Business is divided into two main business segments.
Shipping Services
Cosco shipping International
- Provision of shipping services
- key customers include ship owners and operators, shipyards and container manufacturers
- Tangible products such as marine equipment and spare parts, marine coatings, intangible services such as consultancy services for buying ships, marine insurance, ship financing and related information support, as well as provision of value-added supporting services for vessels operations such as supply of marine equipment, marine fuel and ship supplies, and ship management.
- One stop shop which enhance the core competencies of fleets
1. Ship trading agency services
Providing agency services relating to shipbuilding , ship trading and charting for all types of vessels.
2. Marine Insurance Brokerage Services
Offer insurance intermediate risk assessment, designing insurance program, placing insurance cover, loss prevention and claims handling to
vessels insured worldwide.
3. Supply of Marine equipment and spare parts
Sale and installation of marine equipment and spare parts, as well as equipment and of radio communication systems, satellite communication navigation systems for ships, offshore facilities, coastal station and land users, and marine material supply and voyage repair
4. Production and sale of coatings
Production and sale of container coatings, industrial heavy duty anti-corrosion coatings and marine coatings
5. Trading and supply of marine fuel and related products
Provide marine fuel supply services, as well a trading of marine fuel and related products.
Shipping Services are beneficiaries of shipping capacity
Demand for shipping services are driven by shipping capacity growth and ship owner's fleet restructuring activity. As distinct from shipping companies the revenues of shipping services are either direct or indirect costs of shipowners or ship operators, and are not affected by short term fluctuations of freight rate.
COSCO shipping international has a diversified business mix of shipping services which are complementary to each other without obvious cycle.
As seen from the above image, for ship trading agency, marine insurance brokerage and marine equipment and spare supply, Cosco Shipping International is the "sole agent" to provide a centralised procurement to Cosco Shipping Fleet. This means in simple terms left pocket pass to right pocket. They do not want such a high value and margin business to benefit third party, instead they are passing the meaty part of the business to an internal party.
On the marine insurance brokerage, 40% of revenue comes from external customers and they are growing this segment, moving into non-marine insurances. This could be a growth factor.
Marine insurance, equipment for maintenance, marine bunker, crew changes, logistics and marine coatings are OPEX of a shipping company. They can be reduced in times of downturn but can never be reduced to zero. Moreover, now with the global economy recovery in place, the China Containerized Freight Index is recovering from 2016 low, standing at 836.6 at the time when I was writing this.
In essence, I felt that Cosco Shipping International has certain level of moat. The business is sheltered by the parent company and it has given some autonomy to grow other aspects of the business. However, need to monitor the growth and decrease rate of each individual segments in the next financial report.
Valuation
Based on June 2017 results, Net Cash per Share is HKD 4.19 and NAV is HKD 5.09. As of today, the share price is HKD 3.09 which is approximately 25% safety margin. Recently, I read this book Deep Value Investing by Jeroen Bos. It gives me a good insight on what he looks for in deep value investing.
Conclusion
I am invested in this company. There are certain risk as shipping is cyclical business. Please DYODD. This does not constitute a buy call.
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