At the peak of the business cycle, the only way is down

Few industries are as cyclical as the container shipping sector, and China Cosco is coming to market at the very top of its business cycle.

That will not unduly trouble the management of China's largest shipping company. According to bankers close to the deal, the institutional tranche of Cosco's initial public offering was fully covered by the end of business on Monday, the first day of the roadshow.

By the time Cosco's executives have swung through Singapore, London and New York, the $9.5 billion to $12.9 billion deal should be comfortably oversubscribed.

Cosco's lead managers, HSBC, JP Morgan and UBS, are pitching the company as a direct play on China's growth as a trading economy. With businesses from container manufacturing, to terminals to freight-forwarding, Cosco offers services along the whole freight chain, which bankers contend places the company head and shoulders above pure shippers such as CSCL or OOIL.

To bolster investor confidence, Cosco has enlisted the usual parade of big-name corporate investors, and to sweeten the deal further, it has promised to pay out as much as 35 per cent of this year's earnings in dividends. According to projections by HSBC, that will mean a windfall of at least $624 million for investors in the first year.

Nevertheless, Cosco is carrying some uncomfortable risks. Although the syndicate banks are stressing the breadth of the company's businesses, Cosco still made 79 per cent of its net profit last year from plain old container shipping. For the past couple of years, this has been a great business to be in as soaring demand after China's 2001 accession to the World Trade Organisation sent freight rates skyward, more than doubling Cosco's earnings last year.