Cosco's earnings sank a depressing 65% to S$9.7m

What could be blamed?

According to DBS, Cosco reported a disappointing set of 1Q13 results with net profit coming in at S$9.7m (-65% y-o-y), way below expectation of S$20-25m. 

Key variances were the lower than expected non-offshore revenue and sale of scrap materials, as well as forex loss.

Here's more from DBS:

Nevertheless, overall gross margin held up at 10.7%, attributable to Cosco's improved efficiency and lower steel cost, offsetting the lower newbuild prices.

The bulk of Cosco's outstanding shipbuilding contracts of 27 vessels or <15% of its orderbook of US$6.4bn, will be delivered in 2013.

With the dearth in shipbuilding orders, management expects only c. US$200m or 10% of its target of S$2bn for new orders this year to come from the shipbuilding segment.

While management has no intention of temporarily closing the yard and remains confident to fill the excess shipbuilding capacity with the shuttling of orders among its seven yards, we are less optimistic given the competitive landscape across shipbuilding and offshore segments as well as the weak shipping market.

In addition, the recent yen depreciation has wiped out cost advantages of the Chinese yards, and this may lead to more bulk carrier orders being channeled to Japan.