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COSCO Shipping International HK (517 HK)
27-01-2019, 09:59 PM.
Post: #1
COSCO Shipping International HK (517 HK)
There is a common argument these days that there are no more obvious value in the stock market. Charlie Munger would say that it is meant to be difficult if not everyone else would do it. While I don't disagree that general current valuations look rich, there are still cheap stocks out there with a sufficient margin of safety if you are willing to look where no one else looks.

The thesis on 517 HK is a simple one. The current net cash is worth 6.3bn HKD (~1.08bn SGD) which is 50% higher than the current market cap. The company has been a consistent payer of dividends and their dividend payout policy is a minimum payout ratio of 50% although their historical payout ratio has been much higher than this. Current dividend yield based on TTM DPS (0.17 HKD) gives us about 6%. The current cash pile is sufficient to cover this dividend for the next 24 years even if they do not have profits to fund the dividend. So the cash and the dividend gives us protection on the downside. 

Now onto earnings, does the company make a profit? Yes they do. While industry trends have not been great in the past few years, 517 HK has recorded profits in every single year since the GFC. 1H 2018 reported an EPS of 0.12 which is similar to 1H 2017. So far so good. To put this into perspective, the performance of Neptune Orient Lines (NOL) during this same period saw losses for several years before it was acquired by CMA CGM in 2015/2016. Using the 2017 EPS, current PE is about 11.9x. The cyclically adjusted PE based on the 10Y average EPS would be about 8.5x, if you believe that current earnings are cyclically low and the 10Y average is reflective of a more sustainable level of earnings.

EPS from 2008 - 2017:
2008: 0.33
2009: 0.56
2010: 0.83
2011: 0.25
2012: 0.24
2013: 0.16
2014: 0.23
2015: 0.22
2016: 0.15
2017: 0.23


So what does the company do? They are basically in the business of providing shipping services of all kind. There are 5 main businesses.

1) Ship Trading Agency Services. They earn a commission for being the middle man in a transaction of a ship. Similar to being a real estate agent. The economics of this business is not great as it largely depends on the cycle and demand has been poor given the oversupply in the market. However, 2017 and 1H2018 so far has seen positive growth in both newbuild and secondhand market so who knows? Maybe we have passed the bottom. Average OPMs are in the 60% range.

2) Marine Insurance. This is a stable but low-growth business as companies need to renew their insurance on their vessels frequently. Nothing fancy but the OPMs have averaged about 70% in the last 5 years. From what I can tell, most of the business is done with the group.

3) Marine Equipment and Spare Parts. Again pretty self-explanatory and they have been growing this business as they try to target customers outside of the COSCO shipping group. The economics here are not great with OPMs at 5% and demand is tied to vessel demand (if there is no demand for the vessel, why bother buying spare parts?)

4) Coatings. Here they manufacture and sell marine coating paint with anti-corrosive characteristics. Here the profitability fluctuates with raw material prices but demand itself is stable as most of it is for maintenance and repairs. They also sell similar products for industrial use and for containers. OPMs are in the low single digit range. 

5) Trading business. This is trading mostly for marine fuel and the profits varies with oil price but it accounts for only 4-5% of the profits. 

Overall, the business is nothing fancy and not much of a moat around it other than the parent as the captive customer. For most of the businesses, it is not capital intensive and so returns on the underlying business are not bad. Given the huge cash pile, ROE ends up to about 4-5% but ROE excluding cash is in the high teens. The attractive part about the business is the lack of obsolescence risk. Unlike many other industries like banking or retail where the threat of disruption is high, we do not see many tech companies trying to disrupt the shipping industry. It seems pretty likely that the business will still be around in the next few years.

A common question would be "So what is the catalyst?" My answer is I don't know. It could be the company decides to do a big buy back, or the parent company decides that there is no reason for this subsidiary to remain listed and decides to acquire it given the big discount that the market is pricing in. It could be that the shipping industry starts to improve given we have seen much consolidation over the years. My honest opinion would be I don't need a catalyst as long as we have a sufficient margin of safety and we have sufficient amounts of patience to wait for the market to reassess the stock. The net cash alone gives us 50% upside to current share price. Even if I have to wait for 5 years, that works out to about 8.5% p.a. notwithstanding the dividends. 

