Cosco replies to SGX queries

The following is reproduced from Cosco's annoncement in relation to SGX queries:

COSCO Corporation (Singapore) Limited (Company Registration No.: 196100159G) REPLY TO QUERIES FROM THE SINGAPORE EXCHANGE SECURITIES TRADING LIMITED

The Board of Directors of COSCO Corporation (Singapore) Limited (the “Company”) refers to the queries from the Singapore Exchange Securities Trading Limited (SGX-ST) dated 11 April 2008 and wishes to clarify as follows:

-1) Announcement : "To minimise currency risks, we will going forward, try to have our contracts quoted in Chinese-Yuan and Euro-Dollars in addition to US Dollars."

Question:

(i) Please elaborate how having the contracts quoted in these other currencies help to minimise currency risks.

(ii) Please disclose whether the Group engages in forex hedging activities. If so, (a) who monitors the hedging activities; and (b) does the Audit Committee review the hedging activities and policy? If so, how often?

Answer:

(i) The Euro has appreciated against the US Dollar and Chinese Yuan. Hence, having some contracts quoted in Chinese Yuan and Euro-Dollars in addition to US Dollars will mitigate the risks of currency fluctuations by diversifying such risks. Additionally, as some costs are denominated in Chinese Yuan and Euro-Dollars, the Group will be better able to minimise currency risks with its ability to receive payment in Chinese Yuan and Euro-Dollars rather than only in US Dollars.

(ii) The Group engages in hedging activities to manage its foreign exchange exposure. (ii) (a) Hedging activities are monitored by the Chief Financial Officer who comes under the oversight of the President. (ii) (b) The Audit Committee reviews the Group’s hedging activities and policy from time to time but no less than once every quarter.

2) BT 11 Apr 2008: "According to Mr Ji, the order cancellation was mainly due to a change of requirements from the client, which wanted the builder to do a turnkey project including a drilling package which it doesnot currently have the capability to undertake." The Announcement states however that the cancellation was "because one of the conditions of the contract requiring deposits from the customer before work would commence has not been fulfilled."

Question: Is the reason underlined above an additional reason for the cancellation? Please clarify.

Answer: The basis for the cancellation of the contract was the non-payment of the deposit. The customer had asked for a change in requirements. Such requirements were not contemplated in the contract and the Group could not agree to the same. Accordingly, no deposit was paid. The contract was cancelled because no deposit was paid.

3) BT 11 Apr 2008: "The report cautioned 'Cosco has not received downpayments for roughly 20 per cent of its existing shipbuilding contracts'...Deposits and progress payments for other offshore projects have also been received ... Cosco has yet to receive initial payment for seven vessels valued at about US$280 million and the company is examining details of orders won by its Cosco Shipyard Group."

Question:

(i) We note that the above statements have not been included in the Announcement. Please clarify if these statements are accurate.

(ii) Does Cosco require a downpayment for all of its offshore andshipbuilding contracts? If so, please elaborate on the usual downpayment terms. If not, how does Cosco decide which contracts require downpayments?

(iii) Would the non-receipt of the downpayments for the 20% of existing shipbuilding contracts and initial payment of US$280 million for theseven vessels mentioned above have any impact, such as cancellation, on the contracts?

(iv) Does Cosco have any recourse or receive any compensation in the event a signed contract is cancelled as a result of a breach of contract terms by the customer?

Answer:

(i) Cosco Shipyard Group has yet to receive initial payment for seven vessels valued at about US$280 million. These seven contracts account for approximately 4% of the value of all the shipbuilding contracts awarded to the Group.

(ii) The Group will normally require a downpayment from customers for its offshore and shipbuilding contracts. Such downpayment is usually calculated based on a certain percentage of the total contract value and is to be paid at or prior to the commencement of work. However, the terms and amount of such downpayment are subject to negotiation between each customer and the Group and will accordingly vary from case to case.