are thus valued at $43.6b, or 54% more than that of COSL (2866), which despite a 100%+ rise this year still trails behind at $28.3b. There's no need to compare to OOIL (316) because the discrepancy will be even bigger. Bear in mind shipping profit last year was less than $1b and my best estimate for a normal year was $3b. Either way I look at it the price is steep.
The last time I wrote the cause of the premium was due to the potential injection of dry bulk fleet and A-share listing, the latter has become a reality. The capital will be enlarged by about 20% after listing, which to me is a relatively small scale offering. The proceed will be funding mostly expansion of container fleet. So any injection will come at a later stage. Let's just assume the new container fleet will generate the same rate of return as present so we need not worry about the dilution from A-shares for now.
With the A-share listing factor gone, the premium of $15.3b (over COSL) is based entirely on injection hope, which makes up 1/4 of the current capitalization. It's common ground that share price tend to precede facts and market consensus now seems that China COSCO will be dished $15.3b worth of favor in the coming asset injection.
How big is a favor of $15.3b? For benchmark I use China Shipping Development (1138) which is trading at 19x p/e. I calculate the market valuation for each $1b of dry bulk earnings injected, then how much discount is needed and the injection p/e in order to give $15.3b favor to China COSCO.
1b; 19b; 81%; 3.61x
2b; 38b; 40%; 11.4x
3b; 57b; 27%; 13.9x
4b; 76b; 20%; 15.2x
5b; 95b; 16%; 16x
I don't think the discount to market comparable can be too great so it'll have to be assets with more than $2b earnings at least. With China COSCO's capitalizaiton of $67b, unless the injection is of a grand scale (like that of Dongfang Electric (1072)) the market is likely to be disappointed.
It's not my principle to invest on hope nor ride on speculation too much. So to me it's time to reduce and watch the development.
DISCLOSURE: I hold 1919 at time of writing.
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