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See the last page for analyst cert ification and important disclosures, including investment banking relationships.
Market share expansion
Sailing at full speed. Chinas massive infrastructure investment over the next
few years shall continue to drive robust shipping demand on energy and key
materials. As China is increasingly reliant on coal and ore imports in its iron &steel production, and power generation, we like dry-bulk shipping given its
resilient growth prospects and still-favorable supply-demand outlook. We also
expect the oil tanker market to turnaround by 2009 and Chinas growing oil
imports shall benefit domestic oil shippers.
State policy to benefit shipping SOEs.China has predominantly relied on
foreign shippers to ship its energy imports but its increasing energy demand
has urged the government to protect its energy shipping security. State
government is working out relevant industry policy to encourage domestic
shippers to transport up to 50% of its key energy and materials imports by
2010. We believe the policy could potentially benefit leading shipping
companies in China, including China COSCO Holdings (1919 HK, CCH) and
China Shipping Development (1138 HK, CSD).
Industry consolidation to create shipping conglomerates. In a move to
integrate state-owned assets, China plans to cut the number of central
state-owned enterprises (CSOE) from current 150 to 80~100 by 2010.
Shipping is among the seven core sectors short-listed by the State and will be
a key restructuring focus over the next 2 years. Economies of scale and
market share are the keys to survive the shipping consolidation. We believe
the market leaders, COSCO Group and China Shipping Group are likely to
benefit from the consolidation and their listed subsidiaries may have more
M&A opportunities.
Overweight dry-bulk carrier and neutral on container. We recommend to
buy dry-bulk shippers, including CSD, CCH and Sinotrans Shipping Limited
(368 HK, SSL) given a solid dry-bulk demand outlook throughout 2009.Among the sector, CSD is our top-pick given its high exposure to Chinas rising
coastal coal shipping market and its more defensive shipping model. We are
neutral on China Shipping Container Lines (2866 HK, CSCL) which is most
vulnerable to a slowdown in Chinas exports.
Key risk factors to the sector include: (1) global recession to cut trade
demand and dampen global shipping market; (2) further tightening measure by
the State to curb fixed assets investment, which may slowdown its energy
demand and energy imports; (3) ultimate shipping consolidation plan is yet to
be finalized by the State and may not benefit the listed companies; (4) hiking
vessel prices to undermine the expansion plan by large shipping SOEs.
Peer valuationCode Company Price Mkt cap TP Rating PER (x) PBR (x) ROE (%) Yield (%)
(HK$) (HK$mn) (HK$) 07F 08F 09F 08F 08F 08F
1919 HK CCH 23.00 353,034 32.0 O 11.0 8.6 9.2 3.2 38.4 2.1
1138 HK CSD 24.75 113,663 31.0 O 15.9 12.5 9.9 3.2 28.9 2.6
2866 HK CSCL 3.47 92,628 3.68 N 11.1 10.0 8.6 1.0 9.9 2.5
368 HK SSL 5.06 20,240 6.35 O 14.0 8.0 7.7 1.2 16.9 3.1
2343 HK Pacific Basin 13.08 20,720 N/A NR 4.7 5.2 5.8 1.3 39.1 10.5
316 HK OOIL 48.70 30,476 N/A NR 1.5 4.5 1.2 0.9 12.8 3.8
Note: Closing price as of 3 March 2008Source: Bloomberg, CCB Intl Securities
China shipping
Industry overview
Sector view: overweight
Market data
HSI Index 23,584
HSCEI Index 13,439
HSCCI Index 5,282
Closing price as of 3 March 2008
Source: Bloomberg
HSCEI 1-year performance
Source: Bloomberg
Wang Ren
(852) 2532 6749
China and Hong Kong Equity Research
4 March 2008
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2
Table of contents
Industry overview .............................................................................................................................................. 3Emerging market remains resilient ............. ............ .............. ............. ............ .............. ............. .............. ............ .............. .3Strong China demand to sustain........................................................................................................................................3Robust dry-bulk shipping outlook.......................................................................................................................................5China relies on ore imports................................................................................................................................................6Rising coastal coal shipping market...................................................................................................................................7Oil shipping to turnaround by 2009....................................................................................................................................9Vulnerable container outlook ............. ............. ............ .............. ............. .............. ............ ............. .............. ............. ........ 10
State policy to benefit shipping SOEs........................................................................................................... 11Market share expansion .................................................................................................................................................. 11Industry restructuring underway ............ ............. .............. ............. ............ .............. ............. .............. ............ .............. ...12Emerging shipping SOEs.................................................................................................................................................13
Valuation and recommendation ..................................................................................................................... 14Peer comparison..............................................................................................................................................................14Recommendation.............................................................................................................................................................16 Risk factors......................................................................................................................................................................18
Company research .......................................................................................................................................... 19China COSCO Holdings (1919 HK): Evolving into a shipping conglomerate...................................................................19China Shipping Development (1138 HK): Solid growth prospects ............ ............ .............. ............. ............ .............. ...... 25China Shipping Container Lines (2866 HK): Vulnerable industry outlook ............ ............ ............. .............. ............. ........ 31Sinotrans Shipping Ltd (368 HK): Improving growth visibility...........................................................................................36
Appendix .......................................................................................................................................................... 40Organization chart of listed shipping companies..............................................................................................................40Fleet summary of listed shipping companies ............. ............. ............. ............. .............. ............. ............ .............. .......... 41
Disclaimer......................................................................................................................................................... 42
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3
Industry overview
Chinas rapid economic growth and its infrastructure boom over the 11th-5 period
(2006~2010) shall continue to boost strong shipping demand for iron ore, coal and
oil imports. However, Chinas shipping power is still relatively underdeveloped to
accommodate its growing shipping demand, mainly due to a lack of large-size
vessels for long-haulage transportation. We believe the rapid capacity expansionand favorable state policies shall underpin strong growth prospects for large
state-owned shipping enterprises (shipping SOEs).
Emerging market remains resilient
Relatively immune from global sub-prime crisis, emerging market shall remain as a
key engine of global economy for the next few years. Strong domestic demand from
China and other emerging countries shall be able to sustain their own growth
momentum.
We expect the shipping demand from US to remain sluggish over 2008~09 while
Europe market is likely to slowdown in 2008. We maintain positive on Asia-Pacific
shipping market, which is being led by robust regional economic growth and strong
energy imports. Out of three shipping segments, we like dry-bulk shipping for itsmore favorable demand-supply outlook for the next 2 years, given a bulk of 80%
new dry-bulk vessels will only be delivered in 2009 and beyond.
Global economic outlook
World US Europe Japan Emerging market China
IMF 08 GDP growth forecast (%)
Previous forecast 4.9 2.2 2.6 1.9 7.8 11.4
Latest in Jan 2008 4.0 1.5 1.6 1.5 6.9 10.0
World Bank GDP growth forecast (%)
2007 estimate 3.6 2.2 2.7 2.0 7.5 11.3
2008 forecast 3.3 1.9 2.1 1.8 7.4 9.6
Source: IMF, World Bank
Strong China demand to sustain
Chinas growing demand on energy and key materials has become a major driving
power of global shipping market. Chinas iron ore imports grew at 3-year CAGR of
23% to account for about 50% of global iron ore imports as in 2007. China has
nearly tripled its coal imports in 3 years and is expected to become a net coal
importer in 2008. Based on the research of International Energy Agency (IEA),
Chinas oil production is likely to peak during the next decade but its oil demand is
going up steadily until 2030. In fact, IEA forecasted China to overtake Japan and
become the worlds 2nd
largest oil importer soon after 2010.
China is entering into a period of unprecedented infrastructure expansion as
outlined by its 11th-5 development plan over 2006 to 2010. State government plansto construct infrastructure with a total budget of RMB3.8tn, about 73% higher than
its previous five-year plan. We believe Chinas massive infrastructure investment
over the next few years shall sustain a strong materials imports and overseas
shipping demand.
We forecast Chinas net coal import to grow at above 15% yoy for the next 2~3
years while iron ore import to grow at 8~10% yoy over 2008~2009. We expect
Chinas crude oil import to maintain a steady growth at 10~12% yoy by 2010.
Favorable state policies to encouragethe development of China shippinggiants
China is now the key driving power ofglobal shipping market
Emerging market likely to maintain itsgrowth momentum despite US andEurope slowdown
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4
Chinas ore imports
Source: CEIC, CCB Intl Securities
Chinas coal imports
Source: CEIC, CCB Intl Securities
Chinas iron ore and coal imports remainresilient
148
208
275
326
384
0%
10%
20%
30%
40%
50%
2003 2004 2005 2006 2007
0
100
200
300
400
500
Ore impor ts (mn tons) Crude s teel produci ton growth (yoy) Iron ore import growth (yoy)
1.1
1.9
2.6
5.1
3.8
-40%
-20%
0%
20%
40%
60%
80%
2003 2004 2005 2006 2007
0.0
1.0
2.0
3.0
4.0
5.0
6.0
C oal im ports (m n tons ) C oal ex port grow th (y oy ) C oal im port grow th (y oy )
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Robust dry-bulk shipping outlook
As of Oct 2007, new capacity of dry-bulk vessel on order reached 48.4% of current
capacity, as compared to new delivery ratio of 40.4% and 60.7% in oil tankers and
containerships market respectively. Of the new dry-bulk capacity, 80% will only be
delivered in 2009 and beyond. Global economic slowdown remains the key concern
to containership while oil shipping market is expected to turnaround during late 2008to 2009 given 27% of single-hulled tankers will be phased out of the market by 2010.
Global vessel supply outlook
Source: SSL Prospectus, CCB Intl Securities
Driven by strong Asian dry-bulk demand, BDI index continued to breach record high
during 2H07 with a year-round average at 7,070. Reducing coal exports from China
has spurred Japan and Korea to import their coal needs from further sources, such
as Australia. The lengthening ocean voyage and severe congestion at Australian
ports also contributed to the hiking freight rate. We expect such factors to persist
during the next 2 years and strong China demand to support 2008 average BDI
index at 7,500.
BDI performance since 2004
Source: Bloomberg, CCB Intl Securities
0
2,000
4,000
6,000
8,000
10,000
12,000
Jan04
Apr04
Jul04
Oct04
Jan05
Apr05
Jul05
Oct05
Jan06
Apr06
Jul06
Oct06
Jan07
Apr07
Jul07
Oct07
Jan08
BDI Index
12.2% 9.7%19.7%
28.2% 38.7%
41.0%
0 %
20%
40%
60%
80%
100%
Tan ke rs B ulke rs C on ta ine rs hi ps
D e li v e re d du r in g 0 7 to 0 8 D e li v e re d in 2 0 09 a n d be y o n d
Strong China demand to lengthen industrycycle
Modest supply growth in dry-bulk fleet in2008
2007 average at 7,070
2004 average at 4,510
2005 average at 3,371
2006 average at 3,180
BDI found support at 6,000
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6
China relies on ore imports
Chinas infrastructure boom over 2006~2010 is expected to drive a 10~15% yoy
growth in Chinas iron ore demand, which is in line with its steel production capacity
expansion for the next few years.
