3 December 2008
Dry Bulk Shipping
More reasons to Sell; cutting
forecasts and target prices
Joe Liew, CFA
Research Analyst
(852) 2203 6198
joe.liew@db.com
Sky Hong
Research Analyst
(86) 21 3896 2840
sky.hong@db.com
No end to negative newsflow in sight. Maintaining sells.
Our recent conversations with management teams of dry bulk shipping companies
reveal that they are preparing for a long, cold winter of low dry bulk shipping rates.
The enthusiasm about business prospects of six months ago has faded away and
management teams are now focusing not on making money, but just minimising
losses and keeping their balance sheets healthy. While stocks have collapsed 77%
on average this year, we would still stay away from the sector.
Deutsche Bank AG/Hong Kong
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may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch/ or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Forecast change
Top picks
China COSCO Holdings (1919.HK),HKD4.22 Sell
China Shipping Dev. (1138.HK),HKD6.11 Sell
Pacific Basin Shipping Ltd (2343.HK),HKD3.28 Sell
STX Pan Ocean Co Ltd (STXP.SI),SGD0.68 Sell
Companies featured
China COSCO Holdings (1919.HK),HKD4.22 Sell
2007A 2008E 2009E
P/E (x) 6.9 1.6 –
EV/EBITDA (x) 3.7 0.7 6.8
Price/book (x) 4.6 0.6 0.6
China Shipping Dev. (1138.HK),HKD6.11 Sell
2007A 2008E 2009E
P/E (x) 12.6 3.3 9.6
EV/EBITDA (x) 10.7 3.2 8.7
Price/book (x) 4.2 0.9 0.9
Pacific Basin Shipping Ltd (2343.HK),HKD3.28 Sell
2007A 2008E 2009E
P/E (x) 4.5 1.3 36.3
EV/EBITDA (x) 5.3 0.6 6.1
Price/book (x) 2.9 0.5 0.5
STX Pan Ocean Co Ltd (STXP.SI),SGD0.68 Sell
2007A 2008E 2009E
P/E (x) 5.1 1.3 –
EV/EBITDA (x) 3.9 0.8 30.0
Price/book (x) 2.3 0.4 0.4
Related recent research Date
Dry bulk shipping: Demand slowdown + oversupply =
trough valuation
by Joe Liew 17 Oct 2008
China Macro Strategy : Further FAI downside,
insufficient stimuli.
by Jun Ma 2 Dec 2008
Global Markets Research Company
BDI + China FAI + Newbuilds = Bankruptcies
We are starting to see bankruptcies in the sector, and second-hand vessel prices
have dropped 60% from levels in August 2008. Our China economist Jun Ma
recently downgraded fixed asset investment forecast for 2009 from 16% to 13%.
He thinks the likely increase in government-sponsored investments (including the
announced RMB4tr investments and others under local initiatives) is far from
enough to offset the demand deceleration for most commodities due to slower
FAI in the real estate, manufacturing and mining sectors. We expect newbuild
deliveries to lead to 10% and 15% growth in supply of vessels in 2009-2010E,
respectively. We expect operating conditions to worsen until end 2010, but see
potential for a quick recovery thereafter as bankruptcies force vessels into the
scrapyard and thereby reduce supply.
Sailing into sea of red in 2009? BDI 90% off its peak
At current spot rates, we believe most dry bulk shipping players will lose money.
We expect to see continued quarterly earnings decline until 2010 as existing longterm
charter contracts expire. We expect most companies to show losses in 2H
2009. We have lowered our earnings forecasts to reflect an average BDI of 1,000
in 2009E and 900 in 2010E. We expect balance sheets to deteriorate rapidly over
the next two years. Target prices have also been cut, to reflect the new earnings
and our view that we should see new trough valuations for the sector. This report
changes price targets and forecasts for several companies under coverage:
for a full breakdown of see Figure 11, page 7.
No upturn until 2011E = new trough; key risk is short bounce in BDI
We are pegging target prices at a new trough P/B of 0.3x P/B for China Cosco,
STX Pan Ocean and Pacific Basin. In our view, China Shipping Development is the
only stock that has a realistic chance of avoiding losses in 2009-2010 because of
its secured volume, so we have valued this at a premium 0.6x 2009E P/B. Key
industry risks: quick and sudden turnaround in the BDI should trade financing ease
up and pent-up demand filter back to the market. However, we view any uptick as
short-lived and would encourage selling into any rally in the stocks.

Struggling to survive
A quick and rapid decline in dry bulk shipping rates has rudely forced a new way of thinking
onto dry bulk shipping companies. We are increasingly hearing of companies struggling to
survive and conserving as much cash as possible. Earnings of companies have been propped
up by longer-term charter contracts which were signed earlier this year. Once those roll off,
we think we will likely to see remarkable earnings declines.

Dry bulk companies going bankrupt
We are starting to see companies go bankrupt. Examples include:
1. Ukrainian dry bulk shipping company Industrial Carriers Inc filed for bankruptcy protection
in mid October, according to Lloyds List. The nine-year old company had 52 ships on
charter and reported revenues were as much as US$ 1 billion annually.
2. Administrators were appointed for NYSE-listed Britannia Bulk Plc on 31 October 2008. It
operated an owned fleet of 12 dry bulk vessels.
3. According to Lloyd’s List, Korean company Parkroad Corp, which owns dry bulk carriers
with a total capacity of 459,227 dwt, went bankrupt and its vessels are being operated by
Sinokor Maritime Co Ltd.
We expect this theme to continue over the coming months as we do not see a sustained rise
in the BDI. Companies with high gearing and companies which have chartered-in capacity at
relatively higher rates are most at risk. Shipowners have started to lay up vessels as the cost
of operating them is higher than time-charter rates.
Second-hand prices collapsing
In October, shipbrokers like Clarksons stopped publishing prices for second-hand vessels
because liquidity in the second-hand market had totally dried up. Financing for vessel
acquisitions also became almost impossible to secure. There was a large bid-offer spread.
When some transactions finally got done in November, we saw a c. 60% decline in dry bulk
vessel prices compared to those done in August 2008.