Trading back to the trough; remain cautious
Equities already anticipate a sharp rebound in rates
We sense a growing level of optimism that freight rates may rebound in
the near term. Our analysis suggests that the Asia shippers’ share prices
already anticipate this, and we would sell into this strength. In our view,
2009 is likely to be much more challenging than our previous expectations.
We lean into our cautious stance on shipping on the back of our macro
teams’ recent downgrades to global GDP growth and anticipated weaker
demand for commodities such as oil and iron ore.
Strong negative economic undercurrent
We downgrade our EPS estimates by 5%, 62% and 18% on average for
2008E-10E, respectively, and target prices by an average of 18%, largely on
the back of our macro teams’ recent downgrades. We expect the sector to
retest recent lows before bouncing along the bottom. We have three Buyrated
ideas: Sinotrans Shipping, Orient Overseas and Thoresen Thai,
which we upgrade from Neutral. We also upgrade the shares of Berlian
Laju (SG and IDR) and Regional Container Lines (RCL) to Neutral from Sell.
Lastly, we remove Hanjin from our Conviction list but retain Sell rating.
Downgrading to Conviction Sell list
We downgrade China Cosco (H), China Shipping Dev (H) and CSCL (H) to
Sell from Neutral and add them to our Conviction List following the recent
rally in the shares. These stocks represent our top Sell ideas.
Upside risks to our cautious shipping views
Earlier global recovery; better-than-expected capacity rationalization.

Table of contents
Equities already anticipate a sharp rebound in rates, in our view 3
The sector is likely bottoming, but we see more downside risk 4
Earnings outlook dampened by losses 6
Valuations less demanding but downside risk remains 8
Bulkers: Double whammy – weak demand and too much tonnage 14
Containers: Demand – Expect dismal 1H09, better 2H09 16
Tankers: Disappointing outlook for demand 18
Sector share performance 20
Trailing P/B charts (arranged alphabetically) 21
Bulkers: Company financials (arranged alphabetically) 25
Containers: Company financials (arranged alphabetically) 37
Tankers: Company financials (arranged alphabetically) 47
Disclosures 57

Add China Cosco, China Shipping Dev and CSCL to Conviction Sell
Top Sell ideas
We have Sell ratings for 17 of the 29 shipping stocks in our coverage universe. Our top Sell
ideas are China Cosco Holdings (H), China Shipping Dev (H) and CSCL (H), all on our
Conviction list. Certain bulk shipping stocks have surged off recent lows on perceived
attractive valuations and expectations of a recovery in the Baltic Dry Index (BDI), a closely
followed proxy for bulker rates. China Cosco Holdings (H) and China Shipping Dev (H) are
among the strongest performers, jumping 102% and 62%, respectively, from Oct 27 lows.
In our view, these two stocks are now among the most richly valued at 1.2X and 1.1X
2009E EV/fleet value (FV) relative to the bulker average of 1.0X EV/FV. For containerships,
we downgrade CSCL (H) to Sell from Neutral and add it to our Conviction list. CSCL’s share
price rose 72% from its Oct 27 low of HK$0.65 to HK$1.12 on Dec 12.
Top Buy ideas
The top Buy-rated ideas in our shipping universe have been Sinotrans Shipping and OOIL.
We add Thoresen Thai to the list, which we upgrade to Buy from Neutral, because of its
attractive relative valuation despite our cautious view of the bulker sector. Our positive
view on the other stocks is valuation-driven, as well. For example, Sinotrans continues to
trade at a discount to our estimated 2009E net cash/share level of HK$2.10. Meanwhile,
OOIL trades at a 17% discount to its containership peer group average EV/FV for 2009E,
translating to a P/B discount of 67% despite our anticipation that OOIL will maintain its
comparatively stronger operational performance through the cycles.
Other rating changes
We also upgrade Berlian Laju Tankers (SGD and IDR) and RCL to Neutral from Sell after derating
to undemanding valuations. Since Sep 16, BLT (SGD) and BLT (IDR) fell 75% and 72% vs.
the local index performance of 29% and 27%, respectively; over the last 12 mo, BLT (SGD) and
(IDR) fell 87% and 86%, vs. 51% and 55%. RCL share price dropped 75% since Jun 17 and 80%
over last 12 mo, while the local market fell 45% and 49%, respectively. Last, we remove Hanjin
Shipping from our Conviction list but retain our Sell, due to anticipated regulatory changes in
treating temporary currency movement. The stock declined 11% since Oct 9 vs. a 15% decrease
in the KOSPI, as the stock recently rebounded on hopes of a rate recovery; over last 12 mos:
52% vs. 43%. Upside risks: Better-than-expected rates. Downside risks: Prolonged recession.

