China Cosco Expects to Swing to Profit

China Cosco Holdings Co. said Thursday it expects to report a net profit in 2013, meaning the shipping giant would avoid being delisted, though its results mask a continued weak business performance.

The listed flagship of China's biggest state-run shipping group has racked up losses totaling 20 billion yuan (US$3.30 billion) in 2011 and 2012, as the world's shipping market lingered in the doldrums. A third year of losses would threaten the company's listing status in Shanghai, an embarrassing predicament it sought to avoid.

A return to profitability follows a series of asset sales to Cosco's parent company to offset weak core operations. The company will disclose full-year earnings figures late March.

For years, Cosco was a conspicuous symbol of China's rapid economic rise, with its large cargo ships calling at key global ports. The company was helmed by its longtime chairman, Wei Jiafu, who laid out ambitious growth plans between 2007 and 2008 to increase the size of its fleet, just before the global shipping market tanked.

Under Mr. Wei, who retired in July, Cosco made US$2.3 billion of new ship orders in 2008, while also entering into fixed long-term charter contracts for more ship capacity. The ensuing global economic slowdown contributed to a glut of vessels hitting the shipping business amid reduced demand for seaborne transportation.

The huge capacity boost has been weighing on Cosco's results, The company reduced its dry-bulk shipping fleet to 332 ships as of June from around 450 ships at the height of the shipping boom in 2008.

To prevent the company from being delisted in Shanghai, Cosco in March last year unveiled plans to sell its logistics business to parent Cosco Group for US$1.1 billion. Cosco is also listed in Hong Kong.

That followed a decision in May by Cosco's ports unit to sell its stake in a container manufacturer to Cosco Group for US$1.22 billion. In August, Cosco agreed to sell most of its stakes in two office properties in China to the state-run parent, in a deal valued at more than $600 million.

Still, Cosco's outlook is clouded by the pace of recovery in its dry-bulk business, which ships raw materials like coal and grain, and accounted for around 20% of the company's revenue. Underscoring the market's weakness, the Baltic Dry Index, which tracks the cost of bulk shipping and is widely considered a leading economic indicator, has fallen over 40% in recent months.

Many analysts said they expect Cosco to be barely profitable for 2014. Edward Xu, an analyst at Morgan Stanley, said his earlier forecast of a 400 million yuan net profit now appears optimistic. Weakness in the Asia-Europe trade and new ships coming online will weigh on the company's container business.

"Uncertainties remain for China Cosco given both its container and dry-bulk operations will continue to be overshadowed by overcapacity and lower freight rates," said Mr. Xu.

The investment bank estimates that China Cosco would report a 7 billion yuan loss for 2013 before factoring in the one-off gains.

Cosco In December disclosed plans to order nine new cargo ships in its first major purchase in more than five years, as it takes advantage of a government subsidy to scrap old vessels and upgrade its aging fleet.