The torrent of red ink flowing from China Cosco Holdings' balance sheet may have eased in the third quarter with the help of government subsidies. But the problems facing the firm's core dry cargo and container line businesses look far from over, as a slump in demand, too much tonnage in the global merchant fleet, and high-priced charters continue to weigh on the company.
Overall, quarterly losses at China Cosco have been trimmed this year. From a 2.69 billion yuan (HK$3.32 billion) net loss between January and March, the firm posted a 1.53 billion yuan net loss in the third quarter, helped by a 490 million yuan increase to 808.28 million yuan in government subsidies.
While some of the improvement came from high freight rates at Cosco Container Lines, analysts do not expect the rebound to continue. Jon Windham, head of the Asian industrials sector at Barclays in Hong Kong, said a decline in Asia-to-Europe freight rates since June signalled a sequential decline in container profitability in the fourth quarter.
Pointing to the problems affecting China Cosco and other mainland operators, Winnie Guo, shipping analyst with CCB International Securities, said the third quarter did not live up to expectations as the container freight rate index declined 1 per cent quarter on quarter.
But the losses at China Cosco are only one part of the malaise affecting the mainland's largest shipping company.
China Cosco is the largest in revenue terms of the five listed subsidiaries of China Ocean Shipping (Group). But it is also a hodgepodge of companies, including Cosco Container Lines, Cosco Logistics, Cosco Pacific - which is separately listed - and Florens, China Cosco's container sales and leasing company.
While the other separately listed Cosco group subsidiaries remained in the black, all saw steep declines in profitability.
Cosco Shipping, the Shanghai-listed heavy-lift company, said net profit dropped 72.7 per cent to 798.7 million yuan in the first nine months of this year when it reported its third-quarter results on October 15. This was despite a 6 per cent rise in revenue to 1.39 billion yuan.
Cosco Corporation (Singapore), which controls Cosco shipyards and a dry bulk business, saw net profit drop 19 per cent to S$81.99 million (HK$518.66 million) in the first nine months of this year. This included a 17 per cent drop in the third quarter to S$26.56 million. Revenue slipped 3 per cent to S$2.89 billion between January and September.
Net profit at terminals company Cosco Pacific fell 24.5 per cent to US$178.93 million in the first half while revenue rose 31.8 per cent to US$367.36 million.
Cosco International, whose businesses include marine paints, chartering, and ship services, saw interim net profit slip 1 per cent to HK$232.42 million on revenue that fell 21 per cent to HK$4.48 billion between January and June.
Analysts said the tentacles of the state-owned enterprise were spread into various businesses whose total revenues, profits and losses were impossible to assess.
Cosco's 2010 sustainability report lists 21 separate operations, including its unlisted tanker company, Cosco Dalian, along with support operations such as Cosco Manning and Cosco Finance. Hainan Cosco Boao, the conference and resort complex on Hainan for the Boao Forum, Beijing's attempt to create a Davos in the East, is also among Cosco's interests.
Overall, the Cosco group operates at least 700 ships and employed 71,100 people in 2010, including 44,600 mainland employees.
Janet Lewis, head of industrials research in Asia for Macquarie, said Cosco Dalian probably performed better than the dry bulk division. It has a fleet of more than 50 ships, including supertankers and gas carriers that it owns and other it charters from other owners, but because it is privately held by Cosco no detailed financial information is available.
An indicator of its fortunes may be found in the performance of close rival China Shipping Development, which has about 70 tankers. The poor state of the tanker market meant CSD's tanker business generated a 131.93 million yuan loss in the first half of this year compared with a 384.4 million yuan profit in the first half last year.
Analysis of China Cosco's interim results shows losses at the container and dry bulk shipping divisions dragged the rest of the company down. Cosco Logistics, terminals, and the container sale and leasing operations, all increased their profit contribution to China Cosco in the first half of this year.
Windham points to the massive debt and continuing ship charter commitments as deep-rooted problems.
He said: "The scale of the shipping-related net debt and capital commitments of US$14 billion, excluding Cosco Pacific's debt and commitments, seems irreconcilable with the short/medium/long-term earnings' power of the underlying business assets. Ever-increasing borrowing buys time, but is not a solution."
China Cosco's on-balance sheet debt topped 79 billion yuan in the first half, but Windham said there were thought to be additional off-balance-sheet debts of 13 billion yuan in vessel capital commitments and 52 billion yuan in vessel operating leases as of June 30 this year.
Shareholders have already seen China Cosco's stock lose ground over the last 12 months, falling from HK$3.89 on November 11 last year to HK$3.69 yesterday, despite hitting a 12-month high of HK$5.50 on February 8.
"We are discouraged by the adverse financial impact of the high, fixed-cost vessel operating leases and see little reason to own the name," Windham said.
Lewis thought there were few options available to China Cosco to restore profitability, especially as the company risked being delisted from the Shanghai stock exchange if it reported a third year of losses in 2013.
She suggested the only positive option was for China Cosco to sell its dry bulk operation back to the parent Cosco. Cosco executives, including chairman Wei Jiafu, have avoided giving any detailed proposal to cut the losses, declining all interviews.