20181010-中国银河国际证券-SHIPPING_and_PORT_INDUSTRY_UPDATE_–_The_sector_may_offer_upside_surprise_5页_1mb

Shipping and Port Industry Summary

Core Content

The shipping and port industry in China and the broader Pacific Basin region is showing resilience and potential for upside performance despite ongoing trade tensions between China and the US. Analyst Mark Po highlights that the sector has outperformed the Hang Seng Index (HSI) and Hang Seng China Enterprises Index (HSCEI) over the past month, with an average increase of 3.2%, while the HSI and HSCEI have declined by 3.0% and 1.3%, respectively.

Main Points

Sector Resilience

• The shipping and port sector has demonstrated more resilience than expected.
• Factors contributing to the outperformance include:
  • Privatization of Sinotran Shipping by China Merchant Group.
  • Rally in VLCC rates, which surged by 62% month-over-month (MoM) and 42% week-over-week (WoW) to the highest level since February 2017.
  • Increase in crude oil import quotas for Chinese refiners, expected to rise by 42% to 202 million tonnes/year or 4.04 million barrels/day in 2019.
  • Peak season for container shipping, with the China Containerized Freight Index (CCFI) at 853.61 as of 28 Sep 2018.
  • Strong performance of port operators, such as COSCO Shipping Ports and China Merchants Port Holding.

Crude Oil Transportation

• The crude oil transportation segment is the hottest in the sector.
• VLCC rates are expected to remain elevated due to US sanctions on Iran, shifting sourcing from Iran to Saudi Arabia.
• COSCO Shipping Energy is projected to benefit significantly, with a 58.7% market share in domestic crude oil transportation in 2016.
• The company has been off investors' radar due to weak performance but is expected to report a major turnaround in 2019 due to improved market conditions.
• China Merchant Energy Shipping is also expected to benefit from the increased demand and favorable supply/demand dynamics.

LNG Transportation

• LNG demand in China is rising, supported by government policies promoting natural gas usage.
• COSCO Shipping Energy is expected to benefit from this trend, with additional 20 LNG vessels under construction and expected to be delivered by the end of 2020.
• LNG vessel charter rates are expected to remain stable, contributing to the company's performance.

Port Operators vs. Container Shipping

• The analyst prefers port operators over container shipping names.
• COSCO Shipping Ports has outperformed COSCO Shipping Holdings and OOIL since the pair trade call on 2 Aug 2018.
• China Merchants Port Holding is considered an attractive investment due to its recent underperformance and potential for recovery.
• Dalian Port is also a beneficiary of increased crude oil imports and has been removed from the Hang Seng Index, making it a potential value play.

Event-Driven Opportunities

• Sinotran Shipping is set to be privatized at HK$2.70 per share, offering a 3.8% upside.
• Sinotran may benefit from the potential disposal of Loscam by China Merchant Group, which could result in a significant gain.
• COSCO Shipping International has a strong net cash position and remains profitable despite industry challenges.

Dry Bulk and Other Sectors

• Dry bulk is showing signs of resilience, with the Baltic Exchange Dry Index (BDIy) remaining stable.
• Pacific Basin is expected to continue its strong performance due to resilient BDIy.
• Other sectors, such as container manufacturing and shipping services, are also being monitored, with mixed performance and some potential for recovery.

Key Information

• COSCO Shipping Energy is expected to benefit from both crude oil and LNG transportation due to increased demand and favorable market conditions.
• China Merchants Port Holding has underperformed but may see a rebound due to improved fundamentals and event-driven potential.
• Sinotran Shipping and Sinotran are seen as potential beneficiaries of the privatization and asset disposal.
• COSCO Shipping International remains a profitable player in the sector despite challenges.
• VLCC rates are expected to remain high due to US sanctions and reduced supply.
• Government policies are supportive of the shipping and port sector, especially for export-related companies.
• Container shipping faces challenges due to high fuel costs and the IMO 2020 regulations, which may drag down performance in the short term.
• The CCFI is at a high level, indicating peak season, but may decline as the season passes.

Figures and Data Highlights

• VLCC rates (Middle East to Japan) rose 62% MoM and 42% WoW.
• China LNG imports rebounded to 4.71 million metric tonnes in August 2018, the highest since February 2018.
• COSCO Shipping Energy reported a loss in 1H 2018 due to weak VLCC rates but may see a turnaround.
• China Merchants Port Holding has a market cap of HK$5,966 million and a P/B ratio of 8.7.
• COSCO Shipping Ports has a market cap of HK$3,243 million and a P/B ratio of 10.7.

Investment Recommendations

• The analyst continues to suggest pair trade calls involving COSCO Shipping Ports and COSCO Shipping Holdings.
• COSCO Shipping Energy and China Merchant Energy Shipping are highlighted as potential beneficiaries of increased demand for crude and LNG.
• Sinotran Shipping and Sinotran are considered event-driven plays with upside potential.
• China Merchants Port Holding is recommended due to its underperformance and potential for recovery.