20140228-Maybank_KERPL-China_Shipping_Container_Lines_Outlook_improving__Upgrade_to_BUY_13页_593kb

China Shipping Container Lines (2866 HK) Summary

Core Content

China Shipping Container Lines (CSCL) is a major player in the container shipping industry, currently trading at HKD1.90 with a target price of HKD2.30 (+21%). The company's market capitalization is USD918M, and its average daily trading volume is USD6M. Maybank Kim Eng has upgraded its rating to BUY from SELL, citing potential for a better-than-expected demand-supply balance in the industry this year.

Main Points

• Industry Outlook: The outlook for the shipping industry is improving due to higher-than-expected delivery slippage and scrapping, leading to a slower increase in global fleet capacity.
• Alliance Formation: The formation of the CKYHE Alliance (including Evergreen) is a key development, which is expected to enhance CSCL's competitiveness and reduce the likelihood of price-based competition from P3.
• Capacity and Demand: Industry capacity growth for FY14 is forecasted at 5.5% (vs. 6.3%), while demand growth remains at 5.1%. This is expected to narrow the overcapacity from 1.2ppt to 0.4ppt in FY14 and bring the industry back to balance in FY15.
• Freight Rate Strategy: CSCL plans to increase Asia-Europe freight rates by USD500/TEU in March and follow the Transpacific Stabilisation Agreement. The Asia-Europe trade is performing better, with spot rates rising 18.5% YoY, which is expected to offset lower non-European rates.
• Profitability: CSCL is implementing cost-cutting measures, including scrapping capacity and improving operational efficiency, which are expected to reduce unit costs by 3.7% in FY14 and improve profitability.
• Financial Forecast: CSCL's core net profit for FY14 is forecasted to be CNY-1,352.7M, a 76.4% improvement from the previous forecast of CNY-2,626.2M. The company's core ROE is expected to be -5.7% in FY14, aligning with the five-year average of -5.4%.

Key Information

• Target Price: HKD2.30, based on a target P/B of 0.9x, in line with the five-year average.
• Market Share: CKYHE will have a 26% market share on the Asia-Europe trade, which could rise to 29% if CSCL joins.
• Cost Efficiency: CSCL plans to deliver five 19,000 TEU containerships and scrap 30,000-40,000 TEU to improve efficiency and reduce unit costs.
• Catalysts for Improvement: Expected positive catalysts include 1Q14 earnings, potential alliance membership, and government subsidies from scrapping.

Financial Metrics

Key Trends and Outlook

• Spot Freight Rates: Although spot rates have dropped 11% in the two weeks after CNY, recent industry developments suggest a positive outlook for the remainder of the year.
• Alliance Impact: The CKYHE Alliance is expected to reduce competitive pressure from P3, as the latter is less likely to initiate price-based competition.
• Rate Assumptions: The average containership capacity growth for FY14 is expected to be 5.5%, with the Asia-Europe trade showing the strongest rate growth.

Catalysts

• 1Q14 Earnings: Possibly better-than-expected earnings due to higher Asia-Europe rates.
• Alliance Membership: Potential joining of an alliance could enhance market share and competitiveness.
• Government Subsidies: CSCL is expected to receive CNY150m in government subsidies from scrapping.

Conclusion

Maybank Kim Eng believes that the improved demand-supply balance, alliance developments, and cost efficiency initiatives will lead to better performance for CSCL in FY14. The upgrade to BUY reflects confidence in these positive factors and the potential for the company to trade back to the five-year average PB multiple of 0.9x.