(Needless to say, I am a shareholder with a vested interest in seeing the stock price go up)

For more information:
http://www.coscointl.com/investors/annou...circulars/

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27-04-2019, 01:21 PM. (This post was last modified: 27-04-2019, 01:25 PM by BlackCat.)
Post: #2
RE: COSCO Shipping International HK (517 HK)
Cosco Shipping International hit by alleged debt fraud from Coastal Oil liquidation

Jan 2019: http://www.seatrade-maritime.com/news/as...ation.html

 - Coastal Oil, which filed for bankruptcy in Dec, is a major marine fuel supplier of Sinfeng (Cosco Shipping Intl's subsidiary).  Coastal Oil handles malaysia/Singapore, not sure of others.
 - In 2017, revenue from Sinfeng was 66% of the revenue of Cosco Shipping International.  In 1H18, it was 69%
 - "The board expects that the revenue of the group will decrease significantly unless and until alternative suppliers to Coastal Oil Singapore are identified. However, in light of the insignificant profit contribution of Sinfeng, the board currently does not foresee any material adverse impact on the group as a result of the liquidation of Coastal Oil Singapore,”
 - A number of banks have demanded repayment of alleged debts owed by Sinfeng Marine Services to Coastal Oil.  “Based on preliminiary assessment, the management of Sinfeng is of the view that the documents in relation to almost all of the alleged debts are not genuine,”
 - According to documents obtained by specialist bunker media Manifold Times, Coastal Oil Singapore owes a total debt of approximately $357m to 79 companies. Of the total, banks were the hardest hit taking up about $354m (So the amount above should not be much).
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27-04-2019, 04:53 PM.
Post: #3
RE: COSCO Shipping International HK (517 HK)
COSCO SHIPPING International is a subsidiary of COSCO SHIPPING, which is a wholly owned subsidiary of COSCO SHIPPING. As at 31st Dec 2017, the number of shares in issue of COSCO SHIPPING International was 1,532,955,429 shares, in which COSCO SHIPPING owns 66.12% and the public shareholders own the remaining 33.88%. COSCO SHIPPING is the world’s largest shipping company in terms of comprehensive strength. Its fleet of more than 1,100 ships, with a combined capacity of over 85 million DWT, ranks the first in the world.

But the start of container delivery by railway from China into Europe via Russia may be hurting this share.

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17-10-2019, 10:41 AM.
Post: #4
RE: COSCO Shipping International HK (517 HK)
This cheap stock, which was highlighted many months ago, has gotten even cheaper.

The interest it receives from its cash balance alone is close to the amount of dividend it distributes to shareholders. Though, being an SOE with numerous affiliated companies, its cash -- which has been sitting there for many years, ostensibly pending an acquisition -- may well be summoned to save related parties, should the need arise.

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17-10-2019, 06:00 PM.
Post: #5
RE: COSCO Shipping International HK (517 HK)
There is always a reason not to buy but that is precisely why such opportunities exists. If all is going well then obviously it won't be priced at such a discount.

You are right to point out there is the risk that the company destroys value by using the cash to bail out related companies of the COSCO Shipping group. This has been the biggest concern whenever I talk to anyone about this stock. (The second concern is that people don't believe that the cash is real to begin with but that is another story.)

I don't have all the answers but there is a case back in 2017 where a related company of the group (COSCO Shipping International Singapore, ticker: COS SP) was saddled with debt and had to be bailed out for $300mn SGD. Back then, 517.HK had more than enough cash to bail out this related party but for whatever reason, the people calling the shots decided not to use 517.HK cash. So they had a chance to screw the shareholders of 517.HK but they didn't. In the end, the company that did the bailout was a private, fully owned subsidiary of the parent and no minority shareholder of any listed subsidiary had to pay for that bail out. Of course, the people making the decisions have changed and circumstances also change, so the probability of such an event is not zero but I would argue that it is less likely than most people think.

In the event that they end up using the cash to do a massive acquisition, the hurdle rate is the rate of return that they are currently earning right now. Given the current level of interest rate, that is a very low hurdle to meet. They can buy the whole of Boustead Singapore which is worth 380mn SGD which is trading at 12.5x PE and still have cash left over (I'm not saying that they will do that, but this is just an example). They can buy something for 20x PE (5% earning yield) and still be better off than sitting on the cash given their ROE is less than 5% now.

End of the day, there are always risks involved and you can always find a reason not to buy.

"In the stock market, the most important organ is the stomach. It's not the brain." - Peter Lynch

For more information on the bail out of COS SP:
http://cosco.listedcompany.com/newsroom/...K4A9.1.pdf

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17-10-2019, 07:09 PM.
Post: #6
RE: COSCO Shipping International HK (517 HK)
517 received its huge cash balance since circa 2011, so it has been about eight years and yet no acquisition was made. Eight years is a very long time to make an acquisition. The fact that it has taken so long suggests that management has probably no intention of using the cash to acquire any company.

Though, the management may have been very honest all along; the cash is intended to acquire related companies. Or, it could well be that the stated cash balance is much higher than what they really have. Regardless, in either case, the implication is that the cash is not likely to be available to the shareholder.

Yet, having distributed dividends consistently over the past ten years is an indication that something in 517 must be real.

Even as I think that 517 is priced cheaply, I still hesitate to key in a buy order. I must admit that I do not have the stomach to own companies that I cannot grasp.

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