However, domestic ore supply is unlikely to catch up with increasing demand, given
a modest mining capacity expansion and a nation-wide environment concern. We
expect China to source up to 50~55% of its annual ore demand from imports during
2008~2009 and ore import growth to maintain strong at above 10% yoy for the next
2 years.
Modest mining FAI to cap supply growth
Source: CEIC, CCB Intl Securities
Further, the low grade of Chinas crude oil reserve also contributed to its rising
reliance on ore imports. Chinese Academy of Geological Science (CAGS) reported
in 2007 that China has identified 59.4 billion metric tons of iron ore reservescontaining only 30~35% of iron ore contents, compared to an average ore grade of
over 60% for major ore exporters in the world.
Estimated breakdown of Global ore reserve base Low ore grade of Chinas reserve compared to global ore exporters
Source: US Geological Survey (Mineral Commodity Summaries, Jan 2006), CCB Intl Securities
Chinas ore demand to outpace miningcapacity
67.2%64.1% 63.3% 62.5%
55.4%
48.6%
32.6%29.4%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Brazil Canada India Australia Russia Worldw ide China Ukraine
(ore grade)
Domestic supply is low due to low gradeof Chinas crude ore reserve
Others, 26.8%
Australia, 10.8%
China, 12.4%Russia, 15.1%
Brazil, 16.5%
Ukraine, 18.4%
-20%
0%
20%
40%
60%
80%
100%
120%
Jan 06 Apr 06 Jul 06 Oc t 06 Jan 07 Apr 07 Jul 07 Oct 07
F AI o n o re min in g (y o y ) F AI o n o re pro du ctio n (y o y ) F AI o n m eta l p ro du ctio n ( y oy )
Investment gap likely to sustain
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7
Rising coastal coal shipping market
Over 90% of Chinas coal mines are based in inland provinces in Western and
Midwest China, while the largest demand arises from coastal China. Costal urban
areas, including Shanghai and Guangdong, primarily rely on waterway for coal
transportation, i.e. 80% of Guangdongs coal trading is seaborne.
Strong industrial growth in China continues to drive robust electricity consumption
and coal demand. China targets to upgrade its power capacity during the 11th-5
period to meet rising electricity demand. Annual power capacity is expected to
upgrade from 713mn KW in 2007 to 900~950mn KW by 2010, representing a steady
increase of 8~10% p.a. for the next 3 years.
China relies on a number of major coal-rails, including Daqin Railway (601006 CH)
and Shuohuang Railway (owned by Shenhua, 1088 HK) to transport coal from coal
mines in Western China to key waterway terminals in the east. We expect major
railroads and port terminals to see capacity expansion at 10~15% yoy through 2010
and drives strong volume expansion in coastal coal shipping market.
We forecast total coastal coal shipment in China to increase by 10~12% yoy and
coal shipping rate to grow by 30~15% yoy by 2010, driven by robust coastal coal
demand and strong railroad and port throughput upgrade during 2008~2010. Market
leader, CSD is expected to increase its market share from 30% in FY07 to 35% by
FY09 given its large contract base and strong capacity delivery in 2009. CSD has
signed a strategic agreement with Guangdong in Nov 2007 to become its major coal
shipper from 2008 to 2010.
Market comparison
Key coastal coal shippers
Company CSD Ningbo Marine Shipping CS Haisheng
Stock code 1138 HK 600798 CH 600896 CH
FY07 COA volume (tons) 89.4mn 5.0mn 3.2mn
2008 COA contracts (by company announcement)
Volume (yoy growth) 6.9% 20% 23%
Rate (yoy growth) 40% 60% 79%
Coastal coal capacity expansion (by CCBI forecast)
FY08 (yoy growth) 2% 17% 13%
FY09 (yoy growth) 12.5% 15% 20%
Source: Company data, CCB Intl Securities
Strong power upgrade to meet growing electricity consumption
Source: CEIC, CCB Intl Securities
Railroad upgrade to drive volumeexpansion
Rising costal coal demand to fuel shippingrate
Coastal area is the largest coal user andrelies on waterway to transport coal
0
20 0
40 0
60 0
80 0
1999 2000 2001 2002 2003 2004 2005 2006 2007
(mn KW)
0%
4%
8%
12 %
16 %
20 %
A nn ua l p ow e r ca pa city E le c tr ic ity c o ns u mp ti on gr ow t h ( y oy % )
Electricity consumption steadily
grows since 2003
Rising coastal coal shipping market tobenefit CSD
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Estimated breakdown of Chinas coal reserve Coal is vital in power generation
Source: CEIC, China Mining Association, CCB Intl Securities
Railway expansion to match output growth by 2010
Source: Shenhua Group, CCB Intl Securities
New capacity over 2005~2010
204
326
395
100
Total: 304
0
0
100
200
300
400
Nation-w ide Coal producing area Key coal-rails
(mn tons)
0% 20% 40% 60% 80% 100%
Shanxi, 25.7%
Inner Mongolia,
22.4%
Shaanxi, 16.1%
Xinjiang, 9.5%Other inland area,
19.6%
Coastal area,
6.6%
Electricity
generation
Coal
consumption
China burns 50% of its coal togenerate 80% of its electricity
Coal- ired, 82.9%
Hydro power, 14.9%
Nuclear power, 1.9%
Electricity generation, 50.3%
Petroleum processing, 9.5%Iron & steel making, 8.9%
Chemical production 4.9%
Residential uses, 3.5%
Other industrial uses, 23.0%
Others, 0.3%
Shuohuang Railway
Daqin Railway
Coal producing area
Coal self-supply area
Coal consumin area
Shenhuas key coal mines
Daqin Railway
Shuohuan Railwa Huan hua Port
Qinhuan dao Port
Guangzhou
Nin bo & Shan hai
CSD has signed strategic agreementwith Guangdong to become its major
coal shipper from 2008 to 2010
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Oil shipping to turnaround by 2009
Oil shipping market continued to see freight rate under pressure over the past 2 to 3
years due to tanker oversupply. Based on the order book as of Oct 2007, tanker
market will see new supply of as much as 40.4% of current capacity for the next few
years. However, about 27% of existing tanker fleet are single-hulled and will be
phased out or rebuilt into double-hulls by 2010 to meet revised IMO regulations. Weexpect the oversupply to ease during 2009~2010 and tanker rate to turnaround by
2009.
Based on the forecast by IEA, China oil production will peak during the next decade
and its net oil imports will nearly quadruple from 3.5mn bbl/day in 2006 to 13.1mn
bbl/day by 2030 to account for 80% of its total oil consumption. We believe strong oil
demand from China shall benefit domestic shippers, including CSD and CCH, both
of which are well positioned to ride on China governments strategy to boost
domestic tankers.
Chinas net oil imports forecast by IEA
Source: IEA; CCB Intl Securities
Tanker market performance since 2004
Source: Bloomberg, CCB Intl Securities
3.5
5.1
7.1
13.1
0
3
6
9
12
15
2006 2010F 2015F 2030F
China's net oil imports (mn bbl/day )
Around 27% of existing tankers are to bephased out during 2009~ 2010
Chinas net oil imports to quadruple by2030
0
50
100
150
200
250
300
350
Jan04
Apr04
Jul04
Oct04
Jan05
Apr05
Jul05
Oct05
Jan06
Apr06
Jul06
Oct06
Jan07
Apr07
Jul07
Oct07
Jan08
(WS)
Dirty VLCC rate (Arabian Gulf to Japan)
Tanker rate largely traded below WS100 over 2005 to 2007
Strong rebound seen in late 2007
9.9% p.a.
6.8% p.a.
4.2% p.a.
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10
Vulnerable container outlook
Container market performance was mixed for 2007. Asia/Europe market saw strong
freight rate recovery with good TEU growth while transpacific market continued to
underperform due to the weak US demand and overcapacity. Looking forward into
2008, increasing capacity reallocation from transpacific route to A/E route could
dampen current freight rate recovery while transpacific line is expected to remainsluggish given the worsening US economic outlook. Regional liners, mainly TSA
(Transatlantic Stabilization Agreement) are introducing new bunker surcharge
program to raise transpacific rate but we question the weak demand could actually
affect load factor. Overall speaking, container outlook remains vulnerable for 2008.
Key Chinese liners, including CSCL and COSCON, have large exposure to
US/Europe market and they are highly leveraged to Chinas export performance.
Over the last few months, China saw a weakening export growth and shrinking trade
surplus. Chinas export to US and EU slowed from 20.5% and 37.4% yoy in 1Q07 to
10.7% and 30.0% yoy in 4Q07, respectively.
Key national liners
Company CCH (COSCON) CSCL
Stock code 1919 HK 2866 HKTEU capacity as of 2007 439,677 446,418
Capacity expansion over 2007~2009 14.9% p.a. 12.2% p.a.
Domestic market share 40% 45%
Estimated market exposure as of FY07
Transpacific route 36.7% 37.4%
Asia/Europe route 35.8% 32.8%
China domestic 6.1% 11.5%
Source: Company data, CCB Intl Securities
Chinas recent trade performance
Source: CEIC, CCB Intl Securities
Global economic slowdown and supplyglut are the key concerns
0%
10%
20%
30%
40%
50%
60%
01/07 02/07 03/07 04/07 05/07 06/07 07/07 08/07 09/07 10/07 11/07 12/07 01/08
0
5,000
10,000
15,000
20,000
25,000
30,000
Trade surplus (U S$mn) Ex port grow th (y oy ) Import grow th (y oy )
Trade surplus started to slide
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State policy to benefit shipping SOEs
China has predominately relied on foreign shippers to transport most of its energy
imports but its mounting energy demand has urged the government to protect its
energy shipping security. The State is working out relevant industry policy, which
aims to encourage domestic shippers to transport up to 50% of its energy and key
materials imports by 2010. Meanwhile, State government attempts to consolidate itskey state-owned assets in shipping and six other sectors to cultivate worldwide
industry leaders.
Implementation of such policies are the key rerating catalysts to China shipping
sector. We believe two shipping CSOEs (Central State-owned Enterprise), COSCO
and China Shipping Group are likely to strengthen their market position in the
shipping competition given their strong shipping power to control the market and
mixed business model to create massive synergy.
Summary of key shipping policies
National energy security plan
Energy shipping
security
State government aims to lift domestic shippers market share in shipping energy and
other key materials imports to about 50% by 2010 and to 80% by 2015.
National state-owned assets reform planCSOE restructuring The plan aims to consolidate key state-owned assets and reduce the number of CSOEs
rom currently over 150 to 80~100 by 2010. Among which, there are five CSOEs
operating shipping or shipping-related business.
National security State government has short-listed seven core sectors, of which it shall maintain absolute
control and cultivate leading international enterprises. The seven pillar industries include
armaments, power genera ion and distribution, oil and petrochemicals,
telecommunications, coal, aviation and shipping.
