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China Shipping Container Lines (2866 HK) Summary

Core Content

China Shipping Container Lines (CSCL), listed on the Hong Kong Stock Exchange, has seen a significant recovery in its financial performance for the first half of 2014 (1H14). The company reported a net profit of CNY431.6 million, a sharp turnaround from the CNY1.26 billion loss in 1H13. This improvement is attributed to higher freight rates and a reduction in losses from non-recurring items. The share price is currently HKD2.19, with a target price of HKD2.65, reflecting a 21% increase.

Key Financial Metrics

• Market Cap (USD): 3.3 billion
• ADTV (USD): 7 million
• Share Price: HKD2.19
• Target Price: HKD2.65 (+21%)
• P/BV Multiple: 0.85x (for FY14F), increased to 1x (from 0.9x)
• ROE (FY15F): 3.9%
• ROAA (FY15F): 4.0%
• ROAE (FY15F): 4.0%
• Net Dividend Yield: 0.0%

1H14 Performance Highlights

• Net Profit: CNY431.6 million, a recovery from CNY1.26 billion loss in 1H13.
• Gross Margin: Expanded by 4.7 percentage points YoY to -0.7%.
• Discontinued Operations: Generated a profit of CNY38.8 million in 1H14, up from CNY14.1 million in 1H13.
• Non-recurring Items: Net gains from disposal of terminal and other assets amounted to CNY900 million, while foreign exchange loss was CNY13.8 million.
• Excluding Non-recurring Items: Loss reduced by 62.5% YoY to CNY493 million.
• Revenue Growth: Increased by 8.5% YoY to CNY17.4 billion, driven by shipping revenue (up 1.8%) and logistics revenue (up 97.3%).
• Box Volume Growth: Overall volume increased by 1.4% YoY to 3.95 million TEUs, with international volume up 5.2% and domestic volume down 3.8%.
• Freight Rate: Overall freight rate edged up 0.4% YoY to CNY3,839/TEU. Asia-Europe rates increased by 6.6%, and domestic China rates by 4.1%.
• Net Finance Cost: Decreased by 4.4% YoY.

Earnings Forecasts and Outlook

• FY14F Earnings Forecast: Raised by 31.7% to CNY331.1 million, based on higher freight rate growth.
• FY15E and FY16E Forecasts: Raised by 5.9% and 8%, respectively.
• Recurrent Loss Reduction: Expected to decline by 77.4% YoY in FY14, with the business returning to profit in FY15.
• Freight Rate Growth: Blended freight rate growth is forecasted at 3.6% for FY14 and 5.3% for FY15.
• Volume Growth: Expected to increase by 2.1% in FY14 and 7.9% in FY15.
• Core EPS Growth: Projected to grow by 78.4% in FY16.

Strategic Developments

• CSCL is expected to benefit from peak season freight rate improvements.
• The company will deliver two 10,000TEU and five 19,000TEU containerships over the next two years, improving efficiency and reducing unit costs.
• CSCL is collaborating with Alibaba to explore more extensive co-operations on the B2B market, aiming to expand into third-party logistics and increase market share for SME customers.

Valuation and Peer Comparison

• CSCL's current P/BV multiple is 0.85x, which is considered inexpensive compared to the sector's average of 1.2x.
• The company is expected to have a better ROE outlook, with a projected ROE of 3.9% for FY15F.
• CSCL's EV/EBITDA ratio is forecasted to decrease from 16.3x to 7.1x by FY16E, indicating improved valuation.

Conclusion

Maybank reiterates its BUY recommendation for CSCL, with an updated target price of HKD2.65. The company is expected to benefit from higher freight rates and improved operational efficiency, which should lead to a return to profitability in FY15 and further growth in subsequent years. The current valuation is seen as attractive given the low P/BV multiple and expected ROE improvements.