China COSCO Holdings Co Ltd, which plans to raise US $1.7 billion in an upcoming IPO, will see its profits fall 18 percent to 3.54 billion yuan (US $427 million) in 2006 as the shipping cycle turns down, its sponsor HSBC said. "This forecast decline is mainly driven by our belief that container shipping profits will suffer as a result of an imbalance in the supply-demand picture in 2006," HSBC said in a pre-IPO research report.
It also said the firm's bottom line in 2006 would suffer after 2005 earnings are fattened by a one-off gain of HK$652 million (US $83.6 million) expected to booked on the sale of its 17.5 percent stake in the Shekou port in the southern China city of Shenzhen.
The investment bank expects China COSCO's earnings to climb 4.2 percent to 4.3 billion yuan in 2005.
The company, which is selling 36.5 percent of its enlarged share capital and targets a listing debut on July 4, holds the container shipping business through COSCON, the world's seventh largest container fleet. It also owns 52.34 percent of Hong Kong-listed COSCO Pacific, which operates terminals, leases containers and holds 16.23 percent of Shenzhen-listed China International Marine Containers (Group) Ltd
HSBC, which forecast freight rates to firm marginally in 2005 before falling moderately in 2006, expects the container shipping business to contribute 61 percent of the company's net profits in 2005 and 56 percent in 2006.
With the global container order book now at an average of around 50 percent of the current fleet capacity, the investment bank estimates there will be a 5 percent increase in freight rates this year. But HSBC take a more cautious view for 2006 as new, even larger vessels ships begin to be delivered.
CONSOLIDATING: HSBC said profits of China COSCO's container shipping segment could fall 30 percent in 2006 as supply growth outpaces demand growth.
The investment bank forecast the average freight rate of COSCON to climb 4.5 percent in 2005 to 7,655 yuan per TEU and fall 6.8 percent to 7,461 yuan per TEU in 2006.
The global container industry is fragmented, with the top 20 companies accounting for 60 percent of the market's operating capacity.
But the recent move of Maersk Sealand, the world's largest container liner, to acquire P&O Nedlloyd, would take its market share to 17 percent from 11 percent currently.
HSBC said this could be positive for China COSCO, as fewer players could reduce the power of the shippers versus the container shipping firms. Also Maersk may pull P&O out of the Grand Alliance. This would result in a relative strengthening of COSCO's CKYH alliance, which competes with the Grand alliance.
Grand alliance now operates 140 vessels, with P&O contributing 40 vessels. The alliance's other members include OOCL, NYK, and Hapag Lloyd.
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