Man the lifeboats

Why investors want to throw Cosco’s ‘Captain Wei’ overboard

Man the lifeboats

Not sure why he’s smiling: Wei

Joseph Conrad’s novels often included a nautical theme. But he was under no illusion about the dangers of the deep, warning in The Mirror of the Sea: “The sea has never been friendly to man. At most it has been the accomplice of human restlessness.” This might ring true for Wei Jiafu, the chairman of China’s largest shipping firm, China Cosco. Its Shanghai and Hong Kong dual-listed subsidiary, China Cosco Holdings, has issued another profit warning that investors should brace themselves for a “significant net loss” for the full year, amounting to about $1.5 billion.

This would be Cosco’s second consecutive annual loss, coming after a hefty $1.66 billion shortfall in 2011. The company made a loss in 2009 as well, and Wei, known as the “Old Captain” in the domestic press, is now facing a mutiny from minority shareholders determined to oust him, reports the shipping publication Trade Winds.

Last year, the same magazine ranked Wei as the fifth most important person in world shipping. But this reputation now seems to count for little in the campaign against him, which is being led by Zhang Yuanzhong, a partner at Beijing Wentian law firm and a minority shareholder in Cosco.

Cosco’s management blames the losses on weak global demand in an industry already suffering from excess shipping capacity. But activist Zhang thinks there is more to the story. “If there is a serious problem in business management and risk control, the management should give a reasonable explanation to investors,” he told CBN.

Cosco operates a wide range of shipping businesses, including containers, logistics and terminals. But it is weakness in the dry bulk business that is pulling the company into the red. Accounting for 80% of the company’s income, difficulties in dry bulk have seen Cosco make headlines before (reneging on chartering contracts, for instance, see WiC120). The problems have persisted, with an industry insider, also speaking to CBN, blaming the company’s “aggressive expansion strategy” at the top of the industry cycle in 2008. That has left Cosco high-and-dry financially, with a large, under-utilised fleet in a period of low demand, when the costs of maintaining ships remain high.

Hence the annual losses, too. According to the rules of the Shanghai Stock Exchange, any company that posts two consecutive losses is put on a list for “special treatment”. Companies with this designation have limits on their daily price movement cut to just 5% from 10%, reports Bloomberg. If Cosco’s loss for 2012 comes out as expected, it will also have the unenviable distinction of being the largest A-share company singled out for special treatment, reports the China Times. If the situation does not improve and there is a loss for a third year straight, things become more serious still, with the possibility of fuller suspension in Shanghai or even a delisting.

Any silver lining for the Old Captain, then? One analyst speaking to Bloomberg said that the threat of suspension makes it “highly likely” that the shipping firm will get state support to avoid such an outcome. In the meantime, Wei has said that Cosco is doing everything that it can to reduce its losses, especially in cutting spending. But he also refutes the view that the company’s poor performance is due to anything other than weak market demand, complaining darkly of “a domestic wave demonising state-owned enterprises”.

For all the talk of cost-cutting, Cosco doesn’t seem ready to tie up the purse strings completely.

Last month, Reuters reported that the shipping company was mulling a €1 billion investment in Piraeus, Greece’s largest port, which is currently up for sale as part of Athens’ privatisation plan.

Cosco already has a stake in the port. But the cost of increasing its holding could incite Captain Wei’s critics further.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.