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Message From The Chairman

(*extracted from Annual Report 2015)

Dear Shareholders

COSCO Corporation faced tremendous headwinds during the year under review as sliding oil prices coupled with slowing global economic growth strongly impacted many businesses.

Overcapacity and unceasing rising costs had made it even more challenging for shipyard operators to achieve the desired bottom line. Most of the players in the offshore marine and related industries have not been able to escape unscathed from the oil market debacle.

Increasingly severe market conditions have forced some of our customers to delay delivery or cancel orders, and strongly impacted our business operations. Global surplus of shipyard capacity vying for fewer projects and greater competition meant that new contracts were also secured with lower margins.

Group turnover for the year under review declined 17.4 per cent to $3.5 billion from $4.3 billion in the previous financial year. The Group suffered a gross loss of $214.8 million in FY2015 from gross profit of $291.0 million in FY2014. Higher administrative and finance costs also contributed to a net loss (attributable to equity holders of the Company) of $570 million compared to net profit of $20.9 million for the previous year.

The significant net loss is mainly attributable to the continuing depressed state of crude oil prices that has severely affected the global offshore marine industry, the slump in the shipbuilding market that has negatively impacted the Company's shipyards; and the languid dry bulk shipping market that has put great pressure on the Company's dry bulk fleet business.

In the light of the poor market conditions, substantial write-downs of inventory and provisions for impairment of trade receivables for contracts, which are deferred or may potentially be cancelled, have been made.

Deliveries And New Orders Despite Downturn

In the year under review, shipyard operations contributed to 98.9 per cent of revenue. 60.7 per cent of the shipyard revenues were derived from offshore marine projects.

Massive cost cutting measures from the oil majors had plagued the entire value chain in the oil industry, driving many operators and builders into severe difficulties. Against this challenging backdrop, we delivered a total of 21 projects, comprising nine bulk carriers, six platform supply vessels, two semi-submersible accommodation vessels, two anchor handling tug supply vessels, one floating accommodation unit and one oil tanker.

Global order book for newbuilds declined significantly in 2015. In spite of the declining operating environment, we managed to secure US$820 million of new orders in 2015 compared to US$1.6 billion a year ago.

Depressed Markets, Uncertain Prospects

2015 saw continued turbulence in the global economy following the slowdown in the emerging economies, volatility in the financial markets, and the further slide in oil and other commodity prices that severely impacted our business.

Looking ahead, we expect global economic activity to remain subdued. The International Monetary Fund (IMF) in its update report on World Economic Outlook released on 19 January 2016 estimated global economic growth to be at 3.1 per cent in 2015. It projected that the global economy would grow at 3.4 per cent in 2016 and 3.6 per cent in 2017. However, it also cautioned that recovery in global economies could be "frustrated by new economic and political shocks".

Oil prices were weighed down heavily to scratch 12-year lows of below US$30 per barrel in mid- January 2016, by poor economic outlook, high inventories and oversupply; forcing major oil producers to continue reducing exploration and production capital expenditure around the world.

In the offshore marine business, sentiments continued to be clouded by overcapacity of the rig fleet amidst a sharp decline in utilisation. The IHS Petrodata Weekly Rig Count on 19 February 2016 put global supply at 849 compared to 869 a year ago, with market utilisation at 75.7 per cent, down from 87.9 per cent.

During the year under review, the dry bulk shipping trade was badly hit by the slump in demand for commodities such as coal, iron ore and steel products resulting from the slower growth in the emerging economies. In September 2015, the World Trade Organisation had forecasted global trade to grow to 3.9 per cent in 2016, down slightly from its last estimate of 4.0 per cent, which is still below the average of 5 per cent over the last 20 years since 1995.

For 2016, Clarksons projected that demand for dry bulk trade tonnage would grow by 1.1 per cent and that dry bulk fleet would increase at an even higher pace of 3.6 per cent, contributing to the persistent overcapacity. The weak data will continue to threaten the viability of the shipping sector, and consequently the shipbuilding sector.

For our Group, the global economic turbulence caused by the anaemic demand and overcapacity in the oil exploration markets and dry bulk shipping are of great concern.

Streamlining Internal Efficiency, Tiding Over Tough Times

We are continuously monitoring, addressing and adapting to the rapidly changing circumstances. Over the years, COSCO has built up a highly trained and experienced team that is well supported by a comprehensive range of facilities in our six modern shipyards in Guangdong, Zhoushan, Shanghai, Nantong, Qidong and Dalian. The Group's decade long transformation from ship repair to shipbuilding, and more recently to offshore exploration, production and support products has allowed us to market a wider range of offerings. We have further built on our strengths and made much progress in the offshore marine segment to construct higher specification products. We have also maintained our shipbuilding capability to cater to more wide ranging maritime needs. Recent additions of specialised vessels like containerships, research vessels and cargo transfer vessels to our portfolio have been a tremendous encouragement.

The prevailing winds of change are not in our favour. It has been an increasingly difficult journey. Until the storm abates and the market horizon becomes clearer, we are doing whatever we can to tighten monitoring and control to further improve our operations. We will press on with greater efforts to lift our productivity and strengthen cost management, while casting our nets wider for new business.

Going forward in such uncertain times, it is very important for us not to lose sight of managing risks more effectively. We are taking an even more cautious approach as we enter the new financial year and will continue to work harder for our customers to prepare ourselves for the market recovery.

From August to December 2015, the trading of the Company's shares was suspended on the stock exchange pending details on the reorganisation of our parent company. We deeply appreciate the patience that our shareholders have shown during this period. At the present stage, the reorganisation involves mainly the container shipping, ship leasing, tanker shipping, bulk shipping, financial businesses and other sectors carried out by certain other companies within the COSCO Group. It will not involve the Company's business segments for the time being. Looking ahead, our parent company will further optimise the allocation of resources according to future development strategies and will continue to support our business development.

Our Shipyard Group is currently exploring various options to support its business operations, including expansion of its sources of funding and optimising its assets structure.

Owing to severe difficulties and challenges facing the Group, no dividend has been recommended by the Board.

I would like to express my gratitude to our shareholders and valued customers for your continued support.

The Board would like to record its appreciation to Mr Li Yun Peng who resigned on 19 January 2016, for his contributions to and leadership of the Board during his tenure as Chairman.

Wang Yu Hang