Source: National shipping security plan refers to Nanjing Waterway 2006 Annual Report (600087 CH); SASAC;CCB Intl Securities
Market share expansion
Currently, domestic players have accounted for an estimated 30% and 15% of iron
ore and oil import shipping market, respectively. The market share expansion targetcould at least accommodate new domestic capacity of 110~115mn DWTs of iron ore
and 80~85mn DWTs of crude oil by 2010, or at least 65 Capesize or VLOCs (Very
Large Ore Carrier, estimated as 250,000 DWT) and 60 VLCCs (Very Large Crude
Carrier, estimated as 300,000 DWT).
Capacity expansion
Note: Other SOEs include Changjiang Shipping Group, Sinotrans Group and China Merchant GroupSource: Company data; CCB Intl Securities
Market share expansion to support capacity
growth
Favorable state policies are the key reratingcatalysts to the sector
(No of v essel for 2008~2010)
19
6
12
8
12
6065
Total: 26Total: 31
0
20
40
60
80
Capesize/VLOC on
orders
VLOC needed VLCC on orders VLCC needed
C OS CO Gr ou p C hi na Sh ip pi ng Gr ou p O th er SO Es
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12
Industry restructuring underway
In a move to strengthen major state-owned assets and enhance Chinas national
competitiveness in the world, seven core sectors were named by state government,
of which it will retain absolute control and cultivate worldwide industry leaders.
Shipping is among the seven pillar sectors and will be a key restructuring focus for
the next 2 years. We believe leading shipping conglomerates, with strongeconomies of scale and solid market power, are likely to benefit from the
consolidation trend. We expect to see a two-phase restructuring roadmap:
Phase 1 Parent of large SOEs shall accelerate assets injection into listed arms,
including unlisted shipping business, terminals and other shipping-related business.
Out of Hong Kong listed shipping counters, CCH and CSCL are likely to be the key
beneficiaries. CCH is likely to undergo further assets restructuring with COSCO
Group and may acquire its oil tanker business while CSCL targets to acquire all
container-related assets from its parent after its A-share IPO in late 2007.
Key unlisted assets
CSOEs China Shipping Group COSCO Group Sinotrans Group
Listed arms CSCL CSD CCH SSL
Listed assets Container shipping Dry-bulk shipping
Oil tanker
Dry-bulk shipping
Container shipping
Container terminals
Container Leasing
Container manufacturing
Dry-bulk shipping
Container shipping
Oil tanker
Unlisted assets Container terminals
Container leasing
LNG shipping Oil tanker Dry-bulk shipping
(Sinochart)
Container manufacturing
Source: Company data, CCB Intl Securities
Phase 2. Leading SOEs are expected to take major roles in the coming industry
restructuring and shall have more M&A opportunities. We believe five shipping
CSOEs may potentially consolidate into 2~3 shipping conglomerates over the next 2
to 3 years, which is in line with the national plan to consolidate its 150 CSOEs into80~100 by 2010. Out of five CSOEs, COSCO Group and China Shipping Group are
already two world competitive shipping enterprises, which together control an
estimated 40% of Chinas total shipping power.
Estimate breakdown of current shipping power controlled by CSOEs
Source: Company data, CCB Intl Securities
China shipping sector is currently at phase 1of the consolidation trend
COSCO , 59.8%
China Shipping ,
22.0%
CSC , 7.3%
Sinotrans , 6.1%
China Merchant ,
4.7%
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13
Emerging shipping SOEs
Economies of scale and market share are the key competition focuses in shipping
sector. Currently, COSCO and China Shipping Group are two leading shipping
conglomerates with solid market power in each of three shipping segments. Their
strong capacity base shall achieve better economies of scale and their
comprehensive business mix, particularly terminal-shipping operating models, likelycreate massive synergy in the competition. We believe the two shipping giants shall
strengthen their market position for the years to come and may potentially benefit
from the industry consolidation. Five shipping CSOEs are divided into three
categories as follows.
Shipping conglomerate
COSCO Group is the largest shipping force in China, occupying 38% of domestic
shipping capacity. The group is the largest dry-bulk carriers in the world and has
listed most of its shipping assets in CCH. Oil tanker is expected to be injected into
CCH the soonest by 2008.
China Shipping Groupmainly operates CSCL, the worlds fourth largest container
line and CSD, the largest coastal shipping force in China. China Shipping Group
plans to inject container terminals and other container-related assets into CSCL overthe next 1~2 years.
Inland river carrier
Changjiang Shipping Group (CSC) is the largest inland-river shipping company in
China, accounting for an estimated 10% of Chinas inland-river capacity. CSC Group
has listed most of its shipping business in A-share market, including its oil tanker
Nanjing Waterway (600087 CH) and dry-bulk carrier CSC Phoenix (000520 CH).
Multi-functional shipper
Sinotrans Group is the largest logistics group in China, mainly engaged in agency
and freight forwarding services. Sinotrans Group has recently listed its shipping
subsidiary, SSL in Hong Kong stock market.
China Merchant Group is a diversified conglomerate covering various industries,
including infrastructure, finance, real estate, logistics and energy shipping. Major
shipping business includes its Shanghai-listed subsidiary, Merchant Energy
Shipping (601872 CH).
Shipping CSOE comparison
Note: market share in terms of central state-owned capacity as of Dec 2007Source: Company data, CCB Intl Securities
Economies of scale and market share arecrucial in shipping competition
1.8%
2.8%
12.0%
76.9%
20.2%
7.8%
28.5%
25.8%
6.5%
40.2%
45.3%
0.0%
14.2%
0.3%17.7%
0% 20% 40% 60% 80% 100% 120% 140% 160%
China Merchant Group
Sinotrans Group
CSC Group
China Shipping Group
COSCO Group
Dry-bulk shipping market share Container market share Oil tanker market share
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Valuation and recommendation
Peer comparison
We mainly benchmark with our global and regional peer group to value Chinese
shipping stocks. We used both PBR and PER to set our valuation range and derive
the valuation base for individual company. Our valuation range is set as follows
based on our peer group valuation.
Valuation target
Container Dry-bulk carriers
Peer group Global Asian Global Asian
08F PBR 1.4x 1.1x 1.9x 1.7x
08F PER 15.3x 14.1x 8.1x 8.4x
Target multiples
08F PBR 1.1x 2.2x
08F PER 14.1x 11.0x
Source: Bloomberg; CCB Intl Securities
We value Chinese container lines in line with Asian peers. Our global liner peer
group is currently trading at an average 08F PER of 15.3x and PBR of 1.4x while
key Asian liners are trading lower at 1.0~1.3x 08F PBR. We used 1.1x 08F PBR and
14.1x 08F PER to value Chinese container liners, which is in line with current
valuation of Asian peers.
We give premium valuation to Chinese dry-bulk carriers, supported by
favorable state policy. Global bulk carriers are currently trading at average 08F
PER of 8.1x and 08F PBR of 1.9x while key Asian bulkers are trading at about 8.4x
08F PER and 1.7x 08F PBR. We believe the results of recent price talks between
Chinas steel makers and global iron ore exporters are favorable to Asian bulkers
and BDI sentiment shall continue to improve throughout 1H08. We value Chinese
dry-bulk carriers at 11.0x 08F PER and 2.2x 08F PBR, representing 30% premium
to global peers supported by Chinas strategy to boost domestic players.
High BDI drives high valuation
Source: Bloomberg
0.0
5.0
10.0
15.0
20.0
25.0
1/1/06
3/1/06
5/1/06
7/1/06
9/1/06
11/1/06
1/1/07
3/1/07
5/1/07
7/1/07
9/1/07
11/1/07
1/1/08
(Peer group forward PER)
0
2,000
4,000
6,000
8,000
10,000
12,000(BDI)
Highest valuation at 19.1x PER
BDI peaked at 11,039
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Global shipping peer group
Code Name Price Mkt cap PER (x) PBR (X) ROE (%) Yield (%)
(Local) (Localmn) 07F 08F 09F 07F 08F 09F 07F 08F 09F 07F 08F 09F
1919 HK CCH 23.00 353,034 11.0 8.6 9.2 4.8 3.1 2.3 48.9 38.4 26.0 1.4 2.1 2.3
1138 HK CSD 24.75 113,663 15.9 12.5 9.9 4.1 3.2 2.5 30.8 28.9 28.5 2.0 2.6 3.5
2866 HK CSCL 3.47 92,628 11.1 10.0 8.6 1.4 1.0 0.9 13.0 9.9 10.3 11.6 2.6 3.2368 HK SSL 5.06 20,240 14.0 8.0 7.7 1.0 1.2 1.2 11.8 16.9 15.8 1.4 3.1 3.2
Global dry-bulk carriers
005880 KS Korea Line 200,000 2,304,827 6.0 9.1 14.2 2.5 1.7 N/A 41.5 19.1 N/A 1.3 0.6 0.6
DSX US Diana shipping 28.50 2,120 13.5 9.9 11.0 2.7 2.6 2.6 19.6 26.3 23.9 5.3 10.2 9.8
DRYS US Dryships Inc 75.30 2,762 5.7 4.1 6.0 2.7 1.6 1.3 47.7 39.3 21.6 1.1 1.1 1.1
SCI IN Shp Corp India 211 59,693 10.1 12.0 N/A 1.2 1.2 N/A 12.4 10.2 N/A 3.7 3.5 3.5
QMAR US Quintana Mari 23.03 1,341 9.7 9.0 10.7 2.5 2.6 2.8 25.9 29.3 25.8 6.2 7.2 6.0
STX SP STX Pan Ocean 2.89 5,949 7.9 8.2 15.8 2.4 1.8 2.2 30.4 22.6 13.7 2.7 2.4 3.0
2343 HK Pacific Basin 13.08 20,720 4.7 5.2 5.8 1.8 1.3 N/A 39.1 25.8 N/A 11.5 10.5 N/A
2606 TT U-Mine Marine 85.00 72,931 8.1 7.6 8.0 2.9 2.4 2.1 36.3 32.0 26.9 8.0 9.7 8.6
Average 8.2 8.1 10.2 2.3 1.9 2.2 31.6 25.6 22.4 5.0 5.7 4.7
Global containers
2603 TT Evergreen 25.85 78,033 9.9 16.4 10.5 1.1 1.1 1.0 11.3 6.8 10.0 5.0 3.9 5.4
2609 TT Yang Ming 20.60 47,807 10.9 11.1 9.9 1.0 1.0 1.0 9.4 8.9 9.7 4.9 5.1 4.2
NOL SP NOL 3.03 4,452 9.6 8.7 7.1 1.5 1.3 1.1 15.4 14.9 15.5 2.8 2.8 4.6
DAC US Danaos Corp 26.41 1,441 12.2 12.9 13.0 2.2 2.1 2.0 17.9 16.2 15.5 0.0 6.8 7.1
SSW US Seaspan Corp 28.57 1,644 NM 24.7 20.5 1.9 1.9 1.9 (1.3) 7.9 9.1 6.2 6.7 7.1
011200 KS Hyundai Marine 38,400 5,110,012 42.5 30.2 44.7 2.6 N/A N/A 6.0 N/A N/A 1.3 1.3 1.3
000700 KS Hanjin Shipping 34,800 2,770,531 4.9 13.9 17.6 0.9 N/A 0.7 19.4 N/A 3.8 2.9 2.8 2.8
316 HK OOIL 48.70 30,476 1.5 4.5 1.2 0.9 0.9 0.4 40.9 12.8 14.5 18.5 3.8 4.2
Average 13.1 15.3 15.5 1.5 1.4 1.2 14.9 11.2 11.2 5.2 4.1 4.6
Global tankers
1192 HK Tijan Petroleum 0.46 2,946 13.4 7.2 4.9 0.9 0.8 0.8 6.8 10.5 15.3 0.0 0.0 0.0
GESCO IN Great Eastern 408 62,196 6.2 8.1 5.8 1.5 1.3 1.2 24.8 16.7 20.7 2.8 2.7 2.8
NAT US Nordic American 28.34 850 18.2 13.1 21.0 1.3 1.3 1.6 7.0 9.6 6.3 13.4 13.4 10.6
FRO US Frontline Ltd 45.14 3,378 N/A 14.9 9.9 6.5 6.6 6.1 N/A 44.0 66.7 N/A 16.4 11.9
9112 JP IINO Kaiun 937 104,078 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Average 12.6 10.8 10.4 2.6 2.5 2.4 12.9 20.2 27.3 5.4 8.1 6.3
Diversified shipping conglomerates
MAERSKB MAERSK 49,800 218,461 11.9 9.7 7.8 1.4 1.3 1.1 12.1 13.3 14.4 1.2 1.4 1.5
9101 JP NYK Line 962 1,183,441 9.9 9.7 9.5 1.6 1.4 1.3 16.0 14.4 13.4 2.5 2.5 2.6
9104 JP MOL 1,325 1,598,209 8.4 8.6 8.3 2.2 1.8 1.5 25.8 21.0 18.3 2.3 2.3 2.3
9107 JP K Line 1,042 665,593 7.9 7.9 7.7 1.6 1.3 1.2 20.0 17.0 15.2 2.4 2.5 2.6
HRZ US Horizon Lines 20.17 603 9.8 7.7 5.9 2.6 1.9 1.2 26.6 25.1 21.3 2.3 2.5 3.0
MISC MK MISC Berhad 8.75 32,548 13.7 12.8 11.5 1.6 1.5 1.4 11.9 12.0 12.2 4.0 4.1 4.3
Average 13.3 10.3 9.3 2.2 1.8 1.5 17.2 17.5 16.4 17.2 17.5 16.4
Note: Closing price as of 3 March 2008Source: Bloomberg
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Recommendation
Favorable industry outlook, strong government support and ongoing consolidation
focus are the key rerating catalysts. We recommend to overweight China shipping
sector and buy dry-bulk carriers CSD, CCH and SSL, given their resilient growth
prospects. We are neutral on container liner CSCL, given the vulnerable container
outlook. Our stock picks derive from our competitive analysis as follows.