Equities already anticipate a sharp rebound in rates, in our view
Over the past couple of weeks, we have received an increasing number of queries
from investors on whether the bulker sector would rally on a rebound in rates. We
believe the market has already discounted such a rebound. The bulk shipping sector
stocks have jumped 50% on average from their recent lows, while containership and
tanker stocks have appreciated 36% and 29%, respectively. We think the market could
be disappointed by the magnitude and duration of the recovery in rates.
While we believe the BDI should rebound in the New Year off of currently depressed and
loss-making levels, our analysis suggests that the market is already anticipating a sharp
and sustainable rebound. Note that the market sold off bulkers aggressively when the BDI
was 1,048 on Oct 27. Since then, the sector has bounced back strongly despite the BDI
remaining 32% lower than at that point in time. By our estimation, stocks like China Cosco,
China Shipping Dev and STX Pan Ocean are discounting an average 2009E BDI of 3,381 to
as much as 4,978. We expect the BDI to average just 1,250 next year. While demand could
increase incrementally, there is a significant amount of idle capacity ready to meet that
demand. Our channel checks suggest that as much as 30% of the Capesize fleet is sitting
idle currently. Meanwhile, we expect newbuild deliveries to limit upside to rates, as well.

The sector is likely bottoming, but we see more downside risk
We lean into our cautious stance of shipping on the back of our macro teams’ recent
downgrades to global GDP growth and anticipated weaker demand for commodities such
as oil and iron ore. In our view, 2009 is likely to be much more challenging than our
previous expectations and we now expect all containership operators to lose money next
year while many bulkers will likely sink into the red, as contracts roll over from mid-2009.

While we expect global growth to rebound from 2H09, there is still a great deal of
uncertainty surrounding the economic environment. Furthermore, excessive newbuild
orders scheduled for delivery next year remains a threat to pricing power. Therefore, we
remain cautious on the 6-12 month outlook for shipping equities.

Over the past 30 years, we have observed two “super cycles” for shipping. The first one
went largely unnoticed by equity investors because the sector was comprised of many
illiquid, small-cap companies. The second — and current — one began in 2003 following
China’s accession to the WTO. Since then, marine transportation has garnered significant
investor interest, largely thanks to the institutionalization of the sector, with a number of
well-followed equity issuances, including China Cosco, CSCL, STX Pan Ocean and Pacific
Basin. One of the similarities we have noted between these two cycles has been the
voracity of the de-rating of the equities: Sizeable gains created during the boom have been
largely given back typically within one year from the peak of the cycle. In our view, the
brunt of the selling has been done but de-rating may continue for a further 6-12 months,
particularly after the recent run-up, in our view.

Earnings outlook dampened by losses
We incorporate our economic team’s recessionary outlook, lowering volumes and freight
rates. Fortunately, fuel costs have come off sharply in recent weeks, which reduce our
operating cost estimates. As we do not take a view on fuel prices, we use the current
average for bunker price for Singapore, Rotterdam and Los Angeles of US$223/ton from
US$578/ton previously. Nevertheless, we now expect every containership operator to turn
loss-making in 2009E. We also expect several bulkers we analyze to post losses in 2010E,
based on our new rate forecasts.

