Cosco..my mistake to postco.

COSCO Corp
Core business that deals with ship repairing, ship drying and marine businesses in China

Earlier this year, probably during April-may period, I issued a "buy" report on this stock to most of my friends via hotmail. How this stock caught my eye, was because of the “who-ha” it created during those months, many people where buying Cosco stock and analysts that cover it were issuing a buy as well, almost everyone considered it to be a safer investment a-mist an unfolding market turmoil.

Suffice to say it was treated as market daring and so I wanted to find out more about the stock, and see what was all the “who-ha” about.

As I searched through their annual reports, digested analysts coverings, scan through their past balance sheets, I found no fault with the company. Therefore, without hesitation, I issued a "Buy" report on the stock just like all the analysts having been doing. And this is what I wrote as of 14th May 2008


=========My stock report covering============

Here is why I will buy this stock
Company nature
1) Largest Ship Repair Company in China, the economics of scale is there. Simply means other competitors have a hard time taking away its profits.
2) They already have ship building contracts worth $US7.2Billion
3) High transparency. Good auditors.
4) Good history (5 years) of earnings, cash flow and sales figures
5) Net profit for the 1st Quarter more then doubles to $83million Future growth
6) Continue build up in offshore marine engineering, offshore rigging and building in China, more new areas for the company to expand and reap more profits
7) New contracts are being formed, with Indonesia, additional 2 more units for Sevan company. 8) Possible fund inflows in the near future
9) China’s growth, even after Olympics
10) More contracts growth waits, not disclosed yet. Etc 6 rig building.

Industry and country outlook
1) Global demand, surging demand for commodities in China will result in more ship building.
2) Recent Earthquake in China acted as benefit for the company, thus more demand for imports such as iron ore.
3) Recent high oil prices will encourages import/exports via shipping as compared to air travel. (Not a valid point as oil prices are volatile)
4) Company claims that, the demand for ship repair in China is so overwhelming that they cannot take in all the orders.( Spoken in 2007)

Financial studies reviews
1) Fallen from a high of $8.90 in Oct 07 to $3.10 in July 2008
2) ROE consistently high*
3) Price to book ranges from 5-7 times*
4) PE ratio is at 20 times*
5) Free cash flow remains healthy
6) Accounting irregularities are not present *
Basically, a high ROE, a Price to book and a low PE ratio means the stock is undervalued. In this case Cosco have super high ROE, a justifiable Price to book and reasonable PE ratio.

Other concerns with this company

1) Continue High prices in steel, labour costs will eat into its earnings
2) Chinese government’s policy on inflation and exports /imports policies
3) High PE ratio compared to other marine stocks like SembCorp , Keppel (20,15,16 respectively)
4) A sudden great fall in oil prices (below $60) will affect their rig/ship building contract growth 5) Global recession, because the company’s profits comes from both imports and exports in China, should the country or the world goes into a recession, the company’s earnings will fall.



VALUATION
Based on my Future Earnings model I calculated the stock’s real value
Most optimistic view is $29 with an EPS growth rate of 60%
Most average view is $4.42 with an EPS growth rate of 25%
Most bearish view is $1.76 with an EPS growth rate of 8%
Given the facts above, the company’s share price is now $3.03-$3.70 recorded as @ May-July 2008.

I recommend a buy issue, as this company’s has the potential to grow in many areas and especially China and the possibility of the China Funds will propel this stock. With that said, more importantly is its earnings in the future; therefore I will recommend a sell issue or an exit order if

· If EPS growth rate drops below 20%

· Once the stock become overvalued with PE over 35, PV above 10

· Any top management fraud

· China’s growth seem to decrease these 3-5 years

· China’s exports and imports start to decrease drastically

TIMING THE MARKET
Once Stochastic blue line cross over red line. Buy! Technical Aspect The stock has began to recover from its recent sell down in early April 2008 this was due to a contract lose by the company, however the company said that only left 6% of the remaining 94% contracts have been secured.
In view of this, once confidence has been restored, the stock price broke through 10EMA and 40 EMA, stochastic review a positive sign to buy. For those who are risk takers, buy the stock now at $3.00-$3.70 For those who are a bit risk adverse.
Buy the stock at $4, as this price will have ensured that the stock has gotten out of its downtrend.
Verdict: BUY Targeted Price: $4.20
==============End of report===========

Just an update on the current market trading price as of 16 Oct. 08, Cosco now trades at 0.745 per share. That a huge drop at an entry price of $3.10-$3.70

This insight forced me to review my own report, after doing so, I feel kind of disgusted with myself. How could I have been so blind? Thus, let’s not blame anyone, those analysts and me for being so optimistic. What’s important here is to learn from mistake or at best, I can just learn fro my own folly and not repeat and review misleading reports again.

Learning from mistakes: Why I eventually didn’t invest
1) Cosco’s free cash flow calculation remained uncertain. There was a huge increase in payables and receivables respectively, management and analysts have yet to reply to my quires on it. Especially times like this, where a company is being well capitalized is very important , able to meet short time loans with available cash, passing the acidity test

2) It’s order book of $7.2billion was a significant conviction that justified my call issue. Now that I learnt, that these order books might not come to pass. *note to self: next time don’t give so much confidence to a stock, just because of its huge order books. Now the company might have trouble assuring all of them.

3) Insider’s trading (don’t worry, this is public information shown in their website) was inconsistent and misleading, directors were seen buying 50 lots time and again, and then a sudden 1000lot sold by another director.

4)Cosco was considered a growth and glamour stock, not a valued stock The EPS growth valuation model stated that in order for Cosco to maintain or have a price of $3-$4 it had to growth it’s earnings by 17%-20% which, looking at their quarterly report, couldn’t sustain that market price.

5) Cosco high share prices were also supported by its huge promise of contracts in the future. This however must be taken with a pinch of salt, as they are “EXPECTED to get” contracts might not come to pass

6)Through out the 5 years there was consistent earnings growth, however in the period of 2001-2002, there earnings was lower (early warning sign that maybe during bad periods, this stock really cannot make it)

7) Cosco’s earnings were also well linked to the Ballistic Dry Index, which I forecasted, could drop drastically, due to its huge increase in the pass years. This has come to pass. That’s why it’s very important to know, the industry of the company is in, and how other factors/ variables affect its future earnings.

Recent News
HSBC downgraded Cosco Singapore to 'underweight' from 'neutral' and cut its target price to S$1.30 on Thursday, citing a sombre outlook for the shipping sector. 'We believe the year-long sell-off in shipbuilding stocks will continue. Rising material costs, a substantial increase in the supply of bulk and container ships, a decline in new orders and a falling Baltic Dry Index all point to further near-term market weakness,' HSBC analyst Steve Man said in a note. Man said Cosco also faced volatility and uncertainty over the direction of freight rates, which were causing Cosco's customers to put off new orders. http://uk.biz.yahoo.com/18092008/323/singapore-hot-stocks-cosco-corp-focus-hsbc-downgrade.html

What's Next?
Even though Cosco, have fallen drastically these pass few months, there is still good value for the stock, which I believe so. What I need to do now is go review Cosco’s NAV per share again, adjust its assets and find the NAV per share.Go review it’s growth prospects, and not being to pessimistic as factoring 100% cancellation of its $7.2Billion order book.