Competitive analysis
Competitive factors Scores Comments
Growth prospects
CCH 2 Earnings may slowdown in FY09 due to BDI retrenchment. Potential acquisition
of oil tanker shall bode well for its earnings stability.
CSD 4 Maintain good growth over FY08~FY09 with strong costal freight rate outlook
and capacity expansion.
CSCL 1 Modest growth over FY08~09, driven by new vessel deliveries
SSL 3 Stable TCE improvement to drive visible growth in FY08
Industry outlook
CCH 2 Evolving into a shipping conglomerate and shall further comprehend its
shipping business mix for the next few years.
CSD 4 Ride on rising coastal coal shipping market and Chinas strategy to boost
domestic players in energy overseas shipping.
CSCL 1 Container freight rate vulnerable to global economic slowdown
SSL 3 Leverage to dry-bulk shipping boom and shall renew its contacts on high BDI.
Profit margins
CCH 2 Sustainable margins with synergies among different shipping segments.
CSD 3 Market leadership to sustain pricing power and strong freight rate improvement
to boost margins over FY08~09.
CSCL 1 Generate lowest margins among peers with high leverage to spot market
SSL 4 Leveraged to dry-bulk chartering and yields highest margins among peers.
Capacity expansion
CCH 3 Stable delivery over 2008~2009 but is expected to build more large-size dry
bulk carriers for iron ore imports shipping.
CSD 4 Strong delivery in FY09 to support its market share expansion in both coastalcoal shipping and iron ore imports shipping market.
CSCL 2 Rapid capacity expansion in Asia/Europe and domestic route over FY08~09
SSL 1 Has the most aggressive expansion target among peers but surging vessel
price is likely to undermine its capacity expansion plan.
Risk factors
CCH 2 Has the most sensitivity to BDI volatility among peers but we have already
factored in a 25% BDI decline in its earnings forecast model.
CSD 4 High exposure to coastal coal shipping market, which is the bes shelter from
worldwide shipping cyclicity.
CSCL 1 Highest sensitivity to freight rate, freight volume, bunker costs and RMB
appreciation.
SSL 3 Improving growth visibility with good TCE improvement but surging vessel
prices may dampen its fleet expansion target.
Recommendation
CCH 11 Key beneficiary of favorable industry trend and buy recommended.
CSD 19 Our most preferred shipping play with visible earnings growth. Buy.
CSCL 6 Neutral. The counter is fairly valued at current price level and key upside risk
may come from Chinas strong export performance towards Europe.
SSL 14 Discounted price vs. good growth. Buy.
Source: CCB Intl Securities
We recommend to overweight Chinashipping sectors, and buy CSD, CCH andSSL
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China shipping comparison
Valuation and ratings
Company valuation Target PBR (x) Target PER (x)
Rating TP (HK$) Upside (%) 07F 08F 09F 07F 08F 09F
CCH O 32.00 39.1 6.4 4.1 3.1 14.2 11.1 11.8
CSD O 31.00 25.3 5.0 3.8 3.1 19.1 15.0 11.9CSCL N 3.68 6.1 1.5 1.0 0.9 11.2 10.1 8.7
SSL O 6.35 25.5 1.3 1.5 1.5 17.4 10.0 9.6
Growth prospects
(%) Revenue growth (yoy) Net profit growth (yoy) EPS growth (yoy) CAGR over 06A to 09F
07F 08F 09F 07F 08F 09F 07F 08F 09F Revenue Net profit EPS
CCH 91.4 22.3 2.3 885.6 29.0 (6.5) 495.5 28.6 (6.5) 33.8 128.2 92.8
CSD 32.2 30.3 26.6 72.5 27.7 25.3 71.4 27.7 25.3 29.7 40.2 40.0
CSCL 27.9 11.9 16.9 291.5 10.8 16.4 142.4 10.8 16.4 18.7 71.6 46.3
SSL 2.8 97.0 16.0 11.0 159.6 4.0 2.2 74.1 4.0 33.0 44.2 22.8
Profit margins
(%) GPM OPM EBIT margin NPM
07F 08F 09F 07F 08F 09F 07F 08F 09F 07F 08F 09F
CCH 32.4 34.5 31.3 26.2 28.1 25.1 27.8 29.6 26.7 21.6 22.9 20.7
CSD 43.8 46.2 47.2 45.5 45.7 46.3 45.5 45.7 46.3 37.5 36.8 36.4
CSCL 12.9 12.3 12.6 11.4 10.8 11.0 11.4 10.8 11.0 8.7 8.6 8.6
SSL 52.5 62.0 62.2 51.1 60.7 60.8 53.3 62.0 62.1 51.9 68.4 61.3
Financial performance
(%) Net gearing ROE Depreciation/operation cost Bunker /operation cost
07F 08F 09F 07F 08F 09F 07F 08F 09F 07F 08F 09F
CCH Net cash Net cash Net cash 48.9 38.4 26.0 6.9 6.7 7.2 14.0 14.5 16.2
CSD 15.5 10.8 5.3 30.8 28.9 28.5 14.0 12.6 11.7 41.9 41.9 42.2
CSCL Net cash Net cash Net cash 13.0 9.9 10.3 4.0 4.0 3.7 23.4 25.9 24.5
SSL Net cash Net cash Net cash 11.8 16.9 15.8 23.1 22.0 25.7 15.7 11.3 9.3
Capacity expansion
(%) Dry-bulk capacity (yoy) Tanker capacity (yoy) Container capacity (yoy)
07F 08F 09F 07F 08F 09F 07F 08F 09F
CCH - 4.6 7.7 - - - 11.9 14.2 15.5CSD 45.5 3.6 12.5 8.6 1.1 51.9 - - -
CSCL - - - - - - 12.2 15.6 8.8
SSL 2.5 38.0 20.5 0.0 28.6 36.8 0.0 38.0 10.5
Source: CCB Intl Securities
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Risk factors
Freight rate and operating performance of shipping companies are sensitive to a
number of factors, including global/regional economic outlook, change in demand or
supply, bunker costs and other seasonal factors. Key risk factors of China shipping
sector is summarized as follows.
Economic risks
US and Europe recession are the key risks to CSCL, given its high exposure to US
and Europe market. Further, a significant economic slowdown in China will weaken
its overall material demand and undermine the growth prospects of dry-bulk carriers.
Policy risks
Macro tightening by state government to curb overheated economy may cut national
infrastructure investment budget and is likely to reduce Chinas material imports.
Further, the ultimate consolidation plan of shipping SOEs is yet to finalized by state
government, and may not benefit the listed companies.
Operational risks
Hiking vessel prices could potentially hamper SOEs fleet expansion plan. Further
high-than-expected bunker prices and runway operating costs could significantly cut
profit margin.
Other risks
China will renew its iron ore contracts with global ore exporters from year to year.
Significant change of current contract prices and conditions may adversely affect
shipping volume of iron ore.
Sensitivity summary
Key assumptions Freight rate Freight volume Operating costs
(-5% change) Bulk Container Tanker Bulk Container Tanker Bunker costs
Change in FY08 EPS
CCH -4.4% -1.6% - -4.2% -1.8% - +3.2%
CSD -3.0% - -0.6% -0.9% - -0.6% +3.8%
CSCL - -14.6% - - -15.8% - +10.3%
SSL -4.0% -0.5% -0.2% -3.7% -1.1% -0.5% +0.3%
Change in FY09 EPS
CCH -3.8% -2.0% - -3.6% -2.1% - +3.5%
CSD -2.9% - -0.8% -0.8% - -0.8% +3.0%
CSCL - -17.0% - - -17.0% - +11.8%
SSL -4.2% -0.5% -0.2% -4.1% -1.3% -0.6% +0.3%
Change in valuation
CCH -3.5% -0.6% - -3.3% -0.7% - +1.8%
CSD -3.0% - -0.6% -0.9% - -0.6% +3.8%
CSCL - -11.2% - - -13.8% - +8.2%
SSL -4.0% -0.5% -0.2% -3.7% -1.1% -0.5% +0.3%
Source: CCB Intl Securities
CSCL is the most vulnerable to freight ratevolatility and mounting bunker costs.
