20140204-高盛-Leveraged_to_an_improving_outlook_at_trough_valuation__add_to_CL-Buy_19页_885kb

Summary of Investment Analysis on Orient Overseas Int'l (OOIL)

Core Content

Orient Overseas Int'l (OOIL) has been re-rated as a Buy by Goldman Sachs, and it has been added to the Conviction List due to its attractive risk-reward at current trough cycle valuations. The analysis is based on the company's strong fundamentals, improving industry dynamics, and potential for margin expansion.

Main Points

• Attractive Valuation: OOIL is currently trading at 0.6X 14E P/B, which is 42% below the Asia average of 1.01X. It is also trading at 0.56X EV/GCI, suggesting that it is effectively pricing in an extended down-cycle.

• Earnings Growth Expectations: The company is expected to achieve 64% CAGR in earnings from 2014E to 2016E, with ROE expanding from 0% in 2013E to 4%/5%/10% in 2014/15/16E.

• Industry Recovery and Demand: Goldman Sachs forecasts improving global trade and higher DM consumer spending over the next few years, which is expected to support better returns for OOIL. Additionally, industry concentration is anticipated to improve due to alliances like the G6 extended alliance and proposed mergers (e.g., Hapag Lloyd and CSAV), which could lead to better pricing power.

• Margin Outperformance: OOCL, the container arm of OOIL, is expected to regain margin leadership over Asian peers as it begins to utilize more fuel-efficient mega-vessels in 2013 and 2014. The yield management and back-haul cargo control are key factors in this performance.

• Valuation Adjustments: The 12-month target price has been increased to HK$59 from HK$54, based on 0.80X EV/GCI and improved CROCI forecasts (7.6% for 2014-15E).

• Key Risks: The main risks include slower-than-expected industry recovery, poor capacity discipline from carriers, and volatility in bunker fuel prices.

Key Financial Highlights

Investment Profile

• Current Price: HK$32.40
• 12-Month Price Target: HK$59.00
• Market Cap (HK$ mn / US$ mn): 20,275.7 / 2,611.2
• Dividend Yield: 1.6%
• EPS Growth: 63.2% in 2013, with significant increases in 2014-16E

Catalysts

1. OOIL's 2013 Full-Year Results: Expected to show a turnaround after losses in 1H 2013.
2. G6 Extended Alliance: Subject to regulatory approvals, could improve industry structure and capacity discipline.

Analyst Coverage

• Analysts: Ronald Keung, CFA and Ross He
• Contact: ronald.keung@gs.com and ross.he@gs.com
• Coverage View: Neutral

Investor Concerns

• Margin Concerns: The market has been overly concerned about OOIL's margins, but the company is expected to improve due to new vessel deliveries and cost efficiency.
• Supply-Demand Dynamics: While the containership industry is still oversupplied, the supply-demand gap is expected to improve over 2014-16E.
• Port Disruptions: Possible disruptions in 2014 due to labor talks, but they are generally short-lived and unlikely to have a long-term impact on share prices.

Strategic Positioning of OOIL

• Balanced Trade Exposure: OOIL has exposure to both DM (Asia to EU/US/Australasia) and EM (Intra-Asia), giving it flexibility in adjusting capacity.
• Strong Balance Sheet: OOIL has a strong financial position, which supports capacity expansion and resilience during the recovery cycle.
• Yield Management: OOCL has a strong track record in yield management and margin outperformance compared to Asia peers.

CROCI and Valuation Metrics

• CROCI Improvement: Expected to rise from 6% in 2013E to 10% in 2016E, driven by cost optimization and improving industry outlook.
• Valuation Metrics: OOIL is trading at historically low asset multiples, which suggests attractive upside potential.

Conclusion

OOIL is positioned as a top Buy idea in the container shipping sector, with a strong balance sheet, improving earnings growth, and favorable industry dynamics. The company is expected to benefit from industry consolidation, improved cost structures, and recovery in global trade. Despite current underperformance, the attractive valuation and potential for margin recovery justify the Buy rating and Conviction List membership.