Industrials

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

A strange thing is happening in China's state-owned marine transport industry.

The government shook up its kaleidoscope of shipping companies last year to create four discrete businesses focused on container shipping, commodities transport, terminal services, and leasing. At a time when the global container industry is in crisis, you might have expected that China Cosco Holdings, the unit that ended up with the container assets, would be the least-loved by shareholders. You'd be wrong:

On Stranger Tides
Based on price-book ratios, China's state-owned container line is worth more than its ports business
Source: Bloomberg
Note: Comparable price-earnings ratios aren't available because analysts aren't forecasting profits for China Cosco Holdings in the next three fiscal years.

This is almost a reversal of the normal situation. Globally, shipping lines trade on a median 33 percent discount to book, according to data compiled by Bloomberg, well below the 17 percent premium for China Cosco. Meanwhile, ports businesses around the world trade on a median 15 percent premium, but Cosco Shipping Ports is on a 30 percent discount.

There's a reason most people treat ports as better investments. The huge cast of players competing in the global container fleet has ensured a ruinous oversupply of vessels plying the seas, but harbors are natural monopolies that present formidable barriers to new entrants. While all five of the world's biggest shipping lines by revenue have posted negative returns on equity in the most recent period, all five of the biggest ports operators are in the black.

Living in a Box
Major port operators show far better returns on equity than shipping lines
Source: Bloomberg
Note: Chart shows top five listed companies by revenue in each category.

Why, then, is Cosco Shipping Ports not performing better? One reason is that it's a minority shareholder in almost all of its terminals with the exception of Piraeus, in Greece. That turns it from a true ports operator into more of a passive investor, with a broad portfolio.

Still, with $188 million of net income in the six months through June and net debt equivalent to just 16 percent of equity, it has ambitions to do more. The company will spend $738 million on building a new port in Abu Dhabi and will consider buying the terminal assets of bankrupt Hanjin Shipping, Chairman Xu Lirong said this week.

That would allow it to add extra terminal space to Cosco berths at California's Port of Long Beach, as well as at Gwangyang, a Korean port close to one of the world's biggest steel plants. Hanjin doesn't break out the earnings from its ports, but they still seem to be performing reasonably well. While it essentially suspended investment in new ships over the past few years as debts started to bite, the amount dedicated to terminals actually increased.

Keep on Truckin'
Hanjin has stopped outlaying money on new ships, but it's spending more on its port facilities
Source: Company reports

There are two problems with this strategy. One is that the most reliable route to profit for a port operator is to screw money out of shipping lines and ground-based logistics companies. But Cosco Shipping Ports' biggest shareholder is the aforementioned China Cosco Holdings, which also happens to be one of the world's five biggest container lines. That will hamper the terminals' ability to squeeze the marine side of the business.

The other is more profound. Ports can be emotive affairs: Dubai's state-owned operator DP World had to carve U.S. operations out of its $6.8 billion 2006 acquisition of P&O's ports unit in the face of sustained opposition from Congress. Cosco first arrived at Long Beach in 1996, when China was still seen as a bit-player in world affairs -- and even then there were security concerns from U.S. lawmakers.

The atmosphere now is considerably hotter. Beijing is building artificial islands to assert its maritime claims in the South China Sea and a senior Chinese admiral has warned of "disaster" if foreign navies sail through international waters in the region. Recent Sino-Russian joint naval exercises off the country's southeast coast practiced "island seizing" activities and anti-submarine warfare, while state news service Xinhua editorialized that the latest round of U.S.-South Korea naval exercises in the Sea of Japan jeopardizes stability in northeast Asia.

With all that tension roiling the high seas, you don't even need a Trump factor to thwart Cosco Shipping Ports' international ambitions.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. It's a sign of how incestuous the relationships are that Xu isn't technically the boss of either of the companies most immediately involved in the deal. Cosco Shipping Ports is making the investment in Abu Dhabi; its chairman is Huang Xiaowen. Cosco Shipping Ports is in turn controlled by China Cosco Holdings, whose chairman is Wan Min. Xu is the chairman and party secretary of China Cosco Shipping Corp., the peak company.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net