20151008-Maybank_KERPL-China_Transport_Gets_new_wind_in_its_sails_32页_1mb

China Transport Sector Summary

Core Content

The China Transport sector is currently rated OVERWEIGHT, driven by supportive policies, potential property market recovery, and regional trade expansion. The analysis highlights key demand and supply trends, as well as the impact of strategic initiatives such as SOE reform and M&As.

Main Points

I. Potential Demand Drivers

• Regional Infrastructure and Industry Developments:

  • The implementation of the Beijing-Tianjin-Hebei (BTH), Yangtze River Economic Zone (YREZ), and One Belt One Road (OBOR) plans will stimulate government infrastructure investment, potentially boosting commodities shipping demand.
  • The BTH plan involves significant investment over the next six years (CNY4.2t) to improve traffic integration, environmental protection, and industrial upgrading.
  • The YREZ plan aims to create an integrated transport system by 2020, with substantial investments in highways, railways, and airports.
  • The OBOR plan focuses on infrastructure development and regional cooperation, targeting 26 countries with a population of 4.4 billion.

• Property Market Recovery:

  • The government's relaxation of purchase restrictions and reduction in down payment requirements have helped the property market recover, especially in Tier-1 cities.
  • The revival of the property sector could lead to increased construction activity, which in turn supports bulk shipping demand.

• Tanker Market Strength:

  • China's rising oil imports and diversification of sources (e.g., Venezuela, Brazil) are expected to increase demand for Very Large Crude Carriers (VLCCs).
  • VLCC supply is currently low, with an orderbook of 37.8m dwt, down 54% from the peak in 2008, indicating a favorable demand-supply balance.

• Regional Trade Expansion:

  • Intra-Asia trade is expected to grow faster than long-haul trade over the next two years due to increased regional cooperation and the signing of multiple Free Trade Agreements (FTAs).
  • The proliferation of FTAs with Asian countries, such as China-Australia and China-South Korea, will boost regional trade and logistics demand.

II. Positive Supply Trends

• Mild Growth in Bulk Vessels:

  • Global bulk shipping capacity growth has slowed significantly, with a CAGR of 1.9% for 2015-2017, down from 6.9% in previous years.
  • The orderbook for bulk vessels is at 1.5% of total capacity, suggesting manageable supply pressure.

• Limited Supply of Small Containerships:

  • The orderbook for small containerships (below 2,000 TEUs) is only 6.3% of the existing fleet, indicating limited new supply and favorable demand-supply balance for short-haul trade.

III. SOE Reforms and M&As

• Strategic M&As:
  • The potential merger of China Shipping and COSCO Groups could create the world's third-largest container line and the largest bulk shipping company, improving industry efficiency and profitability.
  • These reforms are expected to drive consolidation and benefit companies with strong market positions.

Key Companies

• China Shipping Dev (1138 HK):

  • Top Pick with a BUY rating. Expected to benefit from bulk shipping recovery and continued tanker strength. Target price: HKD7.35, Upside: 34%.

• Sinotrans (0598 HK):

  • Top Pick with a BUY rating. Likely to benefit from e-commerce and cross-border logistics demand. Target price: HKD6.35, Upside: 50%.

• China Merchants (0144 HK):

  • Top Pick with a BUY rating. Anticipated to see improved profitability from new ports and overseas expansion. Target price: HKD33.85, Upside: 36%.

Summary of Investment Thesis

• The sector is supported by three major forces: potential demand drivers, positive supply trends, and SOE reforms.
• Companies with exposure to bulk shipping, e-commerce logistics, and new port developments are expected to benefit from the favorable environment.
• Industry consolidation is a key theme that will drive profitability and efficiency improvements.

Key Information

• The government is increasing public expenditure and setting up dedicated funds for infrastructure projects.
• The property market is showing signs of recovery, which may lead to increased construction activity and thus support bulk shipping demand.
• The tanker market is expected to benefit from higher global oil demand and China's shift in oil import sources.
• The proliferation of FTAs is likely to boost regional trade and logistics demand.
• Limited supply of small containerships and bulk vessels supports better demand-supply balance and profitability.