Cosco dropped a bombshell, indicating that 2008 profits would be lower than 2007, due to provisions for doubtful debts, cost overun and potential penalties for delays. We cut our forecasts by 20% to 30% on lower sales and margin assumptions, maintained Fully Valued.

Could plunge into losses in 4Q08. As the group has achieved net profits of S$326.5 up to 9months in 2008, this implies that 4Q08 net profit is likely to be a loss or at best, profits of less than S$10m vs consesnus expectations of S$96m.

Hit by provisions for debts, cost over-run and penalties. Earnings were hit by :(1) Provisions for doubtful debts ? includes provision for S$19m due for repair works on three Russian vessels which defaulted, and MPF which went into bankruptcy. Delays in payment will rise as shipowners are losing money due to the plunge in freight rates; (2) Cost overrun for shipbuilding and offshore marine projects due to weak execution, higher steel prices, sub-contracting cost, and additional development cost at Zhoushan. The group provided for the 30% drop in steel prices over the past quarter for its stockpile; (3) Potential penalties for delivery delays - it completed only one 57K bulk carrier in 2008 vs ten originally scheduled.

Clients push back vessel deliveries Cosco has rescheduled the delivery of seven bulk carriers, from 2009/2010 to 2011/2012, on request from its clients. With shipowners operating at a loss, we expect more cancellations, rescheduling, and bad debts.

Net profits forecasts cut by 20% to 30%. We cut our sales estimates and now expect cancellations and delays affecting 40% of its order book (from 15% previously). Including provisions and cut in margin assumptions, the net impact is a 20% to 30% cut in earnings forecasts. Maintained Fully Valued, target price cut to 76ct.