Staying on the boat
More upside to be captured in 2013; top picks: CSCL and OOIL
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Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm 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. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.
Sky Hong, CFA
Research Analyst
(+852) 2203 6131
sky.hong@db.com
Joe Liew, CFA
Research Analyst
(+65) 6423 8507
joe.liew@db.com
Top picks
China Shipping Container
(2866.HK),HKD2.55
Buy
Orient Overseas Int'l (0316.HK),HKD54.15 Buy
Companies Featured
China Shipping Container
(2866.HK),HKD2.55
Buy
2011A 2012E 2013E
P/E (x) – 41.4 12.1
EV/EBITDA (x) – 16.5 7.7
Price/book (x) 0.7 0.9 0.8
China Cosco Hldgs (1919.HK),HKD4.41 Hold
2011A 2012E 2013E
P/E (x) – – 20.5
EV/EBITDA (x) – – 24.5
Price/book (x) 0.9 1.4 1.3
Evergreen Marine (2603.TW),TWD19.05 Buy
2011A 2012E 2013E
P/E (x) – – 10.6
EV/EBITDA (x) 295.4 15.0 7.0
Price/book (x) 0.9 1.1 1.0
Hanjin Shipping
(117930.KS),KRW12,200.00
Buy
2011A 2012E 2013E
P/E (x) – – 9.0
EV/EBITDA (x) – 32.7 10.1
Price/book (x) 0.70 1.00 0.90
Neptune Orient Lines (NEPS.SI),SGD1.24 Buy
2011A 2012E 2013E
P/E (x) – – 15.5
EV/EBITDA (x) – 13.2 4.3
Price/book (x) 0.9 1.2 1.1
Orient Overseas Int'l (0316.HK),HKD54.15 Buy
2011A 2012E 2013E
P/E (x) 31.3 19.7 10.7
EV/EBITDA (x) 11.1 10.2 7.1
Price/book (x) 0.9 1.0 0.9
Yang Ming Marine (2609.TW),TWD15.10 Sell
2011A 2012E 2013E
P/E (x) – – 17.0
EV/EBITDA (x) – 71.5 8.9
Price/book (x) 1.2 1.7 1.5
Despite the recent rally, we think investors should stay invested. The sector
should see strong earnings recovery in 2013, driven by demand recovery and
carriers’ discipline. The 8.5% sector ROE we projected for 2013 means that
P/B, currently below 1x, still looks inexpensive. Also, experience from previous
cycles seems to support our positive stance: 1) stocks have always performed
well in the first good year of the cycle; 2) sector P/B has always moved in line
with ROE; and 3) idle capacity has tended to lead stocks.
Demand recovery + carriers’ discipline = strong earnings recovery in 2013
The strong housing recovery in the US and a stabilization of the debt crisis in
Europe will drive demand recovery going forward. We expect global container
volume growth to accelerate to 7.0% in 2013 and 8.3% in 2014, from 4.6% in
2012. On the supply side, carriers remain disciplined. The idle ratio has
increased further, to 5%. On the back of improving supply/demand, we expect
rates to rise, driving strong sector earnings recovery in 2013. We expect sector
average ROE to recover sharply, to 8.5% in 2013, from -10.4% in 2012.
History at least a guide, if not a teacher
The sector appears to be showing a consistent pattern historically, with two
bad years followed by 1-2 good years. Stocks have always performed well in
the first good year of the cycle. After two bad years (2011-12), 2013 should be
the first good year of the cycle if history holds. Also, despite a deep cyclical
sector, sector P/B historically has always moved with ROE, which we expect to
recover sharply this year. Lastly, the recent increase in idle capacity also bodes
well for stock performance in the coming months. In recent years, the pick-up
in the idle ratio has tended to lead stocks by three months.
P/B below 1x still looks cheap, given 8.5% 2013E sector ROE; key risks
Looking at recent cycles, if the sector can make a small profit, its valuation can
trade at 1.1x P/B. If the industry can generate a high single-digit ROE, P/B can
trade above 1.2x. In this sense, the current sector P/B of below 1x (excluding
Yang Ming and China Cosco) still looks cheap in light of 2013E sector ROE of
8.5%. We remain positive on the sector, with CSCL and OOIL being our top
picks. We cut China Cosco to Hold from Buy and downgrade Yang Ming to
Sell from Hold on valuations. Key risk is weaker-than-expected rates.