May 21, 2009
A/P Container Shipping
Operating Fundamentals
Weak for 2009-11; Too Early
to Dismiss Multi-year Losses
Worst may be over in 1Q09 but long journey to
recovery: Morgan Stanley held a container shipping
forum on May 15, 2009, with NOL, OOIL and
independent consultant Containerisation International.
The key takeaway was that, although the worst
operating performance was probably seen in 1Q09, the
supply/demand imbalance will likely persist for some
years, continuing to squeeze freight rates. In addition,
2009 Transpacific negotiations are delayed but so far
the signed contracts have seen “considerable downside”
to 2008 rates. We think investors looking for a quick
turnaround in industry fundamentals will be disappointed
and we Underweight CSCL, YMM and WHL. For a more
defensive play, we like OOIL, which in our view has
more attractive valuations than its regional peers.
Factoring in sharper multi-year losses for 2009 and
2010 and more modest earnings recovery in 2011 –
intensifying our already bearish outlook on sector
fundamentals. We expect all container shipping
companies under our coverage to report significant
losses in 2009, greater than consensus expectation.
Raising our price targets: We believe that the worst
operating performance may have passed in 1Q09 and
that the magnitude of demand deterioration has
bottomed. Nonetheless, we remain cautious on the
stocks, as we think the market is underestimating the
duration and depth of the container shipping downturn.
Our revised price targets are based on 2010e P/BV
multiples at the lower end of the historical range. We
think that investors are keen to look beyond trough
valuations and focus on 2010.
What would make us more bullish: i) Concrete efforts
by shipping companies to focus on profitability rather
than market share; ii) quicker-than-expected recovery in
consumer spending and; iii) more aggressive ship order
cancellations and scrapping of older containerships.