Initiate on Shipping: En Route to Profitability, Selective by Segment
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Marine Shipping Equity Research Huatai Research 23 March 2017 Equity | Hong Kong Initiate on shipping: En route to OVERWEIGHT profitability, selective by segment Initiation Lisa LIN +86 21 2897 2209 Prefer dry-bulk and container shipping to tankers Analyst [email protected] We launch coverage of China and Hong Kong shipping with OVERWEIGHT on Xiaofeng SHEN +86 21 2897 2088 Analyst [email protected] both dry-bulk and container shipping, and NEUTRAL on tankers. The industry is characterized by highly cyclical supply and demand: typically, strong demand lifts freight rates, boosting carriers’ earnings; then follows rapid growth in capacity, Stock recommendations prompting a downturn. We select stocks on the basis of segment exposure and TP operating model. In order of preference: 1) we like dry bulk shipping, for its real Company Code (HKD) Rating industry recovery; 2) we like container shipping, for an earnings upside Sinotrans Shpg 368 HK 2.33 BUY OOIL 316 HK 51.20 BUY opportunity; and 3) we are less keen on the tanker segment, largely on oil COSCO 1919 HK 3.46 HOLD Pacific Basin 2343 HK 1.82 HOLD production cut and heavy orderbook headwinds. We assume coverage of: Sinotrans Shipping (BUY), Orient Overseas (International) Limited (OOIL, BUY), Source: Huatai HK Research estimates Cosco Shipping Holdings (HOLD), and Pacific Basin Shipping (HOLD). Dry bulk shipping: BUY Sinotrans Shipping; HOLD Pacific Basin We think the market has bottomed, and is trending upwards. A depressed 2016 saw the Baltic Dry Index (BDI) at its lowest level ever, but we expect a gradual recovery from 2017 onwards, driven by: 1) a healthy demand growth trend; 2) limited growth of vessel supply and a high scrapping rate; and 3) earnings uplift from improving freight rates. We rate Sinotrans Shipping BUY on its return to profit in 2017E and dividend payout upside in 2017E-2018E. We HOLD Pacific Basin on likely another net loss year in 2017E resulting from higher average vessel cost, despite rising freight rate. We forecast positive earnings for Pacific Basin will occur from 2018 onward. Container shipping: BUY OOIL; HOLD on Cosco Shipping We hold an optimistic view on container shipping in 2017, when both freight rates and industry profitability look set to rebound. Industry consolidation and discipline on freight pricing have been triggered by the severe market condition last year, and we think co-operation and consolidation among lines will remain prominent trends, with a positive impact on capacity supply in the long term. We rate OOIL BUY on its strong earnings upside driven by rising freight rate and potential new business from the Ocean Alliance network. We have a positive results outlook on OOIL for 2017E-2019E. We HOLD Cosco Shipping, given our cautious view on its aggressive expansion and the higher cost of chartering vessels from its group company. Tankers: Oil production cut and heavy orderbook headwinds Tanker shipping, our less liked segment, is facing short-term headwinds from oil production cut and heavy orderbook, in our view. We are also cautious on rising optimism on recovery of oil production in the US (the second-largest seaborne crude importer), which could lower global crude seaborne demand growth. Meanwhile, with 40.8mn DWT capacity (7% of existing fleet capacity) due for delivery in 2017, a rise in supply with little change in demand could make 2017 a downside year for tanker shipping. Huatai Financial Holdings (Hong Kong) Limited is abbreviated as Huatai HK throughout this report. 1 Please refer to end pages for analyst certification and required disclosures. Hong Kong Marine Shipping Content Investment summary .................................................................................................................................................. 3 Dry bulk shipping: recovery from 2017 onwards .................................................................................................... 5 Favorable supply-demand balance into 2017 ............................................................................................................................ 5 Supply ................................................................................................................................................................................... 5 Demolition ............................................................................................................................................................................. 6 Demand ................................................................................................................................................................................. 6 Balancing ............................................................................................................................................................................... 9 BDI rebounded, positive on industry earnings ........................................................................................................................... 9 Container shipping: opportunity unfurls in 2017 .................................................................................................... 11 Industry consolidation under way .............................................................................................................................................. 11 Realignment of global shipping alliances ................................................................................................................................... 12 Supply-demand looks better in 2017 ......................................................................................................................................... 13 Deliveries ............................................................................................................................................................................... 13 Supply ................................................................................................................................................................................... 13 Scrapping .............................................................................................................................................................................. 14 Demand ................................................................................................................................................................................. 14 Freight rate heading into positive territory.................................................................................................................................. 15 Tanker shipping: unattractive on headwinds .......................................................................................................... 17 Pressure appears on VLCC earnings ........................................................................................................................................ 158 Companies Sinotrans Shipping (368 HK; TP HKD2.33; BUY) ........................................................................................................ 19 Orient Overseas International (316 HK; TP HKD51.20; BUY) ...................................................................................... 24 Cosco Shipping Holdings (1919 HK; TP HKD3.46; HOLD) .......................................................................................... 28 Pacific Basin Shipping Limited (2343 HK; TP HKD1.82; HOLD) .................................................................................. 32 23 March 2017 2 Hong Kong Marine Shipping Investment summary Sinotrans shipping: We see 2017E as a profitable year for Sinotrans Shipping (Sinotrans), with dry bulk market recovery and rising freight rates supporting a net profit of USD15mn. Operating all major types of dry bulk vessel (Capesize, Panamax, Handymax and Handysize), Sinotrans should have diversified gains from the rising market. We think balance-sheet strength will support dividend payout surprise in 2016 (DPS of US¢0.51, even in a loss-making year), and likely upside in dividend payout for 2017E-2018E. We initiate coverage at BUY with a target price of HKD2.33, based on 0.67x PB (three-year historical average +2SD). We think a premium is deserved under the rising market and dividend payout upside. Orient Overseas (International) Limited (OOIL): Our top pick in liners, Orient Overseas International (OOIL), is historically one of the most profitable in the region. Record-low freight rates and OOIL’s loss-making 2016 were caused by secular choppiness which has now subsided, in our view, and we forecast 2017E net profit of USD178mn driven by: 1) strong rate recovery on all main routes; and 2) potential revenue upside and expanded network coverage from joining the Ocean Alliance. We initiate coverage at BUY with a target price of HKD51.20, based 0.88x PB (five-year historical average +1SD). We view the current valuation of 0.77x PB as still attractive, given the rising market and its premium profitability comparing to its peers. Cosco Shipping Holdings: We expect Cosco Shipping Holdings (Cosco) to return to profit in 2017E, supported by a freight rate recovery that began in 2H16 and will be sustained, in our view, by high rates of idling and scrapping continuing into 2017. We initiate coverage at HOLD with a target price of HKD3.46, based on 1.50x PB (three- year historical average +1SD). As a Chinese flag line and A+H listed company, Cosco has historically traded at a premium to peers, and we think