COSCO Shipping Ports' Faustian Bargain and Impact of Restructuring on 2016 Financials

Leading Independent Investment Research, Morningstar, Inc.

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Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/360" target="_blank" data-smartkarma-citation="entities:360:1">COSCO Shipping Ports Ltd (1199 HK)</a> will become <a href="https://www.smartkarma.com/entities/19462" target="_blank" data-smartkarma-citation="entities:19462:1">Qingdao Port International Co Ltd (6198 HK)</a>'s second-largest shareholder following the subscription of shares amounting to a 16.8% stake. We think the acquisition will strengthen CSP’s operation in northeast Asia, given QPI’s well-located assets: a major hub in the region, which is ranked No. 4 and No. 6 in container and bulk handling volumes domestically.However, the pricey valuation reduces the attractiveness of the deal, and the consideration of CNY 5.71 per share implying 2.2 times price/book, compared with only 0.6 times for CSP’s existing assets, as well as a 40% premium to QPI’s current trading level. The deal is subject to regulatory and independent shareholders’ approvals, and we maintain both our earnings forecasts and our fair value estimate of HKD 10.00 per share pending additional details, but expect 3%-4% earnings upside upon completion of deal.Analyst: Jennifer Song

COSCO Shipping Ports Ltd (1199 HK) will become Qingdao Port International Co Ltd (6198 HK)'s second-largest shareholder following the subscription of shares amounting to a 16.8% stake. We think the acquisition will strengthen CSP’s operation in northeast Asia, given QPI’s well-located assets: a major hub in the region, which is ranked No. 4 and No. 6 in container and bulk handling volumes domestically.However, the pricey valuation reduces the attractiveness of the deal, and the consideration of CNY 5.71 per share implying 2.2 times price/book, compared with only 0.6 times for CSP’s existing assets, as well as a 40% premium to QPI’s current trading level. The deal is subject to regulatory and independent shareholders’ approvals, and we maintain both our earnings forecasts and our fair value estimate of HKD 10.00 per share pending additional details, but expect 3%-4% earnings upside upon completion of deal.Analyst: Jennifer Song

Acquisition of QPI Favors CSP's Long-Term Strategic Position, But Valuation Is Unattractive

Cosco Shipping Ports

Acquisition of QPI Favors CSP's Long-Term Strategic Position, But Valuation Is Unattractive