Tuesday, September 04, 2007
Latest on China COSCO (1919)
Finally the mystery is over and I come to understand, again, that the market, or at least some part of the market, is more efficient than I. Last time I questioned about the market enthusiasm over the asset injection and suggested reduction. Subsequently I sold out my last position at around $12. Of course looking back now, when the share price is standing over $19, that sell call appears very premature or even questionable. But hey that's also the fun/pain and challenge of investing on your own.
The dry bulk fleet acquisition deal is at last inked and proposed, but I don't think it'll have any difficulty in seeking approval from shareholders, given the terms are so favorable. In fact it's hard to imagine why this type of deal can still exist - there's no better way to demonstrate that selling state assets cheap is still everyday life in China.
The fleet (over 400 of them though some will only be partly owned after completion) will be acquired at a total of $34.6b, $24b to be financed by shares and the rest in cash. And part of the consideration is even deferred, meaning China COSCO can take time to arrange financing or even pay from the cashflows of the acquired fleets!
Attributable earnings from the fleet were $2b for 2006 and judging at the doubled results of 2007 1st half, one can safely assume $4b annual earnings. So we are talking about a prospective p/e of 8.65x for a national dry bulk fleet! Its competitor China Overseas Shipping Development (COSD) which reported similar interim profit has a capitalisation 100%+ higher at $78.5b. With a discount this deep my valuation framework used last time was immediately rendered useless. Now I know a price of $12 is of course sustainable but how about $19?
Let's try again. The market capitalisation post completion is about $190b. Taking out value of COSCO Pacific ($25b) and container fleet ($55b, generously using CSCL as benchmark), we have $110b for the dry bulk fleet. This translates to a 07 p/e of 27.5x, or 40% higher than COSD. It seems even the big favor from the parent company can't mop up all the excitement and hype around the share. China analysts are suggesting a target price of $40! I'm beginning to like my Chinese counterpart more and more as they really do introduce new rules and bring a whole different ball game here.
From this episode I think I have overlooked two things: (1) the grand re-rating of all H-shares which is still pretty much continuing and (2) the much improved prospect of dry bulk shipping since my last analysis in June. Perhaps the biggest lession is as value investors we can often tolerate undervaluation for as long as we want, but when its comes to overvaluation we don't do as much as we need to.
Of course I don't recommed a buy at this price. This should go without saying.
DISCLOSURE: I don't hold 1919 at time of writing.
p.s. to share my friend's blog which is quite enlightening: http://hk.myblog.yahoo.com/ohpalkof/
The dry bulk fleet acquisition deal is at last inked and proposed, but I don't think it'll have any difficulty in seeking approval from shareholders, given the terms are so favorable. In fact it's hard to imagine why this type of deal can still exist - there's no better way to demonstrate that selling state assets cheap is still everyday life in China.
The fleet (over 400 of them though some will only be partly owned after completion) will be acquired at a total of $34.6b, $24b to be financed by shares and the rest in cash. And part of the consideration is even deferred, meaning China COSCO can take time to arrange financing or even pay from the cashflows of the acquired fleets!
Attributable earnings from the fleet were $2b for 2006 and judging at the doubled results of 2007 1st half, one can safely assume $4b annual earnings. So we are talking about a prospective p/e of 8.65x for a national dry bulk fleet! Its competitor China Overseas Shipping Development (COSD) which reported similar interim profit has a capitalisation 100%+ higher at $78.5b. With a discount this deep my valuation framework used last time was immediately rendered useless. Now I know a price of $12 is of course sustainable but how about $19?
Let's try again. The market capitalisation post completion is about $190b. Taking out value of COSCO Pacific ($25b) and container fleet ($55b, generously using CSCL as benchmark), we have $110b for the dry bulk fleet. This translates to a 07 p/e of 27.5x, or 40% higher than COSD. It seems even the big favor from the parent company can't mop up all the excitement and hype around the share. China analysts are suggesting a target price of $40! I'm beginning to like my Chinese counterpart more and more as they really do introduce new rules and bring a whole different ball game here.
From this episode I think I have overlooked two things: (1) the grand re-rating of all H-shares which is still pretty much continuing and (2) the much improved prospect of dry bulk shipping since my last analysis in June. Perhaps the biggest lession is as value investors we can often tolerate undervaluation for as long as we want, but when its comes to overvaluation we don't do as much as we need to.
Of course I don't recommed a buy at this price. This should go without saying.
DISCLOSURE: I don't hold 1919 at time of writing.
p.s. to share my friend's blog which is quite enlightening: http://hk.myblog.yahoo.com/ohpalkof/
Subscribe to Posts [Atom]