A/P Dry Bulk Shipping
Initiation: Defensive Stocks
amid Recession Fears
Investment conclusion: We recommend that investors
accumulate dry bulk shipping stocks. We view the dry
bulk shipping companies as the least exposed within the
transportation space to fears of recession in developed
economies. Demand for dry bulk ships is leveraged on
growth in developing economies and the supply is
potentially constrained by lack of funding. Our top pick
is Pacific Basin, followed by China COSCO. We see
potential upside of a further 10-25% for the two stocks
over the next 12 months. We assume coverage of
China COSCO with an Overweight rating. We initiate
coverage of Pacific Basin at Overweight and STX Pan
Ocean at Equal-weight.
What's new: We expect ship utilisation to remain tight in
2008 and 2009, similar to 2007 levels. Accordingly, we
expect both charter rates and second-hand ship prices
to stay high over the next 12 months and dry bulk
shipping companies to report record earnings for 2008.
Where we differ: Our demand and supply fundamental
analysis indicates a positive outlook for the dry bulk
shipping companies over 2008 and 1H09. Our earnings
estimates are higher than consensus, and we expect
consensus earnings estimates to be revised upward
post the strong 1Q08 and 1H08 results we expect.
What’s next: We expect the release of solid results for
1Q08 for STX Pan Ocean (preliminary results after the
market closes on May 7) and for China COSCO and
Pacific Basin for 1H08 (in August) to be near-term
catalysts for dry bulk shipping stocks. Also on the
upside, tight ship utilisation rates would be exacerbated
in the event of port congestion or adverse weather
conditions, which could cause charter rates to spike up
sharply and stock prices to rally accordingly.
Key risk: We view the potential threat of a slowdown in
the emerging market economies, especially China, as
the key risk to our positive view.

Contents
Investment Case............................................................................................................................................................. 3
Positive Fundamentals over Next 12 Months ......................................................................................................................................3
Pacific Basin Is Our Top Pick in the Sector .........................................................................................................................................3
Supply and Demand to Remain Tight ........................................................................................................................... 7
Dry Bulk Vessel Supply ................................................................................................................................................. 9
VLCC to VLOC Conversions Accelerate Supply .................................................................................................................................9
Increased Scrapping Could Reduce Supply and Offer Some Support to Dry Bulk Rates ....................................................................9
Delivery Delays Potentially Reduce Ship Supply ...............................................................................................................................11
Ship Cancellations Could Potentially Cut Supply ...............................................................................................................................12
Dry Bulk Trade Demand............................................................................................................................................... 14
Iron Ore, Coal and Grain Key Drivers of Demand ..............................................................................................................................14
China’s Industrialization Propels Steel Demand................................................................................................................................14
Thermal Coal Remains One of Largest Energy Sources; High Crude Oil Prices Benefit Coal Trade ................................................15
Industrialisation in Developing World Underpins Long-term Grain Demand.......................................................................................15
Longer Haul Voyages Trend Lifts Tonne-Mile ...................................................................................................................................16
Port Congestion and Infrastructure Constraints ................................................................................................................................17
China Costal Shipping Demand Growth to Remain Strong in 2008 but Slow in 2009-10E ................................................................18
Seasonal Patterns.............................................................................................................................................................................19
Freight Rates ................................................................................................................................................................ 21
Expect BDI to Stay High at 8,000 in 2008, Ease to 6,800 in 2009 .....................................................................................................21
Strong Correlation between BDI and Stock Prices............................................................................................................................21
Dry Bulk Ship Prices.................................................................................................................................................... 23
Close Correlation between Second-hand Ship Prices and Charter Rates..........................................................................................23
New-build Ship Prices Should Stay Flat in 2008-09 ...........................................................................................................................23
Second-hand Ship Prices Forecast to Fall 5-10% in 2009 and 20-25% in 2010 ................................................................................23
China COSCO: Assuming Coverage with Overweight, 10% Potential Upside ....................................................... 27
Pacific Basin: Initiating Coverage with Overweight, 23% Implied Upside .............................................................. 38
STX Pan Ocean: Initiating Coverage with Equal-weight; Fairly Valued .................................................................. 46