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Companyresearch
China COSCO Holdings (1919 HK): Evolving into a shipping
conglomerate
Restructuring underway. Financed by its A-share IPO fund, CCH has
acquired the dry-bulk fleets from its parent, COSCO Group and became the
worlds largest dry-bulk shipping company. We believe CCH is likely toundergo further asset restructuring with its parent and may acquire its oil
shipping business during the next 1~2 years. CCHs strategy to diversify
into other shipping segments shall bode well for its earnings stability.
Acquisition to boost strong FY07 results. We expect a 496% yoy
earnings growth for CCH in FY07 to be boosted by full-year profit
contribution from its dry-bulk shipping business which is estimated to
account for a bulk 74% of FY07 EBIT. EBIT from container shipping is
expected to jump by 56.6% yoy during 2007 driven by the strong recovery in
Asia/Europe rate while EBIT from terminals to rise 32.4% yoy, thanks to the
tariff improvement and robust throughput growth. Our earnings forecast for
FY07 is largely in line with CCHs latest profit guidance at not less than
RMB18bn.
Earnings may peak during 2008. We forecast earnings to grow by 28.6%
yoy in FY08 but to peak off by 6.5% yoy in FY09. Our earnings forecast has
factored in: (1) strong dry-bulk EBIT growth at 42.0% yoy for FY08 but to
decline by 19% yoy in FY09, assuming average BDI to peak at 7,500 in
2008 and drop by 25% in 2009 on rising new supply; (2) capacity expansion
to drive container EBIT growth at CAGR of 35% over 2006 to 2009. We
forecast CCHs Asia/Europe and transpacific freight rate to decline by 2.5%
and 5% yoy in FY08 respectively due to the weak US and Europe trade
outlook.
Undemanding valuation. We used sum-of-the-part model and valued CCH
at HK$32.0 per share or 11.1x 08F PER, which represents about 10%
premium compared to global shipping conglomerates. The premium is well
supported by CCHs potential assets restructuring with its parent. Further
catalysts include stronger than expected results and BDI performance.
Key risk factors to CCH include: (1) a sharp correction in BDI led by global
recession; (2) macro tightening by the State to restrict its material demand;
(3) lack of an efficient management over multiple shipping businesses could
lead to decreasing economies of scale.
Financial Summary
FYE Dec (RMB mn) FY06 FY07F FY08F FY09F
Turnover 50,994 112,771 134,902 137,210
EBIT 4,806 27,158 35,305 32,538
Net profit 3,168 21,098 27,379 25,311
EPS (RMB) 0.330 1.964 2.527 2.364
y-o-y chg (%) (69.7) 495.5 28.6 (6.5)
PER (x) 65.8 11.0 8.6 9.2
Yield (%) 1.1 1.4 2.1 2.3
ROAE (%) 7.5 48.9 38.4 26.0
BVPS (RMB) 3.076 4.392 6.737 9.022
Source: Historical data from the company, others are CCB Intl Securities es timates
China Shipping
Outperform (initiate)
Target price: HK$32.0Upside: 39.1%
Share data
Bloomberg code 1919.HK
Share price (HK$)* 23.00
Total issued shares (mn) 2,580
Market cap. (HK$ mn) 353,034
52-wk hi/lo 39.45/5.26
Average turnover (mn share) 37.8
Major shareholders %
COSCO Group 53.6
JP Morgan# 8.0
Morgan Stanley# 7.7
UBS# 7.4
# H-share only
* Closing price as of 3 March 2008
Source: Bloomberg
Market data
HSI Index 23,584
HSCEI Index 13,439
HSCCI Index 5,282
2008F 2009F
BVPS consensus (RMB) 7.900 9.736
EPS consensus (RMB) 2.193 2.283
Source: Bloomberg
Stock price performance
Source: Bloomberg
Wang Ren
(852) 2532 6749
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A diversified shipping conglomerate
Funded by its A-share IPO, CCH has acquired the entire dry-bulk shipping business
from its parent, COSCO Group during 2H07, and become the worlds largest
dry-bulk shipping company. CCH targets to develop itself into diversified shipping
conglomerate and we believe CCH may acquire the oil tanker business from its
parent to comprehend its business portfolio for the years to come.
Strong FY08 vs. flat FY09. We forecast FY07 earnings to grow at 496% yoy, in line
with companys recently revised profit guidance. The robust growth is attributed to
full-year profit contribution from the newly-acquired dry-bulk shipping business,
which is estimated to account for 74% of CCHs FY07 EBIT. We forecast FY08
earnings to grow by 28.6% yoy and a modest FY09 earnings decline by 6.5% yoy,
based on the following projections.
Solid dry-bulk shipping performance. Dry-bulk segment shall continue to be the
key driver for CCH in FY08, and segment EBIT is expected to grow at 42.0% yoy in
FY08 but to decline by 19% yoy in FY09, assuming about 65~70% of its dry-bulk
capacity is chartered-in and annual average BDI to peak off in 2009. We have
already factored in a 25% yoy decline in 2009 average BDI in our earnings forecast.
Capacity expansion to boost container growth. We forecast 13~18% yoy growth
for CCHs liner revenue over 2008 to 2009 to be driven by strong capacity expansion.
CCHs annual shipping capacity is expected to increase by about 50% to reach
580mn TEUs by 2009. We expect transpacific and Asia/Europe rate to drop by 5%
and 2.5% yoy due to the weakening US and Europe trade volume.
Healthy container leasing growth. EBIT from container leasing is expected to
grow at 16~18% yoy over FY08~FY09 in line with CCHs overall container volume
growth. Currently, COSCON the container shipping arm of CCH, occupies about
65% of CCHs leasing capacity.
Stable container terminal growth. EBIT from container terminals shall maintain
stable growth at CAGR of 22.1% over FY06~FY09, mainly driven by strong
container throughput growth in Bohai Rim. Container terminals shall account for
about 3.7~4.6% of CCHs total EBIT during FY08~ FY09. CCHs strategy to gain
controlling stake through equity investments could fuel earnings of the segment.
Revenue breakdown as in FY08F EBIT breakdown as in FY08F
Source: Company data, CCB Intl Securities
Container shipping,
39.6%
Dry-bulk shipping,
48.1%Container leasing,
2.0%
Container
terminals, 0.3%
Logistics & others,
10.0%
Logistics & others,
4.1%
Container
terminals, 3.7%
Container leasing,
5.2%
Dry-bulk shipping,
80.8%Container
shipping, 6.2%
Potential breakthrough in assetsrestructuring with its parent
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Key segment statistics
Dry-bulk shipping 2006 2007F 2008F 2009F 2007F 2008F 2009F
(Yoy %) (Yoy %) (Yoy %)
Revenue from dry-bulk segment (RMBmn) 20,226 51,195 64,859 55,601 153.1 26.7 (14.3)
- self-owned vessels 7,787 20,019 25,473 23,789 157.1 27.2 (6.6)
- chartered-in vessels 12,439 31,176 39,387 31,812 150.6 26.3 (19.2)
GPM at dry-bulk shipping 35.3% 46.3% 50.2% 47.7% 11.0 3.9 (2.5)
OPM at dry-bulk shipping 36.7% 39.2% 44.0% 41.6% 2.5 4.8 (2.4)
Container shipping
Container shipping volume (1,000 TEUs) 5,111 5,699 6,591 7,566 11.5 15.7 14.8
- transpacific 1,303 1,525 1,753 2,034 17.0 15.0 16.0
- Asia/Europe (incl. Mediterranean) 1,209 1,360 1,604 1,885 12.5 18.0 17.5
- Intra-Asia (incl. Australia) 1,501 1,426 1,497 1,609 (5.0) 5.0 7.5
- domestic market 257 251 258 264 (2.0) 2.5 2.5
- others 842 1,137 1,478 1,774 35.0 30.0 20.0
Average container rate (RMB/TEU) 6,487 6,846 6,699 6,910 5.5 (2.1) 3.1
- transpacific 10,264 9,391 8,922 9,145 (8.5) (5.0) 2.5
- Asia/Europe (incl. Mediterranean) 8,062 10,279 10,022 10,373 27.5 (2.5) 3.5- Intra-Asia (incl. Australia) 3,970 4,268 4,481 4,593 7.5 5.0 2.5
- domestic market 9,777 9,044 8,817 9,038 (7.5) (2.5) 2.5
- others 1,870 2,076 2,335 2,452 11.0 12.5 5.0
GPM at container shipping 10.7% 11.1% 10.0% 12.1% 0.5 (1.2) 2.1
OPM at container shipping 3.9% 5.3% 4.1% 6.2% 1.4 (1.2) 2.1
Container terminals
Total container thought put (1,000 TEUs) 32,792 40,550 48,442 56,003 23.7 19.5 15.6
- Bohai Rim 13,431 18,106 21,813 25,161 34.8 20.5 15.4
- Yangtze River Delta 7,732 8,175 9,807 11,505 5.7 20.0 17.3
- Pear River Delta 10,401 12,491 14,121 15,912 20.1 13.1 12.7
- Overseas 1,227 1,778 2,701 3,425 44.9 51.9 26.8
Revenue from container terminals (RMBmn) 232 373 463 558 60.5 24.0 20.5Profit from associates/JCEs (RMBmn) 609 774 909 1,021 27.2 17.4 12.3
Investment returns (RMBmn) 162 187 211 239 15.2 12.9 13.3
Container leasing
Total container leasing volume (1,000 TEUs) 1,233 1,504 1,719 1,913 21.9 14.3 11.3
- COSCON 457 566 689 796 23.9 21.7 15.5
- Intl long-term leasing 120 239 285 313 100.0 19.0 10.0
- Intl master leasing 27 37 34 22 37.3 (8.3) (34.2)
- managed container fleet 630 661 711 782 5.0 7.5 10.0
Total container fleet (1,000 TEUs) 1,251 1,588 1,813 1,998 27.0 14.2 10.2
Container utilization rate 98.6% 94.7% 94.8% 95.8% (3.9) 0.1 1.0
Logistic operation
Total services income (RMBmn) 10,167 11,784 13,546 15,411 15.9 15.0 13.8- third-party logistics 2,234 2,793 3,351 3,854 25.0 20.0 15.0
- shipping agency services 3,312 4,024 4,855 5,817 21.5 20.7 19.8
- Others 4,621 4,967 5,340 5,740 7.5 7.5 7.5
Source: Historical data from the company, others are CCB Intl Securities estimates
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Key growth catalyst asset restructuring
To diversify its business mix, we expect CCH may undergo further assets
restructuring with its parent, COSCO Group and may acquire the oil tanker business
from its parent.
