HONG KONG — China Shipping Container Lines will exit the container trade under the merged and reorganized China Cosco Shipping Group, a move that raises questions on the carrier’s continued participation in the Ocean Three Alliance it shares with CMA CGM and United Arab Shipping Company.
CSCL will be transformed into a financial services and ship leasing platform, according to filings to the Hong Kong and Shanghai exchanges over the weekend. No timeline was given for the carrier’s transformation.
Trading in the shares of the seven companies under the Cosco-China Shipping umbrella resumed today (Dec. 14) with a flurry of exchange announcements illustrating the scale of the restructuring task required in reorganizing the multitude of companies involved.
This is how the new entity will operate after the restructuring: China Cosco Holdings will be the dedicated operator for container shipping, acquiring 33 container companies from CSCL that are distributed across the mainland for $176 million. China Shipping Development, the former bulk division, will focus on tanker and LNG transport, offloading its loss-making dry bulk business to China Cosco Group and acquiring a Dalian tanker subsidiary. Terminal operator Cosco Pacific will continue to focus on port investments and operations, becoming the world’s second-largest in throughput terms, and CSCL will transform itself into a container and vessel leasing company and related financial service provider.
While CSCL is with the O3, Cosco is a member of the CKYHE Alliance with “K” Line, Yang Ming, Hanjin Shipping and Evergreen Line, but it is not known yet how the China carriers’ participation in these vessel sharing agreements will change.
By the end of 2016, the O3 Alliance may have G6 carrier APL as a member if the proposed CMA CGM offer for NOL goes ahead, possibly replacing CSCL.
Independent Hong Kong-based analyst Charles de Trenck said there was no surprise that Cosco emerged as the container flagship. “Despite all the failures at Cosco management levels, Cosco nonetheless is the more established institution between Cosco and China Shipping,” he said.
But from an investor perspective, he said the restructuring was going to be difficult. “Investors are going to have one hell of a headache, not so much to keep up with where the assets are going — that is the easier part — but what they are worth and how they are to be adjusted to the existing vehicles.”
Analysis of the plan by Jefferies was generally positive. “Moving from liners to leasing will turn CSCL from being a deep cyclical into a steady income play. We welcome CSCL’s exit of container shipping, which we believe will face overcapacity for at least 2-3 more years given the massive newbuilding orders placed this year. Though, we are not sure shareholders will be happier holding something like a bank,” it said in a note to customers.
Citi Research analysts also appeared largely satisfied with the reorganization. “We are most positive about China Shipping Development’s restructure plan as it will get rid of the money-losing business and focus on the profitable oil shipping,” its note stated.
Under the plan, China Shipping Development will become the world’s largest tanker operator, with a market share of 3.8 percent by disposing dry bulk business to China Cosco Group and purchasing Dalian Ocean, which specializes in tanker and LNG shipping, from China Cosco Group.
The merger will create the fourth-largest liner globally with a market share of 7.8 percent, but Citi pointed out that despite the long-term synergy that would gradually be realized over the years, it expected earnings in 2016 to be dragged down by the initial merger cost such as losing customers and switching IT systems.
According to Drewry, the coming together of CMA CGM with APL and of Cosco with CSCL will allow these two groups to play catch up with Maersk and Mediterranean Shipping Co. at the top of the size rankings and will further concentrate control of the global fleet among the leading few carriers. The new Top 5 carriers will control around 55 percent of the active fleet and orderbook as they currently stand.
However, the London-based analyst did not believe the consolidation would improve industry profitability in the medium term as it merely shuffled the excess number of ships into fewer hands.
China Cosco told investors the merger would focus on the container shipping service chain. “As China Cosco and CSCL have many similar aspects in container business, the transaction will lead to optimal allocation of assets for container shipping,” the statement said.
Unsurprisingly, scale is one of the major motivations behind consolidating the China carriers. “The listed company will integrate the assets of the two groups for container shipping, expanding the fleet and network to further improve its competitiveness in the international market, close the gap between it and the world’s top three shipping companies and achieve all-round growth in shipping capacity and shipping line support.”
The group’s terminal network will be expanded to cover China’s five major port groups and overseas pivotal ports, with full coverage of coastal provinces. This would significantly improve the the company’s competitiveness in the terminal business while producing synergy between the new container shipping business and the new terminal business, China Cosco said in its announcement.
Source: Journal of Commerce
Source: Journal of Commerce