China shipping groups merger plan erases S$1.27b in market value, Cosco Corp Singapore hit

China's biggest shipping reform failed to enthuse investors as two major companies lost about S$1.27 billion in total market value. PHOTO: BLOOMBERG

SINGAPORE (BLOOMBERG) - China's biggest shipping reform failed to enthuse investors as two major companies lost about HK$6.95 billion (S$1.27 billion) in total market value after the government proposed combining its two key ocean liner groups.

China Shipping Container Lines Co and China Cosco Holdings Co led the declines with drops of as much as 30 per cent on Monday (Dec 14), the most on an intraday basis in more than 10 years. The shares had been halted from trading since August pending an announcement by their parent companies.

The State-owned Assets Supervision and Administration Commission announced approval on Friday for the reorganization of China Ocean Shipping Group and China Shipping Group, extending efforts to shrink industries plagued by overcapacity while creating globally competitive businesses. The plan comes as other shipping companies explore mergers and acquisitions amid a slump in global freight rates.

"China shipping stocks have been suspended for more than four months so part of today's slide has to be the shares catching up with the broader market" decline, said Castor Pang, head of research at Core Pacific Yamaichi International Hong Kong Ltd. "The entire reorganization plan, while intended to help consolidate operations, is very complicated and unwieldy. It won't be a year or two before effects are fully seen and understood."

Hong Kong's benchmark Hang Seng Index fell 13 per cent during the four months when shares of China Ocean Shipping Group and China Shipping Group companies were halted in the city. The Shanghai Composite index dropped 8.3 per cent in the period.

China Shipping Container lost as much as 30 per cent, the biggest intraday loss since June 2004, and traded at HK$2.19 as of 11:53 am in Hong Kong. China Cosco declined as much as 28 per cent. The stock declines wiped out as much as HK$3.41 billion (S$621 million) and HK$3.54 billion (S$644.8 million) respectively.

The companies' shares remain suspended from trading in Shanghai pending a review of the restructuring by the stock exchange there.

Cosco Corp Singapore Ltd fell as much as 19 per cent to S$0.305, the lowest intraday price since February 2004, after resuming trading on Monday. The company expects a significant loss in the fourth quarter as some offshore contracts are deferred or potentially canceled, Cosco Singapore said last week. Its shares also had been halted since August.

The proposed combination of the two Chinese groups comes days after CMA CGM SA, the world's third-biggest container shipping company, offered to buy Singapore's Neptune Orient Lines Ltd. for S$3.38 billion. The Chinese combination would have a 7.7 per cent share of the container market, overtaking Hapag-Lloyd for fourth place, behind CMA CGM, according to Alphaliner.

The Chinese government's plan would lead to four listed entities, each focusing on one aspect of the shipping business: containers, financing, terminals, and oil and gas, the official Xinhua News Agency said.

When the businesses are reshaped, China Cosco will operate container ships, while China Shipping Container will be a leasing and financing company for vessels and boxes, the companies said in exchange filings late Friday.

For China Shipping Container, "letting go of the container liner operation is a welcoming move but taking on container leasing, manufacturing and banking does not inspire," analysts including Johnson Leung at Jefferies Hong Kong Ltd. wrote in a note on Monday. "We are not sure whether the deal will go through."

Cosco Pacific Ltd will acquire wharf assets held by China Shipping Container to operate the combined company's terminals globally, the statements showed. China Shipping Development Co will be the focal point for oil- and gas-transportation business.

State companies' "reform is a good thing, broadly speaking. China's state sector is inefficiently run and change is needed," said Jackson Wong, associate director at Huarong International Financial Holdings in Hong Kong. However "the parent bodies are not taking back the parts of the businesses that are unprofitable in this reorganization, as we have seen in most other state-owned enterprises reform," he said.

In May, CSR Corp and China CNR Corp combined to create CRRC Corp, a train equipment maker that challenges Europe's Siemens and Alstom. China Minmetals Corp, the country's biggest metals trader, last week agreed to buy China Metallurgical Group Corp, a government-owned engineering and mining group.

Combining operations could help the shipping companies enlarge their presence and improve bargaining power, but the overcapacity plaguing the industry will remain. Ships with a total capacity of about 2.9 million 20-foot containers are expected to be delivered this year and next, according to Drewry Shipping Consultants Ltd.

Shipping lines are attempting to charge more, lifting spot rates for hauling a 20-foot container to Europe from Asia to US$703 for the week ended Dec. 11, from US$275 from a week earlier, according to the Shanghai Shipping Exchange. Levies to the U.. West Coast dropped to US$816 per 40-foot box.

China Shipping Group had revenue of 82.8 billion yuan ($13 billion) in 2014, according to data compiled by Bloomberg. Cosco Group had revenue of 169.3 billion yuan last year, according to its website.

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