Earnings sensitivity analysis
Given the high degree of error in forecasting freight rates, we have provided a sensitivity
analysis as a guide for 2009E earnings under different assumptions, all else being equal.
• Bulkers will likely feel the pinch from mid-2009: Given that most companies we cover
have a varying number of available vessel days on contract coverage, we would expect most
operators to remain profitable even if rates were to decline to zero in the spot market in 2009.
However, we expect several companies we analyze to lose money in 2010E.
• We expect losses to dog all containership operators in 2009: Even with bunker fuel
prices declining more than 65% from their peak levels in 3Q, we still expect every containership
operator in our coverage universe to post losses next year. In our view, top-line pressure is far
greater than any cost-cutting initiatives the carriers are able to implement, largely due to a rate
war triggered by large carriers with excessive newbuild deliveries.
• Tankers should remain profitable even under a worst-case scenario: The tanker
companies we cover generate income from other shipping-related businesses, and therefore
should remain profitable over the next few years, unlike their peers in bulkers and containers.
A risk to this sensitivity analysis is that it does not consider freight derivative contracts that
companies, like China Cosco, STX Pan Ocean and Korea Line, have entered into.

Valuations less demanding but downside risk remains
As we expected, the shipping sector has de-rated significantly over 2008. Since the
beginning of the year, the MSCI AEJ Marine Transportation Index has declined 55% even
after rebounding 15% from Oct 27 lows. In our view, the recent rally represents an
opportunity to exit, particularly for a few stocks that have bounced very strongly. While we
are cautious on the shipping sector, we acknowledge that the market is discounting most
of the negative news. With all three sectors — bulkers, containers and tankers — trading
below 1.0X 2009E P/B, it is clear to us that the market anticipates losses. Furthermore, we
believe that the equities are factoring in the risk of asset write-downs. Thus, we would
suggest that investors exercise caution when considering selling stocks short. However,
we still see selective opportunities. Our top Sell ideas are China Cosco (H), China
Shipping Dev (H), CSCL (H), all of which we have downgraded from Neutral and
added to our Conviction list. We also think there is significant downside risk from
current share price levels to Hanjin Shipping as well as STX Pan Ocean shares listed in
Korea and Singapore.
We expect the sector to de-rate a further 30%-35% on average over the next 12 months.
This is still meaningful downside risk, which is why we maintain our cautious stance. If the
sector retests recent lows, we would expect it to trade around the trough for 6-12 months,
given the oversupply situation we anticipate for bulkers, containers and tankers. In our
view, tankers look most interesting on a medium-term outlook, given the potential for
significant scrapping. While the market is decidedly bearish on containerships, we see the
potential for upside surprise in 2H09, as we think market expectations for earnings will
come down sharply in 1H09. We are most negative on bulkers, because of the current
aggressive newbuild delivery profile for 2009E-10E.

Summary of rating and target price revisions
We reduce our 12-mo target prices by an average of 18% for the sector reflecting changes
to our estimates for returns on fleet (ROF), fleet values (FV) and WACC assumptions.
• China Cosco Holdings (H): Downgrade to Sell from Neutral and add to Conviction list due to
rich valuations against our more cautious outlook for bulker freight rates. We also see risk related
to its loss-making freight derivative positions. Our new target price is HK$2.50 (vs. HK$4.30
previously), reflecting significantly lower asset values.
Key risks: While we think that the market is discounting a sharp rebound in rates, a sustained
higher level could lead to upside risk. Asset sales also pose a threat to our earnings outlook.
• China Shipping Dev (H): While we believe the company’s earnings tend to be less volatile,
annual contract renewals imply that earnings tend to rise and fall with the broader freight rate
cycle. In our view, slower growth in China could lead to disappointing domestic freight rates,
which is why we downgrade to Sell from Neutral and add to Conviction List. We have lowered
our target price to HK$3.60 (from HK$5.90) assuming significantly lower domestic freight rates.
Key risks: Lower-than-expected declines in domestic coal freight.
• CSCL (H): The company was among the first containership companies to post losses at 3Q08. In
our view, the market is underestimating the potential for losses in 2009. We downgrade to Sell
from Neutral and add to Conviction List using our more bearish freight rate and volume forecasts.
Our target price is unchanged at HK$0.70.
Key risks: Stronger-than-expected freight rates.