20141027-高盛-In_line_3Q_performance__reasons_to_be_optimistic__maintain_CL-Buy_11页_424kb

Orient Overseas Int'l (0316.HK) Summary

Core Content

Orient Overseas Int'l (OOIL) is a container liner company, with its segment OOCL reporting its third-quarter 2014 (3Q14) operating statistics on October 24, post market close. The report highlights that OOIL is maintaining a CL-Buy rating, reaffirming its position as a top pick in Asia shipping due to its attractive valuation, strong balance sheet, and expected margin outperformance relative to the Asia container shipping industry.

Main Points

• 3Q14 Performance: OOCL reported a 5.3% year-over-year (yoy) increase in container volumes and a 0.5% yoy increase in average container rates, resulting in a 6% yoy increase in liner revenues and a 2.9 percentage point (pp) increase in load factors.
• Transpacific Volumes: OOCL's Transpacific volumes declined by 1% quarter-over-quarter (qoq), attributed to front-loading by customers to 2Q against the 3Q peak season due to earlier concerns over West Coast port labor talks. However, stronger qoq rates and a decline in bunker fuel prices (-2.3% qoq) led to higher revenues.
• Intra-Asia Volumes: Intra-Asia volumes rose by 1.5% yoy, marking slower growth compared to the first half of 2014 but expected to peak in 4Q14.
• Asia-Europe Volumes: OOCL's Asia-Europe volumes grew by 21% yoy, supported by its efficient 13k TEU vessels.
• Liner Revenue Growth: Overall liner revenue grew by 5.7% yoy, driven by volume and rate improvements across all segments.
• Valuation: The 12-month target price of HK$66 remains unchanged, based on 0.88X EV/GCI, underpinned by a 2014-16E CROCI of 9.4%.
• Investment Thesis: OOIL is favored due to its strong balance sheet, high fleet management efficiency, and balanced route exposure, including intra-Asia and transpacific routes. The company is also expected to benefit from the G6 alliance's expansion and potential mega-vessel orders.

Key Information

• Valuation Metrics:
  • 2014E P/B: 0.7X vs. industry peers at 1.0X.
  • 2014E ROE: 6.6%.
  • 2014-16E CROCI: 9.4%.
• EPS Growth:
  • 2014E: $0.41 (up 545.5% from 2013).
  • 2015E: $0.46 (up 13.5% from 2014E).
  • 2016E: $0.78 (up 67.3% from 2015E).
• Dividend Yield:
  • 2014E: 2.1%.
  • 2016E: 3.6%.
• Free Cash Flow Yield:
  • 2014E: 0.6%.
  • 2016E: 14.8%.
• Net Debt/Equity:
  • 2014E: 29.3%.
  • 2016E: 12.9%.
• EBITDA Margin:
  • 2014E: 8.5%.
  • 2016E: 11.8%.
• Growth Outlook:
  • Expected 2015-16 recovery with 2015's scheduled delivery of 1.8mn TEUs not de-railing the recovery trend.
  • 2015's scheduled deliveries may see slippage, and not all mega-vessels will be deployed at full capacity, which could help maintain supply-demand balance.
• Mega-Vessel Orders:
  • Potential new 18,000TEU vessel orders by G6, including OOIL and MOL, could help the alliance compete with other major alliances (2M, O3, CKYHE).
  • G6's expansion into transatlantic trade lanes could further improve unit cost efficiency.

Investment Implications

• Continued Margin Outperformance: OOIL is expected to outperform Asia container shipping industry margins due to its balanced route exposure, superior yield management, and cost benefits from the G6 alliance.
• Optimistic Outlook:
  • Asia-Europe spot rates are expected to recover in early-November, coinciding with carriers' proposed US$800-900/TEU rate hikes for Nov 1.
  • Balanced supply-demand in 2015 and a favorable outlook for 2016.
  • Potential mega-vessel orders in 2017 could strengthen OOIL's cost base.
• Risk Factors:
  • Worse-than-expected capacity discipline.
  • Bunker fuel price increases.

Investment Lists

• Asia Pacific Buy List
• Asia Pacific Conviction Buy List

Analyst Contributors

• Ronald Keung, CFA: ronaldkeung@gs.com
• Kevin Li: kevin.li@gs.com

Key Financial Highlights

Summary Financials

• Pretax Profits: Increased significantly from $59.6mn in 2013 to $276.5mn in 2014E, with further growth expected in the following years.
• Net Income: Rose from $39.7mn in 2013 to $303.0mn in 2014E, with continued growth anticipated.
• EPS Growth: Expected to grow by 545.5% in 2014E, followed by 13.5% in 2015E and 67.3% in 2016E.
• Dividend Yield: Increased from 0.3% in 2013 to 3.6% in 2016E, indicating a more attractive dividend return for investors.

Conclusion

OOIL remains a strong investment candidate in the Asia shipping sector due to its attractive valuation, strong financial position, and strategic advantages within the G6 alliance. The company is expected to benefit from improved market conditions, including rate recovery, capacity discipline, and the potential for new mega-vessel orders, which could further enhance its competitive position and profitability.