COSCO Group currently occupies oil tanker fleet with total capacity of about 3.5mn,
which is expected to grow by 85~100% by 2010, based on the Groups tanker
expansion plan. Following table summarizes the key unlisted shipping assets held
by COSCO Group:
Key shipping assets remaining at COSCO Group
Oil tankers No of vessels DWT (mts) Average fleet age
VLCC 9 2.41 3.4
Panamax 12 0.82 9.0
Handysize 5 0.22 13.6
LPG carrier 6 0.02 19.8
Sub-total 32 3.47 10.1
General cargo ships
Multi-purpose 58 1.12 18.2General cargo 34 0.47 25.8
Sub-total 92 1.59 21.0
Specialized vessels
Semi-submersible 3 0.05 14.0
Asphalt 11 0.06 12.8
Ro-Ro 7 0.06 25.8
Sub-total 21 0.18 17.2
Source: COSCO Group
Undemanding valuation
We applied sum-of-the-part method and valued CCH at HK$32.0 per share, which
translates into 08F PER of 11.1x. The valuation represents about 15% premium to
current valuation of global shipping conglomerates. Our SOTP valuation of CCH
mainly comprises the following:
(1) HK$26.0 for CCHs dry-bulk cargo shipping business valued at 11.0x 08F PER,
compared to Asian peer average of 8.4x 08F PER. 25% premium is given the
state governments policy to protect domestic players.
(2) HK$3.9 for container shipping valued at 1.1x 08F PBR, which is based on our
FY08 book value projection of CCHs container segment, or COSCON. Our
divisional valuation is comparable to Asian liner peers;
(3) HK$1.8 for CCHs 51.3% stake of COSCO Pacific (1199 HK) valued by currentmarket price with a holding company discount of 15%. COSCO Pacific operates
CCHs container leasing, container terminals, container manufacturing business
and holds 49% of COSCO Logistics.
(4) HK$0.4 for CCHs remaining 51% stake of CCHs logistic operation, or COSCO
Logistics at 9.0x 08F PER, which is largely in line with current valuation of key
China logistic operators.
Tanker capacity may double by 2010
SOTP valuation at HK$32.0
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SOTP valuation breakdown
Key assets Stake Valuation methodology
Valuation
(RMBmn) % of valuation
Dry-bulk shipping 100% 11.0x 08F PER 231,672 81.1%
Container shipping 100% 1.1x 08F PBR 34,825 12.2%
COSCO Pacific 51.3% Market value with 15%
holding company discount 15,911 5.6%
COSCO Logistics 51% 9.0x 08F PER 3,171 1.1%
NAV - - 285,579 -
NAV/share (RMB) - - 28.0 -
Exchange - - 1.14 -
Target price (HK$) - - 32.0 -
Source: CCB Intl Securities
Key risk factors to our valuation include: (1) a sharp correction in BDI index led by
global recession; (2) stringent macro tightening by state government to cut its
infrastructure budget and overall materials demand; and (3) higher-than-expected
bunker costs and operation costs to undermine fleet returns.
Valuation comparison
Code Name Price Mkt cap PER (x) PBR (X) ROE (%) Yield (%)
(Local) (Localmn) 07F 08F 09F 07F 08F 09F 07F 08F 09F 07F 08F 09F
1919 HK CCH 23.00 353,034 11.0 8.6 9.2 4.8 3.1 2.3 48.9 38.4 26.0 1.4 2.1 2.3
Shipping conglomerate
MAERSKB MAERSK 49,600 217,802 11.8 9.6 7.8 1.4 1.3 1.1 12.1 13.3 14.4 1.2 1.4 1.6
9107 JP K Line 1,042 665,593 7.9 7.9 7.7 1.6 1.3 1.2 20.0 17.0 15.2 2.4 2.5 2.6
9104 JP MOL 1,325 1,598,209 8.4 8.6 8.3 2.2 1.8 1.5 25.8 21.0 18.3 2.3 2.3 2.3
MISC MK MISC Berhad 8.75 32,548 13.7 12.8 11.5 1.6 1.5 1.4 11.9 12.0 12.2 4.0 4.1 4.3
Average 10.5 9.7 8.8 1.7 1.5 1.3 17.4 15.8 15.0 2.5 2.6 2.7
Global container2866 HK CSCL 3.47 92,629 9.9 10.1 8.8 1.4 1.3 1.1 14.1 12.7 12.1 3.7 2.7 3.0
2603 TT Evergreen 25.85 78,033 9.9 16.4 10.5 1.1 1.1 1.0 11.3 6.8 10.0 5.0 3.9 5.4
000700 KS Hanjin Shipping 34,800 2,770,531 4.9 13.9 17.6 0.9 N/A 0.7 19.4 N/A 3.8 2.9 2.8 2.8
316 HK OOIL 48.70 30,476 1.5 4.5 1.2 0.9 0.9 0.4 40.9 12.8 14.5 18.5 3.8 4.2
Average 6.5 11.2 9.5 1.1 1.1 0.8 21.5 10.7 10.1 7.5 3.3 3.9
Global bulker
005880 KS Korea Line 200,000 2,304,827 6.0 9.1 14.2 2.5 1.7 N/A 41.5 19.1 N/A 1.3 0.6 0.6
2343 HK Pacific Basin 13.08 20,720 4.7 5.2 5.8 1.8 1.3 N/A 39.1 25.8 N/A 11.5 10.5 N/A
2606 TT U-Mine Marine 85.00 72,931 8.1 7.6 8.0 2.9 2.4 2.1 36.3 32.0 26.9 8.0 9.7 8.6
STX SP STX Pan Ocean 2.89 5,949 7.9 8.2 15.8 2.4 1.8 2.2 30.4 22.6 13.7 2.7 2.4 3.0
Average 6.7 7.5 10.9 2.4 1.8 2.2 36.8 24.9 20.3 5.9 5.8 4.1
Chinas logistic operator
598 HK Sinotrans 2.42 10,283 11.7 9.3 8.3 1.2 1.1 1.0 10.1 11.6 12.0 3.1 3.6 4.4152 HK Shenzhen Intl 0.85 12,085 11.0 8.3 14.7 2.0 1.6 1.4 18.2 19.4 9.7 4.5 7.3 2.8
Average 11.4 8.8 11.5 1.6 1.3 1.2 14.2 15.5 10.8 3.8 5.4 3.6
Note: Closing price as of 3 March 2008Source: Bloomberg; CCB Intl Securities
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Financial SummaryIncome statement forecasts Balance sheet forecasts
FYE 31 Dec (RMBmn) 2006 2007F 2008F 2009F
Total revenue 50,994 112,771 134,902 137,210
- dry bulk shipping - 51,195 64,859 55,601
- container shipping 40,033 47,069 53,365 62,654
- container terminal 232 373 463 558
- container leasing 1,797 2,349 2,669 2,986
- logistic & others 10,167 11,784 13,546 15,411
Cost of services (46,020) (81,180) (93,729) (98,995)
Gross profit 4,974 31,591 41,174 38,215
Administrative expenses (2,910) (7,041) (7,888) (7,906)
Other income, net 1,732 879 300 346
Share reform (440) 120 0 0
Operating profit 3,356 25,548 33,586 30,654
Profit from JCEs/assos 1,450 1,610 1,719 1,884
EBIT 4,806 27,158 35,305 32,538Finance costs, net (714) (1,429) (1,294) (499)
Profit before tax 4,092 25,729 34,011 32,039
Income tax expense (924) (4,631) (6,632) (6,728)
Net profit 3,168 21,098 27,379 25,311
Minority interests (1,137) (1,080) (1,561) (1,164)
Net attributable profit 2,031 20,018 25,818 24,146
Dividends (1,489) (3,023) (4,647) (5,071)
EPS (RMB) 0.330 1.964 2.527 2.364
DPS (RMB) 0.242 0.297 0.455 0.496
BVPS (RMB) 3.076 4.392 6.737 9.022
FYE 31 Dec (RMBmn) 2006 2007F 2008F 2009F
PP&E 26,401 31,991 44,129 55,959
Intangible assets 129 242 268 295
Long-term investments 10,995 20,425 26,757 30,117
Other non-current assets 598 1,143 1,257 1,382
Total non-current assets 38,123 53,801 72,411 87,754
Inventories 602 736 920 1,030
Trade receivables 8,924 12,500 10,625 10,838
Other receivables 11 8 7 8
Derivative fin. instruments 5 1 1 1
Cash and cash equivalents 7,796 28,129 36,462 38,341
Current assets 17,338 41,373 48,014 50,217
Total assets 55,460 95,174 120,425 137,971
Trade and others payable 11,370 14,045 16,573 19,059
Short-term borrowings 6,159 10,136 7,651 4,740
Derivative fin. instruments 431 339 288 274Tax payable 235 278 300 322
Current liabilities 18,195 24,798 24,813 24,396
LT borrowings 8,947 15,025 14,225 7,025
Other LT liabilities 841 1,005 1,098 1,161
Non-current liabilities 9,788 16,030 15,323 8,186
Total liabilities 27,983 40,828 40,135 32,581
Net assets 27,477 54,346 80,290 105,390
Shareholders' equity 18,935 44,756 68,823 92,172
Minority interest 8,541 9,590 11,467 13,218
Net assets 27,477 54,346 80,290 105,390
Financial ratios Cash flow projections
FYE 31 Dec (%) 2006 2007F 2008F 2009FGross margin 9.8 28.0 30.5 27.9
Operating margin 6.6 22.7 24.9 22.3
EBIT margin 9.4 24.1 26.2 23.7
Pre-tax margin 8.0 22.8 25.2 23.4
Net margin 6.2 18.7 20.3 18.4
S&D/revenue 5.7 6.2 5.8 5.8
Effective tax rate 22.6 18.0 19.5 21.0
Dividend payout ratio 73.3 15.1 18.0 21.0
ROAE 7.5 48.9 38.4 26.0
ROAA 3.6 26.6 24.0 18.7
Current ratio (x) 1 1.7 1.9 2.1
Quick ratio (x) 0.4 1.1 1.5 1.6
Net debt/equity 26.6 Net cash Net cash Net cash
Inte rest coverage (x) 4.9 16.6 23.1 43.5Inventories days 4.8 3.3 3.6 3.8
Receivables days 63.9 46.7 32.5 32.4
Payable days 90.2 63.1 64.5 70.3
FYE 31 Dec (RMBmn) 2006 2007F 2008F 2009FPretax Profits 4,092 25,729 34,011 32,039 Adj: non-cash i tems (864) 118 6,454 4 ,373
Interest received 261 349 375 369
Tax paid (1,843) (4,527) (6,575) (6,657)
Net cash from operating 1,646 21,669 34,265 30,124
Capex & investment (5,859) (15,250) (18,731) (15,448)
Investment income & 7,890 1,995 177 349
Net Cash from Investing 2,031 (13,255) (18,554) (15,099)
Equity raised/ (repaid) 0 22,881 0 0
Change in borrowings (1,826) (8,915) (3,284) (10,111)
Interest expense (881) (1,325) (1,225) (599)
Dividends & d is tr ibutions (2,686) (2,740) (1,863) (1,220)
Others (383) (839) (931) (1,166)Net Cash from Financing (5,775) 9,063 (7,303) (13,096)
Net change in cash (2,098) 17,477 8,408 1,929
Source: Historical data from the company, others are CCB Intl Securities estimates
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China Shipping Development (1138 HK): Solid growth prospects
Better growth visibility. Relatively immune from US recession and global
trade slowdown, CSD is nearly 70% exposed to buoyant domestic shipping
market. CSD is better sheltered from the volatile shipping cycle than its
domestic shipping peers, given that: (1) CSD has locked-in over 80% of itscurrent capacity by COA contracts, mainly on a freight rate plus fuel charges
basis, which could potentially protect its profit margins and earnings. We
expect COA contracts to generate 90% of its total revenue by FY09; (2)
CSD has secured a 40% yoy rate improvement in its renewed 2008 coastal
coal contracts to contribute 65% of its FY08 revenue; (3) occupying 70%
and 30% of Chinas coastal oil and coal shipping market, CSD is likely to
sustain its leadership in domestic market and continues to enjoy a stronger
pricing power as compared to its peers.
