Cosco and China Shipping merger: First impressions

Cosco and China Shipping merger: First impressions

I spent most of Sunday looking through COSCO and COSCO Pacific reorganization disclosures. I found my conclusions and readings quite different than press reports. For the big picture politics side, the reorganization appears about in line with what many of us thought would happen. COSCO will be the national champion on the container side, and China Shipping more on the tanker side. The container business warrants more analysis and is more strategic in the sense that it has more moving parts and is a more complex business to get right. Tanker, energy and bulk operationally are certainly a tough business. But from a valuation and owner perspective it is generally more straightforward.

Looking through the documents what I found is investors are going to have one hell of a headache, not so much to keep up with where the assets are going (that is the easier part) – but what they are worth and how they are to be adjusted to the existing vehicles. In early morning trade it seemed like the bulk vehicle, China Shipping Development, was the winner as it gets converted into more of an energy play. The rest looked like losers.

But it is more complicated than that, of course. In terms of a direct comp, COSCO Pacific, for instance, should be considered relative to China Merchants in terms of missed performances over the last few months. Again this is surface level. The next level down is trying to value the new COSCO Pacific as a port play. I have done part of the analysis, based on available information, which is a separate discussion.

But what about COSCO and the new COSCO Container Lines, which is now the new #4 and includes the ships of CSCL? Note: this includes the operational side of the ships, but the ships are to be chartered in from the China Shipping Container side of the equation. And there is a lot of maths that will need to get done here.

This gets a lot more dicey very quickly for the new COSCO. We got some financial details of a whole bunch of subsidiaries. Not all the information we would want. And certainly not enough to plug into financial models. But on top of that we don’t really get a picture yet of the COSCO operational re-organization. COSCO Pacific as a ports play is easy. COSCO Container Lines not so easy.

We can certainly can imagine the broad strokes and the company has drawn an outline. But the actual details of changes to services has yet to come. Also we will need more details on how CSCL ships get chartered in and details on pricing, to be sure.

On the CSCL side it appears it will be turned into a financial vehicle for ships and boxes. What changes to related party transaction agreements and how it adds up for CSCL will need fleshing out, although we certainly can take pot shots on many parts of the new business.

COSCO and China Shipping published reams of information. And yet there are still so many holes.

Charles de Trenck

Charles de Trenck began his study of China in 1980 and eventually got in on the ground floor in China's equities boom of the early 1990s through work in Hong Kong and China shares. By the mid-90s he shifted to containerised trade, ports and shipping, eventually leading Citi to #1 rankings in Asia transport equities.

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