COSCO Pacific Ltd. and its affiliated companies held 4.5 million shares of China International Marine Containers (Group) Co. Ltd. (CIMC) as of March 6.

Four months ago, the board of directors of COSCO Container Industries Ltd. (COSCO Container) decided to buy more B shares of CIMC through the securities market. COSCO Container is a shell company registered in the British Virgin Islands with a share capital of only $1. Funds for the share purchase this time all came from its sole shareholder COSCO Pacific.

From December 10, 2007, onward, COSCO Container, through concentrated transactions on the Shenzhen Stock Exchange, purchased B shares of CIMC at market prices. At a purchase price of HK$12.9-HK$15.6 ($1.66-$2) per share, it had spent about HK$1.6 billion ($205.70 million) in total, including all taxes and fees for the transactions. At present, COSCO Pacific and its affiliated companies hold 21.43 percent of shares of CIMC.

COSCO Container and Hong Kong-listed COSCO Pacific are both affiliated with COSCO, the largest international shipping carrier on the Chinese mainland and a leading shipper in the world. COSCO Container is a pioneer in businesses such as container shipping, container docks and container leasing.

CIMC, whose B shares were purchased by COSCO Container, is the world's largest container manufacturer with the most complete range of products and holds over 50 percent of market share in the world for these products. After the stake increase, COSCO Pacific is more capable of controlling CIMC, helping to improve CIMC's strength in container manufacturing and resource allocation.

Two affiliated companies of China Merchants Group (CMG) hold 22.75 percent of CIMC's total shares. As the largest shareholder, CMG obtained the position of chairman of the board of CIMC. At present, Fu Yuning, President of CMG, serves as chairman of the board of CIMC until 2010. His predecessors were all from COSCO and its affiliated companies.

If COSCO Container continues to increase its stake in CIMC, the largest shareholder of CIMC may change. When asked whether the company would continue increasing its stakes, Xiao Junguang from the Investor Relations Division of China COSCO Holdings Co. Ltd., said that the company was now watching CIMC's B-share prices so as to form its investment plan and would likely continue purchasing more B shares.

Chen Jianhui, an analyst of Industrial Securities, believes that a slow stake increase by COSCO can help to reduce acquisition costs. If the stake increase occurs too quickly, it may affect the stock price of CIMC and then increase the acquisition costs.

A further stake increase is expected by industry insiders. Huang Zhen, an industrial analyst in the mechanical manufacturing division of Changjiang Securities, contends that since the price/earnings ratio of CIMC, now 20, is at a low level in the entire mechanical manufacturing industry, it provides opportunities for COSCO to further increase its stake in CIMC. On the other hand, if COSCO could enter the upstream business of container manufacturing, it would help to expand its shipping market. Therefore, it is natural that COSCO will purchase more shares of CIMC, Huang said.

CMG maintains a calm attitude toward the large stake increase of COSCO Container. Compared with COSCO Pacific, CMG is weaker in strength. According to the 2007 interim report released by China Merchants Holdings (International) Co. Ltd. (CMHI), the listed flagship under CMG, the company had held HK$1.22 billion ($157 million) in cash at the end of June 2007. However, its interest-bearing debt within one year was HK$3.55 billion ($456 million). Ni Lulun, Deputy General Manager of CMHI, said that CIMC only accounts for a small portion of less than 10 percent, in the overall businesses of CMG, while 80 percent of CMG's businesses are dependent on ports.

In his opinion, although CIMC was established by CMG, it has close relationship with COSCO over a long period of time. COSCO is one of the clients of CIMC and the two have maintained large amounts of business transactions.

Companies under COSCO have purchased a large number of containers from CIMC: 24,000 standard containers in 2004 and 117,000 standard containers in 2006. The transaction value rose from $35 million in 2004 to $196 million in 2006. This may be the significance for COSCO holding more shares of CIMC; for COSCO has no business of container manufacturing.

"This does not comply with the industrial position of COSCO," Chen said. "To enhance control over the upstream industries and improve its industrial chains, COSCO will certainly not give up the controlling power over CIMC. It is just a problem of time that COSCO becomes the largest shareholder of CIMC."