20140306-Maybank_KERPL-A_good_start_turnaround_in_sight_14页_292kb

China Shipping Development (1138 HK) Summary

Core Content

China Shipping Development (CSD) is a Hong Kong-based transport company with a focus on bulk shipping. The company's share price is currently HKD5.16, and the target price has been adjusted to HKD6.65, reflecting a 29% increase. The market capitalization is USD2.3B, with an average daily trading volume of USD10M. The company's management has been optimistic about the company's performance in FY14F, citing a solid earnings turnaround and improved freight rates.

Main Points

• Earnings Turnaround: CSD is expected to significantly narrow losses in FY14F due to higher freight rates and increased traffic, especially in the domestic coal and international oil transportation segments.
• Domestic Coal Recovery: The domestic coal spot freight rate rebounded by 21-42% after the CNY, alleviating concerns about weak rate trends. The company anticipates continued growth in coal traffic due to infrastructure developments like the Mengji and Hanhuang railways.
• International Oil Recovery: The VLCC rate increased by nearly 300% YoY in the first two months of the year. CSD expects a 10% YoY increase in international oil rates for FY14F, driven by stronger demand and a 15% increase in VLCC fleet capacity.
• LNG Business Potential: CSD has 10 LNG carriers on order and plans to expand its LNG fleet. The LNG business is projected to be a medium-term earnings driver, with potential to account for up to 20% of annual earnings.
• Valuation and Outlook: The company's current P/B ratio of 0.64x is considered too low relative to its five-year average of 0.91x and its peers. The target price of HKD6.65 is based on a target P/B of 0.82x, reflecting confidence in its earnings recovery.
• Performance: CSD's Jan-14 revenue increased by 21% YoY, driven by higher freight rates and traffic growth. The company's performance is expected to continue positively in the first half of the year.

Key Information

Financial Highlights

• Revenue (FY14E): CNY13,132.3M
• Core Net Profit (FY14E): CNY106.8M
• Core EPS (FY14E): CNY0.03
• Core P/E (FY14E): 45.3x
• Core P/E (FY15E): 20.2x
• P/BV (FY14E): 0.6x
• Target P/BV: 0.82x
• Net Debt/Equity (FY14E): 172.4%

Business Segments

• Coal Transportation:
  • Domestic: Traffic up 4.8%, average rate up 12.8%
  • International: Traffic down 58.1%, average rate up 18.0%
• Oil Transportation:
  • Domestic: Traffic up 5.4%, average rate up 4.4%
  • International: Traffic down 4.4%, average rate up 14.4%
• Iron Ore Transportation:
  • Domestic: Traffic up 35.5%, average rate stable
  • International: Traffic up 10.5%, average rate up 20.5%
• Other Bulk Transportation:
  • Domestic: Traffic up 108.5%, average rate down 7.7%
  • International: Traffic up 103.4%, average rate up 141.9%

Earnings Forecast

• FY13F Net Profit: CNY-1,353.1M
• FY14F Net Profit: CNY306.8M
• FY15F Net Profit: CNY990.0M

Share Price Performance

• 1 Month: 10.7%
• 3 Months: -5.5%
• 12 Months: 20.3%

Market Capitalization

• Current: HKD17.6B
• Free Float: 53.6%
• Major Shareholders:
  • China Shipping Group: 46%
  • GIC Pte Ltd. (Investment Management): 9%
  • Templeton Asset Management Ltd. (Hong Kong): 6%

Outlook

CSD is optimistic about a significant turnaround in FY14F and is expected to resume earnings growth in FY15F. The company's focus on bulk shipping, particularly domestic coal and international oil, is seen as a key driver for future performance. The LNG business is expected to grow substantially in the next few years and contribute significantly to earnings. The current valuation is considered undervalued, and the target price reflects this.