History and business
Cosco Shipping International (HKSE:00517, Financial) is the shipping, supply and trade services subsidiary of one of the largest shipping companies in the world, Cosco Group, which has a fleet of 1,100 ships and a capacity exceeding 85 million tons.
The activities of Cosco Shipping are distributed in five main business areas:
- -Ship trading agency sevices.
- The marine insurance brokerage.
- The supply of marine equipment and spare parts.
- Production and sale of coatings.
- Trading and supply of marine fuel and related products.
Cosco Shipping shares traded on the stock exchange market for the first time in 1992, and its parent company, Cosco Group, currently traded more than 66% of the shares, while the other 34% is owned by other private investors.
Company data:
Number of shares: 1,533,000,000
Market cap: $547 million USD
Net debt: -$813 Million USD
Enterprise value: -$266 Million USD
Net income: $43 million USD
Financial strengths
In the last annual report the management team said that it expects important and new investments to expand its business. Until they carry out these investments, they will pay an attractive dividend that will not be less than 50% of the annual profit generated. The dividend paid in the last year was 77% of its profit, while the current dividend yield is 6.5%.
But the most interesting thing is that the company has almost $800 million of net cash for investments for new acquisitions and business expansion.
In May 2018, Cosco Shipping International signed a capital increase in the company Changsu Nasufar to 33%. It will also expand its product chain and generate synergies with the existing businesses of the company
The five business areas previously stated have reported a recurring profit in the last 10 years (between $30 million and $50 million), which allowed the company to raise its net cash levels and the value of its net current assets significantly, while its market value and its enterprise value has been progressively falling.
Equally, the equity of the company has increased significantly, and the dividend yield has reached máximum levels, while the market cap has gradually gone down and it trades at the cheapest ratios.
The ship marketing business currently has an order book of 53 ships with delivery scheduled over the next two to three years. The supply of fuel is increasing strongly and asphalt sales also rose. Despite the brokerage, marine insurance is reducing commissions and margins on the sale of coatings has been deteriorating. Major investments and acquisitions are expected with huge liquidity that the company has accumulated in recent years and can continue to generate significant future cash flow for the company.
Management
Currently, 34% of the shares of Cosco Shipping Interantional are traded on the market, while 66% belongs to the China State-owned Assets Supervision and Administration Commission. In 2018 the president of the parent company Cosco Group was appointed president of Cosco Shipping International, which is expected to bring more interest in the subsidiary. FIL Investment Management, based in Hong Kong, has a more than 3.5% equity stake.
In the last presentations that Cosco International has given, there seems to be a commitment on the part of its management to want to carry out a process of expansión of the company, but also a program of efficiency and cost reduction of every areas in which the it is divided. It is seeking synergies between the different groups, conducting analysis to determinate the areas in which new investments will be carried out.
Valuation
The valuation of the company at the time of this study is only $500 million USD. This is quite difficult to understand because the company has positive net cash of more than $800 million, which determines that the enterprise value of the company is -$300 million. The company is trading at 2.76 Hong Kong dollars and has a net cash per share of 4.23 Hong Kong dollars
Consider the criteria used by Benjamin Graham, it would be trading at a net current asset value per share of 5.16 Hong Kong dollars. This means that Cosco Shipping is trading at a 50% discount to the value of net assets plus all short-term liquidity and minus the value of settling all existing demanding liabilities on the balance sheet.
In the Great Depression of the 1930s, companies below this NCAV were profitable in the long term, with a vision of three to five years. There is also a healthier economy now than there was then.
Cosco Shipping is generating a return on equity excluding net cash of 19%, which is not bad for the sector, but in this case we are not buying business quality -- we are investing in deep value (a company that is extremely undervalued in a sector that is not fashionable). We think that in the medium to long term (three to five years), it should return to its real value.
Risks
The main risk is that the company is controlled by the commission of state assets in China, which is not attractive for an investment because it is not controlled by private equity. Cosco Shipping is a state company, and it could be subject to any kind of intervention by the Chinese state. Also, the current trade scenario between China and the U.S. is not very flattering to these companies.
In addition, valuations below the enterprise value and NCAV for many years (as seen in the graphs above) could be extended in time, although it´s true that a term of three to five years might be appropriate to correct the distortion.
Future investments by the company could be wrong or the company could make acquisitions at an inappropriate price, although if you have been accumulating net cash for years, the acquisitions and investments should not be rushed or overpriced.
Outlook
The company is not in a fashionable sector, and trades at a significant discount to book value, net cash and NCAV. But if the company knows to analyze its inefficiencies well in different areas, knows to invest money in these segments, is patient to accumulate liquidity and allocate that cash to new acquisitions at an appropriate price, it could offer future growth. A higher price would put it more in line with the value of the net assets. Although the areas of insurance brokerage, coatings and packaging need to make major changes, the company has enough experience and liquidity to undertake such changes and investments.
Disclosure: I am currently a shareholder of Cosco Shipping International and own a small number of shares.
