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China Shipping Development (1138 HK) Summary

Core Content

China Shipping Development (CSD) is a Hong Kong-listed company in the transport sector with a current share price of HKD4.23. The target price is set at HKD6.45, indicating a potential increase of 52%. The company's market capitalization is HKD14.4B, and its average daily trading volume (ADTV) is USD8M. The company's earnings are expected to improve, with a forecasted profit of CNY92m for FY14F, despite a 4.8% and 3.9% revision down in earnings forecasts for FY14F and FY15F, respectively.

Main Points

• Earnings Recovery: CSD's FY13 results were in line with its profit warning and expectations, showing a significant improvement in the second half of the year. Core net loss reduced by 33% HoH, and gross margin (ex-provision) expanded by 10.4ppt HoH to 6.3%.
• Revenue Growth: FY13 revenue increased by 2.6% YoY to CNY11,344m, with coal and iron ore shipments showing strong growth.
• Cost Management: Unit fuel consumption decreased by 4.7% YoY, and the company benefited from higher freight rates and lower costs, contributing to the improved gross margin.
• Dividend Policy: No dividend was declared due to the significant loss in FY13.
• Valuation: The company is currently trading at a P/B of 0.53x for FY14F, which is close to its trough. The target price is based on a 12-month forward P/B of 0.8x, suggesting the stock is undervalued.
• Market Outlook: The firm maintains a BUY rating, believing that the recent share price weakness has already reflected concerns about China's economic slowdown. A catalyst for improvement is expected in the first quarter of 2014.

Key Information

• Share Price Performance: Over the past 12 months, the share price increased by 1.0%, while the relative performance to the market was 3.3%.
• Key Metrics:
  • Revenue: Expected to grow from CNY11,344m in FY13 to CNY13,181.1m in FY14F.
  • Core Net Profit: Projected to rise from -CNY1,892.4m in FY13 to CNY92.0m in FY14F.
  • Core EPS: Expected to increase from -CNY0.56 in FY13 to CNY0.03 in FY14F.
  • ROE: Expected to rebound in FY14F, with a forecast of 1.4%.
  • P/BV: Remains at 0.5x for all forecasted years.
• Valuation Comparisons:
  • CSD is compared to other bulk shipping peers like China COSCO Holdings, U-Ming Marine, and Pacific Basin Shipping.
  • CSD's P/BV is lower than the average of its peers, indicating a potentially undervalued stock.
• Earnings Drivers:
  • Domestic coal rates have surged by 68-86% since CNY.
  • International oil transportation has seen a significant improvement with VLCC rates increasing by 305% YoY.
  • Increased ore traffic due to expansion in VLOC and Capsize fleet.
• Cash Flow: Expected to improve significantly in FY14F, with free cash flow projected to be positive at CNY838.4m.
• Debt Management: Net debt/equity is projected to decrease from 161.1% in FY14E to 142.3% in FY16E.

Investment View

• Target Price: HKD6.45, based on a 12-month forward P/B of 0.8x.
• BUY Rating: Reiterated due to the expectation of a turnaround in earnings and the company's current undervaluation.
• Catalysts: Expected improvement in profitability in 1Q14, which will be announced in late-April.
• Dividend Yield: Expected to increase to 3.0% in FY16E.

Conclusion

China Shipping Development is showing signs of recovery, with a notable improvement in its core earnings and gross margin. Despite a lower share price, the company is considered undervalued based on its P/BV and the strong fundamentals expected in the coming quarters. The investment case is supported by the anticipated rise in domestic coal and international oil transportation rates, along with the growth in ore traffic and improved operational efficiencies. The BUY rating is maintained, and the target price reflects the potential for value appreciation.