Once an investor’s darling, COSCO Corporation’s (COSCO) share price plunged more than 20% since 5 August although its 1H08 earnings rose more than 70%. News of the abrupt replacement of its President and Vice Chairman Ji Hai Sheng was not anticipated by investors as they digested this latest change of management.

OUTSTANDING 1H08

COSCO’s earnings for 1H08 rose 74% to $212.6m, with turnover surpassing the $1b mark in a quarter for the first time on broad-based expansion across all key segments. The sharp increase was driven by progressive revenue recognition for COSCO’s healthy stream of high-value offshore marine engineering and ship conversion projects, as well as contribution from the shipbuilding segment which began recognizing revenue for its first dry bulk carrier in Q307. The two new dry docks which became operational at COSCO Zhousan further contributed positively to COSCO’s coffers.

PRESIDENT STEPS DOWN

President Ji’s sudden stepping down from his position came as a shock to analysts and investors. A dinner was hastily organized by the management of COSCO to clarify the intentions of the switch and introduce the new President Jiang Li Jun to analysts. Clarifying the miscommunication in the press release, the management said that Ji will in fact be rotated to head another division and remain within the COSCO Group.

This may ease some concerns among investors but nevertheless the bulk of the damage has been done. On the day of the announcement of Ji’s retirement, COSCO’s share price fell more than 10% in the morning and has not recovered since. The change of management amidst a weak investor climate such as now did not help COSCO as Ji was credited by many as the one who helped to build COSCO to what it is today.

The new President Jiang was previously the CEO of COSCO Shipping Co and has more than 20 years of experience in COSCO, holding several positions during his tenure. According to Merrill Lynch, Jiang appears relatively unfamiliar with the shipbuilding business and will take time to become fully functional in his new role. However, given his strong experience in shipping, he will bring new perspective and strength to COSCO’s current management team. Jiang reaffirmed that there will be no change to COSCO’s overall strategy but some degree of uncertainty could be expected during this transition.

STILL RECOMMENDED BY SOME

As of 12 August, COSCO is currently trading at $2.33, a far cry from its heydays when it was trading at $8. DMG & Partners maintained its Buy recommendation on COSCO with a target price of $3.82, on the back of a strong orderbook of US$7.4b. However, it believed that the share price would likely be pressured in the near future over rising steel costs and possible cancellation of orders. Forecasting a price objective of $4.80, Merrill Lynch believed that COSCO is best valued on a discounted cash flow methodology, as it better reflects the high cash generative nature of its business. In contrast, Credit Suisse maintained its Underperform rating (target price $2.25) on COSCO saying that downside risks persist.

The shipping industry is currently undergoing several setbacks due to high steel costs and intense competition. Like several of its peers, COSCO is going through a slowdown in orders and trying to keep its margins up. Even though COSCO’s share price has fallen to a low level, investors should perhaps wait and observe the company’s performance under its new President before investing.