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Asia300

Cosco eyes $300m savings from Orient Overseas deal in 20 years

Regulatory uncertainties remain over transfer of U.S. port assets

HONG KONG -- Chinese state-owned Cosco Shipping Holdings is expecting synergy benefits to reach $300 million after its acquisition of Hong Kong-based Orient Overseas Container Line, although the benefits might take up to two decades to realize, the company said.

The $6.3 billion takeover announced in July would help Cosco become the world's third-largest container liner with an estimated capacity of more than 2.9 million TEU (20-foot equivalent units), just behind Maersk and Switzerland's Mediterranean Shipping Company.

"The synergy effect will not be shown in one year, but in the next few years and up to 10 or 20 years," Cosco Vice-chairman Huang Xiaowen told reporters at an earnings briefing on Thursday.

Huang denied that the deal was expensive, citing operational efficiency and the brand value of OOCL as a 50-year-old company founded by the Tung family. "All these can't be measured by price," said Huang, adding that the deal would help Cosco realize its target of cutting annual unit costs per container by 3-5%.

While the deal is still pending approval from local authorities, concerns have grown over regulatory obstacles in the transfer of OOCL's port assets at Taiwan's Kaoshiung and Long Beach in California to Cosco.

If the acquisition was to be rejected by the U.S. Committee on Foreign Investment that oversee global deals, Huang said the company would "respect" OOIL's decision and adopt the "best solution" after comparing different proposals.

Nonetheless, Cosco aims to complete the deal by December. OOIL is expected to keep its global headquarters in Hong Kong and its listing there, and the two companies will "operate independently," said Huang.

The acquisition came on the heels of a stronger first half for Cosco, helped by a recovery in an industry hit hard by overcapacity and weak global trade. The company recorded a net profit of 1.86 billion yuan ($282 million), a sharp turnaround from a net loss of 7.17 billion yuan in the same period last year. Revenue reached 43.45 billion yuan, representing a 45.6% jump on the year.

Huang expects a better third quarter, thanks to the relatively low oil price and the recovery of major economies such as the U.S. and European countries. But headwinds will remain as a new delivery of vessels in the second-half will bring additional capacity, Huang said.

State-owned logistics peer Sinotrans also noted a "warming market." In the first half, the company recorded a 2.1% increase in net profit at 988 million yuan on a 27% jump in revenue from a year ago. Its core freight forwarding business saw a near 30% rise in revenue, driven by recovering trade volumes that raised container shipping rates.

Sinotrans is ramping up its growing logistics business. Last week, the company announced a 5.45 billion yuan deal to acquire logistics assets from state-owned China Merchants Group, as part of a government-led restructuring to overhaul the sector laden down by overcapacity.

Sinotrans Chairman Zhao Huxiang said that since last year, the two companies have avoided building overlapping projects to pave the way for the deal, which he said would "reduce internal competition" and boost the competitiveness of Chinese companies globally.

The Hong Kong-listed shares of Cosco Shipping ended 2.9% lower at HK$4.96 on Thursday, after its results were posted a day earlier. Shares in Sinotrans fell 1.78% to HK$4.42, underperforming the 0.7% drop of Hang Sheng China Enterprises Index.

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