After two consecutive years of losses, China Cosco Holding faces the possibility of having its A shares suspended on the Shanghai Stock Exchange should it lose money again this year.
Commenting on the first remedial step taken to ensure a profit this year, involving the internal sale of Cosco Logistics to Cosco Group for CNY6.7 billion (US$1.1 billion), China Cosco Holdings said: "The disposal is expected to improve the earning performance of the Group in 2013, thus reducing the risk of the shares being suspended from trading on the A-share market, which is in the best interests of the shareholders as a whole."
If the deal wins shareholder approval on April 26, it is expected to raise a pre-tax profit of CNY2 billion. But if the shipping market remains flat in 2013, this will not be enough to produce a net profit, so further restructuring and asset sales may well be in the offing.
As China Cosco Holdings owns 100 per cent of Cosco Container Lines (Coscon), the perceived danger for 2013 is still of more than passing interest to the container industry, particularly as compatriot CSCL's shares would now also be under closer public scrutiny were it not for the sale of a large chunk of its container fleet in fourth quarter 2012 for CNY3.2 billion, netting an exceptional profit of CNY1.1 billion.
Beijing cannot be pleased with either result, despite the reduction in unit costs, although Coscon and CSCL were not the worst performers of the major carriers that publish results in terms of EBIT margin. They were not among the best either, so the State-Owned Assets Supervision & Administration Commission (SASAC) must be planning some sort of remedial action. The administration owns 100 per cent of Cosco Group, which in turns owns around 53 per cent of China Cosco Holdings, and 100 per cent of China Shipping Group, which in turn owns 47 per cent of CSCL.
It may already have started the process in October when Coscon and CSCL announced that their domestic coastal services between north/north east China and Guangdong were to be run jointly. A massive 45 per cent of CSCL's total cargo comes from cabotage, compared to Coscon's 27 per cent. Although Chinese cabotage is protected, both companies face stiff competition from a wide array of much smaller Chinese operators specialising in door-to-door services, which explains their comparatively low turnover/TEU margins.
It is unlikely that any merging of international services is envisaged. Apart from the duplication of schedules, Coscon operates within the CKYH alliance, so is not a free agent in this respect.
The danger of a merger resulting in the loss of market share, as happened when Maersk Line acquired P&O Nedlloyd in 2005, and when Hapag-Lloyd acquired CP Ships shortly afterwards, is very real, therefore.
Other changes are possible, however, including the sale of further assets and internal restructuring. The extent of the action taken will depend on pace of market recovery. In this respect, Drewry believes that 2013 will again see a fragile balance between supply and demand, with global cargo growth forecast at 4.2 per cent against a forecast supply growth of 7.4 per cent.
Rationalisation of services offered by Coscon and CSCL seems inevitable in the long term as they both provide similar functions in the same market segments, and one bleeds the other. Assets sales are only a short-term solution.
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