Cosco has issued a profit warning, stating that FY08 earnings will be lower than FY07. The bulk of the lowered earnings will be caused by provisions of doubtful debts. Cosco recorded a net profit of S$336.6m for FY07, and had already posted net earnings of S$326.5m for the first 9 months of FY08. This profit guidance therefore deviates significantly from FY08 consensus estimate of S$425m and our own forecast of S$465m. We are downgrading Cosco to a Hold, while we re-assess our earnings forecast and target price.

Specifically, Cosco says it has recently received requests for delays in making payment by several ship owners. Accordingly, provisions will have to be made for doubtful debts. While increased operational costs such as higher steel and sub-contracting costs and additional development costs at Zhoushan are also being cited, these issues were already well-known and have been addressed by the market. However, Cosco says that these operational issues have also contributed to further delivery delays, and Cosco said it is assessing the various causes of delay and consider the need for further provisions for penalties under these contracts.

In addition to this, Cosco has also announced that it has been asked to reschedule the delivery dates of a total of 7 units of 57,000 dwt bulk carriers by these ship owners. The delivery dates of 4 of these vessels have been rescheduled from between February 2010 and June 2010 to between February 2011 and November 2011, and the delivery dates of the other 3 vessels have been rescheduled from between August 2009 and November 2009 to January 2012. We are also in the process of factoring in these delays to our forward earnings forecasts.