Favorable industry outlook. Strong electricity consumption and easing
coal-rail bottleneck shall drive robust coastal coal shipping demand. We
expect costal coal shipment to remain strong throughout 2010 and overall
costal shipping rate to grow at 10~15% yoy during 2008 to 2009. Further,
the phasing-out of single-hulls during late 2008 to 2009 is likely to
accelerate, which may ease current tanker oversupply. We expect CSDs
VLCC rate to see a 5% yoy improvement in 2009.
Robust earnings CAGR of 40.0% over FY06 to FY09F. We forecast
earnings to grow by 71.4% yoy in FY07 to be boosted by acquisition of 42
bulkers and disposal gain from old tankers, and we forecast earnings to
maintain strong growth at 20~25% yoy over FY08 to FY09, on the back of:
(1) strong capacity expansion at 50% yoy for tanker and 10% yoy for
dry-bulk fleet in 2009, as 6 VLCCs and 1 VLOCs will be delivered; (2) strong
coal contract rate increment at 28.5% and 9.5% yoy during FY08 and FY09;
(3) Improving operating margins and fleet return, thanks to the rising freight
rate and efficient cost control. We expect CSDs market share in coastal
coal shipping market to improve from current 30% to 35% by FY09.
Target price at HK$31.0. Our valuation of CSD translates into a 15.0x 08F
PER, as compared to our valuation of Chinese bulk carriers at 11.0x 08F
PER. The 35% premium is justified by its defensive business mix and
buoyant industry outlook. Our target price is also well supported by our DCF
valuation of CSD at HK$37.66.
Key risks factors to CSD include state governments macro control to
slowdown energy demand, significant BDI correction and significant change
of current contract model.
Financial Summary
FYE Dec (RMB mn) FY06 FY07F FY08F FY09F
Turnover 9,575 12,658 16,490 20,883EBIT 3,431 5,763 7,538 9,659
Net profit 2,759 4,752 6,068 7,602
EPS (RMB) 0.829 1.420 1.814 2.272
y-o-y chg (%) 2.4 71.4 27.7 25.3
PER (x) 27.3 15.9 12.5 9.9
Yield (%) 1.3 2.0 2.6 3.5
ROAE (%) 23.5 30.8 28.9 28.5
BVPS (RMB) 3.787 5.468 7.076 8.867
Source: Historical data from the company, others are CCB Intl Securities es timates
China Shipping
Outperform (initiate)
Target price: HK$31.0Upside: 25.3%
Share data
Bloomberg code 1138.HK
Share price (HK$)* 24.75
Total issued shares (mn) 1,296
Market cap. (HK$ mn) 113,663
52-wk hi/lo 27.20/9.63
Average turnover (mn share) 11.6
Major shareholders %
China Shipping Group 47.5
Davis Selected Ad# 7.2
JP Morgan# 4.9
# H-share only
* Closing price as of 3 March 2008
Source: Bloomberg
Market data
HSI Index 23,584
HSCEI Index 13,439
HSCCI Index 5,282
2008F 2009F
BVPS consensus (RMB) 5.929 7.324
EPS consensus (RMB) 1.720 2.009
Source: Bloomberg
Stock price performance
Source: Bloomberg
Wang Ren
(852) 2532 6749
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Strong organic growth
CSD, which has the highest exposure to domestic shipping market, is better
sheltered from global economic slowdown and the BDI cyclicity. Coastal shipping
continues to be a key driver of CSD, contributing 69.5% of CSDs estimated FY08
revenue. Driven by a strong costal coal demand, CSD has secured a 40% yoy
freight rate increment in its FY08 coastal coal contracts and we expect a further 10%rate improvement in its FY09 contracts. Further earnings upside may come from its
rapid expansion into ore import shipping and potential turnaround of global tanker
market during late 2008 to 2009.
Revenue breakdown by shipping business (FY08F)
Source: Bloomberg, CCB Intl Securities
Robust earnings momentum at CAGR of 40.0% between FY06 to FY09F
We forecast a 71.4% yoy earnings growth in FY07, thanks to full-year profit
contribution from its 42 bulkers acquired from its parent and disposal income from
old tankers. We expect earnings to maintain strong growth at 25~28% yoy over
FY08 and FY09 respectively, to be boosted by improving freight rate and aggressive
fleet expansion.
Optimistic industry outlook. We expect CSDs domestic coal shipment to rose
7.0~12.5% yoy with average contract rate up by 40~10% yoy between FY08 to
FY09, to be fueled by robust coastal coal demand and strong coal-rail expansion.
Further, the phasing-out of single-hulled tankers between late 2008 to 2009 is likely
to ease current oversupply. We expect CSDs VLCC rate to see a 5% yoy
improvement in 2009.
Key performance statistics for CSD
Growth (yoy %) FY06 FY07F FY08F FY09F
Business volume
Domestic coal 4.7 69.3 7.0 12.5
International coal 4.8 36.1 15.0 12.5
Domestic oil 0.2 (20.7) 6.3 4.6
International oil 19.1 16.5 5.0 28.0
Average contract rate
Domestic coal 9.0 11.4 40.0 10.0
International coal 8.9 16.0 15.0 5.0
Domestic oil 4.0 13.9 6.3 10.5
International oil 3.7 (24.0) (2.5) 5.0
Source: Historical data from the company, others are CCB Intl Securities estimates
Domestic
market, 69.5%
Int'l oil shipping,
17.0%
BDI-related int'l
bulk, 13.4%
13.4% exposed to BDI index
Strong VLCC delivery in 2009~2010 to rideon tanker market turnaround
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Market leadership to be strengthened. Currently, CSD occupies about 70% and
30% of China coastal oil and coastal coal shipping market respectively, in terms of
business volume. We expect CSD to maintain its coastal oil market share for the
next few years and strengthen its coastal coal market share to 35% by FY09, given
its rapid fleet growth, close business tie with customers and strong government
support as witnessed by its recent strategic agreement with Guangdong MunicipalGovernment. Under the agreement, CSD will become a key shipper to transport
coastal coal to major power plants based in Guangdong during 2008 to 2010.
Currently, 80% of Guangdongs coal trading are transported by sea.
Fleet expansion to sustain growth. Based on current fleet expansion plan, CSDs
tanker and bulk capacity is expected to grow at CAGR of 20% and 10% respectively
from 2007 to 2010, upon delivery of 8 VLCCs and 4 VLOCs during 2009 to 2010.
We estimate CSD to locked-in about 96% of its 2009 capacity by long-term contracts
with key oil and steel makers in China. We forecast a 25.3% yoy growth in FY09
earnings, to be driven by strong VLCC delivery in 2009 and the potential tanker rate
recovery.
Favorable contract terms to protect margins. CSDs signed COA contracts were
mainly based on a freight rate plus fuel charges. Under such contract terms, CSDshall protect itself from a significant freight rate and bunker volatility. We expect both
GPM and OPM to see good improvement over FY07 to FY09, on the back of rising
coal freight rate and efficient cost control, but ROE may decline slightly to 28.5% by
FY09 on rising capex. Net gearing is expected to maintain at low level of 5.3% as in
FY09, but we expect the company may gear up in FY10 and onwards, due to its
huge capex needs.
Key contracts to sustain growth
Key customer Segment Contract term Volume
Shougang (000959 CH) Intl iron ore 2H09~2019 37mn tons
Baosteel (600019 CH) Intl iron ore 2010~2020 37mn tons
Wuhan Steel (600005 CH) Intl iron ore 15~20 years 170mn tons
Sinopec (0386 HK) Intl oil 2H06~1H16 10~12mn tons by 2010
Shenhua (1088 HK) Coastal coal Set up a 50/50 JV 1mn tons by 2010
Guangdong provincial gov. Coastal coal 2008~2010 Volume not specified
Source: Company data, CCB Intl Securities
CSDs capacity expansion Improving profitability
Source: Company data, CCB Intl Securities
3.40 3.69 3.735.67 6.31
3.555.16 5.22
5.646.52
0
3
6
9
12
15
2006 2007F 2008F 2009F 2010F
(mn DWTs)
Tanker capacity Dry-bulk capacity
Total capacity to grow at 16.6% CAGR
over FY06 to FY10F
5.3%
10.8%
15.5%
21.7% 47.2%
36.4%
28.9% 28.5%
35.3%
43.8%46.2%
36.8%37.5%
28.8%
23.5%
30.8%
0%
5%
10%
15%
20%
25%
2006 2007F 2008F 2009F
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
Net gearing GPM NPM ROE
Expanding market share in coastal coalshipping market
Key beneficiary of Chinas strategy to boostdomestic energy shippers
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Premium valuation warranted
We value China dry-bulk carriers at 12.0x 08F PER, which represents a 20%
premium to Asian dry-bulk carriers trading at an average10.0x 08F forward PER as
we believe domestic players have a huge room to expand their market share in
dry-bulk imports the industry policy. We believe CSD deserves a premium valuation
at HK$31.1, or 15x 08F forward PER, given its higher earnings visibility ascompared to peers.
We also used DCF model to underpin our valuation as we believe CSDs COA
contracts shall continue to provide stable cash flow, visible business growth and
relatively sustainable profit margins for the next few years. Our DCF model valued
CSD at HK$37.66 based on the following key assumptions: (1) company beta of
1.4x; (2) we expect the company to maintain debt-to-equity ratio at 25% going
forward; (3) terminal growth of 2.5%.
Key risk factors to our valuation includes: (1) unexpected slowdown in coastal coal
shipment to be triggered by macro tightening or reducing coastal power generation;
(2) a collapse in BDI index to hurt market sentiment; (3) sluggish global tanker
demand to weaken CSDs VLCC return; (4) rising bunker costs and inability of the
company to pass through bunker costs in new contracts.
