Maintain Sell — Cosco has been one of the biggest underperformers in the sector YTD, but we see no catalysts to turn positive. Results and guidance suggest earnings growth will continue to be hampered by lack of progress in shipbuilding, and we do not rule out potential for losses to deepen further.

2Q09 results — Net profit of S$37mn is below our $60m expectation and reflects i) lower charters secured from bulk carriers & ii) execution woes in ship building, which turned loss making in 2Q09. These resulted in 5% QoQ gross margin decline to 11%. 2Q09 was boosted by S$26m impairment reversal but offset by lower gains from sale of scrap materials (S$16m vs. S$38m in 2Q08). Interest cost increase to S$11.9m (vs. S$1.6m in 2Q08) due to higher debt level.

Key highlights — i) 11 more bulk carriers due for deliveries in 2009 (only one has been delivered so far) but do not rule out further delays; ii) ship repair volume has dropped sharply but margins expected to remain >30%; iii) better execution in Conversion and Offshore and margin to remain resilient; iv) order book reached US$6.5bn but “subject to revision from any cancellation.”

Capacity — Dock expansion remains intact and capacity will reach 2.9m dwt by 4Q10. We fear capacity may be under-utilized post 2011 given orderbook depletion and flight to competitor yards with better execution track records.

Earnings forecast — We cut our earnings forecast by 10-48% over 2009-11E to factor in slower delivery schedule and further margin erosion in new building. We set our target price at S$1.05, based on our SOTP valuation.