Closer Look: The COSCO Maelstrom, China’s shipping giant struggling in a swirl of conflicting interests

05.02.2013 19:44

Closer Look: The COSCO Maelstrom

COSCO Chairman Wei Jiafu can save the company from struggling in a swirl of conflicting interests by taking the company’s shares off of public exchanges

By Wang Lan

Shipping giant China COSCO Holdings Co. Ltd. announced March 28 that the Shanghai Stock Exchange (SSE) would tag the company’s shares for “special treatment.” The measure is used to warn investors of a company’s possible delisting after a company reports two straight years of losses.

In 2011, COSCO lost 10.4 billion yuan, and it posted annual losses of 9.56 billion yuan in 2012, marking the second straight year the company reported a loss.

COSCO is not the only state-owned enterprise (SOE) which has failed to get out of the red. COSCO Chairman Wei Jiafu stated in early April at the Boao Forum in Hainan, “If the company is performing as badly as a few people say, how would it be possible for me to attend the BRICS Summit with government officials in Durban?” Wei went on to add, “I am not worried if the central government and the State Council supports COSCO.” His words sparked public acrimony.It’s not surprising that COSCO reflects the wills of the State Council given the company’s status as a centrally-administered state-owned enterprise. However, COSCO is also publicly-listed and beholden to the interests of shareholders. COSCO must seek to resolve this conflict of interest by delisting from the market and going private.

Two meanings lie in the privatization of property, one is the privatization of the SOE, and the other is taking the listed company private. In this article I refer to the latter.

After a delisting, the only shareholder of COSCO would be the State-owned Assets Supervision and Administration Commission. Without restraints from outside investors, the government assets regulator can take swifter action in righting COSCO’s course.

The company would have no need to make information public following a delisting. Subsidies made by government to COSCO have come under criticism in the past by foreign investors for being related to China’s “paramilitary forces” or “shouldering a special mission.” If public disclosure were no longer required, the company would have more maneuverability in raising capital.

For a centrally-administered company such as COSCO, it was never a wise choice to go public. The state-owned company was doomed to be split on personnel appointments, business strategy, information disclosure and accounting. Sometimes the government’s national strategy does not align with the interests of investments.

COSCO was listed on the SSE in June 2007. Looking back at its performance over past six years, its combined net profit was just 9.1 billion yuan. Its shares closed at 3.53 yuan on April 19, down approximately 95 percent compared to an all-time high of 67.84 yuan.

Put simply, if the top executive of an SOE cares must carry out the will of policymakers, the interests of investors are not going to be the top priority. A man cannot do two things at once. Mr. Wei, please delist COSCO.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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