Asia Container Shipping Sector
SECTOR REVIEW
Forget about the (shipping) cycle, for now
■ The freight market is still bad and we do are not seeing a cyclical upcycle
(and thus no ingredient for a sustainable rerating) yet. That said,
trading opportunities exist since container shipping stocks are high-beta
early-cycle plays that usually move ahead of the global economic cycle.
With the prospect of a global economic recovery in 2H09 (our Chief
Global Strategist thinks global IP could trough in a few months), we
think shipping stocks, some of which have been beaten down to as low
as 0.2x P/B and a 70% discount to NAV (thus expectations are already
very low), could rebound in 2Q09, or even late 1Q09.
■ As large returns could be made when the tide turns, we suggest
investors have a small exposure to the sector to play any potential
recovery, but be nimble. We think we will see only a modest economic
recovery, like that of the early 1990s. Back then, there was a lot of
share price volatility, with shipping stocks range bound for many
quarters after the initial rally.
■ Considering the weak global trade outlook, even factoring in mitigating
factors such as scrapping, slow steaming, the laying-up of fleet and
order cancellations/delays, we still expect to see industry oversupply
in 2009. With weaker rates and volumes, we downgrade FY08-09
earnings for Asian carriers, and now expect most carriers to make
FY09 earnings losses, with some returning to break-even profit by 2010.
While earnings losses are disappointing, it is by no means devastating.
Carriers under our coverage generally have healthy balance sheets and
do not show early signs of short-term cash flow problems.
■ More importantly, the sector is trading on a historically low forward P/B
of 0.5x with all carriers trading below their NAV. This implies large
earnings losses and asset price falls are priced in. We like OOIL and
CSCL due to the depressed valuations (0.2-0.4x forward P/B), solid
balance sheets and recent underperformance. We downgrade EMC and
WHL to NEUTRAL, as they have either outperformed peers and/or
valuations are not as attractive. We downgrade YMM to UNDERPERFORM,
on higher earnings downside and balance sheet risks.