Cosco Corp : Buy out by its parent

The fate of Cosco Corp has now been sealed. China Cosco Shipping Corp, the parent company, is acquiring of Cosco Corp (Singapore)’s shipyard business in Dalian and Nantong. While the details have not been released but this is probable course of action after years-and-years of non performance.

Cosco Corp was listed in great fanfare in early 2006. Personally, I do not know the IPO price for this stock, but a check of the 1st day trading price was between $1.15 and $1.17. (Based on the sentiments at that time, I would expect the IPO to be around $0.80.) Throughout 2006 and into the last quarter of 2007 before the global financial crisis, the share price went up all the time hitting a high of $8.05 on 18 October 2007. But it went downhill to around $1 by January 2009 in the middle of the global financial crisis. At the point of writing, the share price is at $0.32. The counter was suspended when the share price was at $0.28 pending the announcement of the buy-out. It has since climbed about 4 cents perhaps, perhaps in anticipation that the parent company will make a premium over the share price in the buy-out proposal. 

Fundamentally, Cosco is not doing well at all. Its cash flow is always negative year after year and has been a net borrower since I start tracking it in 2009. Basically, the profits recorded in the early years were supported by borrowing, and not by its intrinsic operations. As it turns out, the borrowing cost becomes so heavy that it eats into the profit of the business causing it to suffer losses for the two financial years FY2015 and FY2016. In fact, the cash flow and borrowing were bad enough that I had pointed out in my posts a few years ago that it might do the shareholders a great favour by selling all its assets and return the funds to the shareholders. (Of course, it is not likely they will do that as it is a subsidiary of a big giant!) It is no point to be in business when it gets into losses projects after projects. The foray into the oil rig business a few years ago was a clear-cut mismanagement.  The learning curve was far too steep. Just because it saw Sembcorp and Keppel Corp were doing oil rigs, it also wanted to get a hand in it. But the timing was far too wrong. While it is still on its learning path, the oil price crashed and all the oil rig businesses were wiped out. In fact, it is the only company that I have seen so far that it had suffered two years of negative gross profit (I really mean negative gross profit).  This means that in a very simplified way, the project price offered to customers is not even able to cover the direct costs for those projects. This also means that it is almost certain that the business will suffer a loss in view of other overhead and financial costs. To date, it has negative retained profits. It means that the undistributed profits that it managed to accumulate in the good years were wiped out in these two years of losses. In the eight years of listing in Singapore, the business retained an accumulated loss.

Cosco’s cash flow

Cosco’s P&L statement

Cosco’s balance sheet

Unfortunately, for the investors and existing minority shareholders, there is no much to expect from such a business that goes wrong all the time. However, it may not be all bad for the parent company. Depending on how the share are structured and priced during IPO, they may even gain the difference in view of its current dogging share price. They may have the last laugh after all.

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Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

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