UPDATE 2-China COSCO H1 net doubles, challenges ahead

(Adds detail and analysts comments)

By Alison Leung

HONG KONG Aug 27 (Reuters) - China COSCO Holdings (1919.HK), the flagship of the country's premier shipping conglomerate, beat forecasts to more than double its first-half earnings as China's unabated demand for resources and materials lifted freight rates.

But a slowdown in shipping volumes and a rapid cyclical downturn in container shipping has triggered concerns over its earning growth in the second half, analysts said.

"The first half and second quarter results of listed container shipping companies indicate that a downturn in the container-shipping industry has begun already," said Geoffrey Cheng, an analyst at Daiwa Institute of Research.

China COSCO's freight rates outperformed the Baltic Exchange's chief sea freight index .BADI in the year through June, rising 80 percent against a 60 percent gain in the index, according to a JP Morgan research report. China COSCO (601919.SS) operates the world's largest bulk cargo fleet.

Dry bulk operations contributed 90 percent of the company's interim profit, and container shipping 5 percent.

Margins for its container shipping business improved in the first half from the second half of 2007 even though the sector faced a margin squeeze, JP Morgan said in a research report.

"COSCO's strategy to increase its exposure to China's domestic market and Intra-Asia trade paid off," said Johnson Leung, an analyst at JP Morgan.

GLOOMY CONTAINERS

China COSCO posted a net profit of 15.12 billion yuan ($2.21 billion) for the six months ended June against 7.23 billion yuan a year ago and an average forecast of 13.9 billion yuan from three analysts polled by Reuters.

For the results announcement, please read: here 80826541.pdf But China Shipping Container Lines (2866.HK), which is tied with China COSCO in operating the world's sixth-largest container fleet, on Wednesday posted a 45 percent drop in net profit to 637 million yuan for the first six months of 2008.

Daiwa's Cheng downgraded the sector to negative from positive and forecast container shipping firms will see losses in the fourth quarter and in 2009 due to high fuel prices and declining demand amid a global economic slowdown.

He also cut China Shipping Container rating to sell from buy and rival Orient Overseas International Ltd (0316.HK) to underperform from hold, saying they were unlikely to see their earnings recover in 2009.

Caution about the global container shipping sector is also slowing the pace of consolidation.

Singapore's Neptune Orient Lines (NEPS.SI) said it had not decided yet whether to go through with a bid for Germany's Hapag-Lloyd, the world's fifth-biggest container shipping firm and a unit of TUI (TUIGn.DE), a German newspaper reported. [ID:nLQ474997]

Shares in China COSCO rose 2.3 percent to HK$14.92 on Wednesday but have lost 22 percent of their value since July. China COSCO shares fell 11.6 percent in the first six months, beating a 26 percent loss in the H-share index.

CSCL shares also gained 2.6 percent, beating a 1.6 percent rise in the index for Chinese shares listed in Hong Kong .HSCE.

Goldman Sachs said an oversupply of freight capacity, with the global Capesize fleet set to double by 2011, will drive down dry bulk freight rates.

"That will likely lead to a multi-year bear market for bulkers beginning in 2009 and possibly lasting through 2011," Tom Kim, an analyst at Goldman, said in a research note on Wednesday.

The Baltic Exchange Index, which monitors shipping costs on major export routes for commodities excluding oil, has come down about 40 percent from its peak in May and is back to last August's level. (Editing by Lincoln Feast) ($1=6.847 Yuan)