Sensitivity analysis
Change in assumptions Change in EPS
Corresponding year FY08F FY09F
Freight volume
-5% in domestic coal -3.1% -3.0%
-5% in domestic oil -0.5% -0.5%
-5% in other bulks -0.8% -0.7%
Freight rate
-5% in intl tanker rate -0.6% -0.8%
-5% in annual average BDI -0.9% -0.8%
Operating costs
+5% in bunker costs -3.8% -3.0%
Source: CCB Intl Securities
Premium valuation supported by DCF model
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DCF valuation - 2008
Source: CCB Intl Securities
(R M B m n) FY 07 F F Y 08 F F Y0 9F F Y 10F FY 11 F FY 12F Term ina l va lue
E B IT 5,763 7,5 38 9 ,659 10 ,5 70 11 ,733 12 ,613
T ax ra te 14 .2% 17 .0% 1 9.0% 2 1.0 % 23 .0% 25 .0%
D ep recia tion 998 1,1 22 1 ,291 1 ,48 4 1,748 1,983
C ap ex 6,670 4,4 73 5 ,030 5 ,41 0 6,114 5,197
Increa se in ne t w orkin g cap ita l 520 97 5 1 ,088 707 460 391
F ree cash flow 10 ,098 8,6 32 10 ,474 11 ,569 12 ,940 12 ,282 11 5,288
P re se nt va lue N /A 8,6 32 9 ,235 8 ,99 3 8,869 7,422 69 ,667
D iscount facto r N /A 1.0 00 0 .882 0 .77 7 0.685 0.604 0 .604
T im e fac tor N /A 0.00 1 .00 2 .0 0 3 .00 4 .00 4 .00
Risk-free rate 5.0% Sensit ivity analysis on target price (HK$)
Beta 1 .4 LT g row th W A C C
Equity r isk premium 7.5% 12 .0% 1 3.0 % 13 .4% 14 .0% 1 5.0%
Cost of equi ty 15.5% 1.5% 39 .10 3 5.8 6 34 .71 33 .14 3 0.82
Cost o f debt 6.8% 2.0% 40 .48 3 6.9 8 35 .75 34 .06 3 1.58
Effect ive tax rate 25.0% 2.5% 42 .01 3 8.2 0 37.66 35 .06 3 2.41
After tax cost of de bt 5.1% 3.0% 43 .72 3 9.5 5 38 .11 36 .15 3 3.31
Capital structure 3.5% 45 .62 4 1.0 4 39 .47 37 .34 3 4.28
Debt % 20.0%
Equi ty % 80.0%
W A C C 13.4%
Long- term growth 2.5%
N P V 1 12 ,819
C ash at hand 1,64 3
T ota l deb t 4,20 0
C om pany va lua tion 110 ,2 61
N um ber o f sh ares 3,34 6
Fai r va lue (RMB ) 32.95
E xcha nge 1 .14
Fai r va lue (HK$) 37.66
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Financial SummaryIncome statement forecasts Balance sheet forecasts
FYE 31 Dec (RMBmn) 2006 2007F 2008F 2009F
Total revenue 9,575 12,658 16,490 20,883
- Oil shipping 5,280 4,713 5,034 6,346
- Coal shipping 3,415 6,317 9,352 11,526
- Other dry-bulk shipping 880 1,628 2,104 3,011
Operating costs (6,194) (7,111) (8,879) (11,028)
Gross profit 3,381 5,547 7,611 9,855
Other income, net 273 473 215 137
Administrative expenses (224) (257) (289) (333)
Operating profit 3,431 5,763 7,538 9,659
Profit from JCEs/assos 0 0 0 0
EBIT 3,431 5,763 7,538 9,659
Finance costs, net (129) (224) (226) (274)
Profit before tax 3,302 5,539 7,311 9,385
Income tax expense (543) (787) (1,243) (1,783)Net profit 2,759 4,752 6,068 7,602
Minority interests (3) 0 0 0
Net attributable profit 2,756 4,752 6,068 7,602
Dividends 998 1,521 1,942 2,661
EPS (RMB) 0.829 1.420 1.814 2.272
DPS (RMB) 0.300 0.455 0.580 0.795
BVPS (RMB) 3.787 5.468 7.076 8.867
FYE 31 Dec (RMBmn) 2006 2007F 2008F 2009F
PP&E 15,079 21,749 26,223 31,252
Intangible assets 20 7 5 5
Long-term investments 5 4 4 3
Other non-current assets 45 39 35 33
Total non-current assets 15,149 21 ,799 26,267 31,294
Bunker inventories 202 180 180 125
Trade receivables 428 566 737 934
Other receivables 620 270 200 150
ST investments 160 220 180 150
Cash and cash equivalents 664 1,514 1,643 2,792
Current assets 2,074 2,750 2,940 4,151
Total assets 17,224 24,549 29,207 35,445
Trade payables 227 318 365 435
Short-term borrowings 1,507 1,050 850 850
Other payables 869 1,387 750 788Tax payables 56 60 65 80
Current liabilities 2,658 2,815 2,030 2,153
LT borrowings 1,888 3,300 3,350 3,500
Other LT liabilities 80 138 150 125
Non-current liabilities 1,968 3,438 3,500 3,625
Total liabilities 4,627 6,253 5,530 5,778
Net assets 12,597 18,296 23,677 29,667
Shareholders' equity 12,597 18 ,296 23,677 29,667
Minority interest 0 0 0 0
Net assets 12,597 18,296 23,677 29,667
Financial ratios Cash flow projections
FYE 31 Dec (%) 2006 2007F 2008F 2009FGross margin 35.3 43.8 46.2 47.2
Operating margin 35.8 45.5 45.7 46.3
EBIT margin 35.8 45.5 45.7 46.3
Pre-tax margin 34.5 43.8 44.3 44.9
Net margin 28.8 37.5 36.8 36.4
Bunker/operating costs 41.8 41.9 41.9 42.2
S&D/revenue 2.3 2.0 1.8 1.6
Effec tive tax rate 16.4 14.2 17.0 19.0
Dividend payout ratio 36.2 32.0 32.0 35.0
ROAE 23.5 30.8 28.9 28.5
ROAA 18.0 22.8 22.6 23.5
Current ratio (x) 0.78 0.98 1.45 1.93
Quick ratio (x) 0.25 0.54 0.81 1.30
Net debt/equity 21.7 15.5 10.8 5.3Interest coverage (x) 26.7 25.7 33.3 35.3
Inventories days 11.9 9.2 7.4 4.1
Receivables days 16.3 16.3 16.3 16.3
Payable days 13.4 16.3 15.0 14.4
FYE 31 Dec (RMBmn) 2006 2007F 2008F 2009FPretax Profits 3,302 5,539 7,311 9,385
Adj: non-cash i tems 384 1,123 (44) 960
Interest received 129 224 226 274
Tax paid (448) (804) (1,249) (1,799)
Net cash from operating 3,367 6,082 6,244 8,820
Capex & investment (4,588) (6 ,719) (4,473) (5,029 )
Investment income 142 285 190 142
Net Cash from Investing (4,446) (6,434) (4,283) (4,887)
Equity raised/ (repaid) 0 0 506 0
Change in borrowings 1,719 2,955 (150) 150
Interest expense (185) (207) (232) (260)
Dividends & d is tr ibutions (998) (1,521) (1,942) (2,661)
Others 0 0 0 0Net Cash from Financing 537 1,228 (1,818) (2,770 )
Net change in cash (543) 876 143 1,163
Source: Historical data from the company, others are CCB Intl Securities estimates
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China Shipping Container Lines (2866 HK): Vulnerable industry outlook
Weak global demand. Container market outlook is likely to deteriorate
triggered by the weakening global trade demand. Transpacific line is
expected to remain flat over 2008 but is likely to see revival in 2009 while
increasing supply could shorten the freight rate recovery in Asia/Europeroute. We are cautious with CSCL given its high leverage to Chinas export
to US and Europe and increasing exposure to spot market, i.e. 90% of its
FY08 Asia/Europe capacity shall be on spot market.
Flat container rate. We forecast CSCLs overall container rate to remain
flat in FY08 and grow by 5% yoy in FY09, based on: (1) transpacific rate to
decline by 7.5% yoy in FY08 despite regional liners effort to introduce new
bunker surcharge program and raise transpacific rate. We question the
effectiveness of possible rate hike due to the potential declining load factor;
(2) A/E rate to drop by 2.5% in 2008 and pick up by 2.5% yoy in FY09.
strong A/E rate recovery during 2007 could be short-lived as increasing
capacity reallocation from transpacific route to A/E route may lead to
oversupply; (3) robust demand in domestic container market to drive
domestic container rate up by 12~10% yoy over FY08 to FY09. We expect
CSCL to maintain its leadership in domestic market with a share of
approximately 45%.
Vulnerable earnings outlook over FY08~09. We forecast FY07 earnings
to grow at 142% yoy on the back of strong A/E rate recovery and improving
margins, but we are cautious with its FY08~FY09 earnings prospects. We
expect FY08~09 earnings to grow at CAGR of 13.6%, mainly driven by new
vessel deliveries. Furthermore, increasing operating costs, mainly bunkers,
port and railroad charges, could further undermine its earnings outlook.
Fair valuation at HK$3.68. We valued CSCL at 1.0x 08F PBR, which
represents a 10% discount to Asian liners given its increasing exposure to
spot market. We believe CSCL is fairly valued at current price level andfurther upside may come from acquisition of container-related assets from
its parent.
Key risks to our valuation includes: (1) high volatility in container rate in
transpacific and A/E line; (2) compared to other Chinese shipping counters,
CSCL is the most sensitive to bunker costs which accounts for about 25% of
its total operating costs; (3) accelerating RMB appreciation to undermine
CSCLs earnings prospects as it has the largest currency mismatch
compared to domestic peers.
Financial Summary
FYE Dec (RMB mn) FY06 FY07F FY08F FY09F
Turnover 30,502 39,003 43,659 51,019
EBIT 1,677 4,447 4,702 5,600
Net profit 859 3,364 3,729 4,342
EPS (RMB) 0.119 0.288 0.319 0.372
y-o-y chg (%) (80.0) 142.4 10.8 16.4
PER (x) 27.0 11.1 10.0 8.6
Yield (%) 1.0 11.6 2.6 3.2
ROAE (%) 5.2 13.0 9.9 10.3
BVPS (RMB) 2.290 2.219 3.215 3.622
Source: Historical data from the company, others are CCB Intl Securities es timates
China Shipping
Neutral (initiate)
Target price: HK$3.68Upside: 6.1%
Share data
Bloomberg code 2866.HK
Share price (HK$)* 3.47
Total issued shares (mn) 3,751
Market cap. (HK$ mn) 92,628
52-wk hi/lo 10.88/1.57
Average turnover (mn share) 79.9
Major shareholders %
China Shipping Group 47.9
Baring Asset Mgmt# 4.8
Cheung Kong (0001 HK)# 4.1
# H-share only
* Closing price as of 3 March 2008
Source: Bloomberg
Market data
HSI Index 23,584
HSCEI Index 13,439
HSCCI Index 5,282
2008F 2009F
BVPS consensus (RMB) 2.419 2.936
EPS consensus (RMB) 0.317 0.362
Source: Bloomberg
Stock price performance
Source: Bloomberg
Wang Ren
(852) 2532 6749
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Vulnerable earnings outlook over FY08~09
Global container rate continued to rebound since 2H06, largely triggered by a
lower-than-expected supply. Particularly in Asia/Europe route, CSCL enjoyed a
37.7% yoy rate hike during FY07 in its Asia/Europe route, while incre