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Raising sector view to Overweight; Buy CSCL, Hanjin, and OOIL
The sector continues to deteriorate at a faster pace than we expected entering
4Q, with liners now burning cash rapidly. While this adds near-term earnings
downside risk to liners, we read it as a positive signal for the sector in the
medium term, as carriers will be forced to be disciplined given their negative
cashflow. Along with demand picking up and newbuild supplies tapering off,
we expect the sector to bottom out in late 1Q12. We believe investors should
position in advance, as stocks move ahead of industry fundamentals.
Start positioning for sector bottoming-out in 1Q12
As we anticipated, some early signs of carrier discipline have emerged lately,
on carriers’ negative cashflow. Liners have cut Transpacific capacity c.10%
since October. Idle capacity and order slippage ratios have been rising steadily.
Maersk finally announced it will raise Asia-Europe rates US$200/TEU in late
December. While rates may continue to be under pressure in the near term, we
expect carriers’ rising discipline, along with demand picking up and new
supply tapering off, to lift the sector off the bottom in late 1Q12. As stocks
move ahead of fundamentals, we believe investors should start positioning.
History as a teacher, or at least a guide
Looking at the past decade, when rates’ YoY growth momentum reverted to
positive, stocks always followed suit (1998, 2002, 2007 and 2009). Looking at
the current cycle, while rates may remain under pressure in the near term,
rates’ momentum is set to revert to positive in 2012 on easier comparisons and
expected sector bottoming out ahead. Also, the sector appears to be showing
a consistent pattern historically, with two bad years followed by 1–2 good
years. Stocks have performed well in the second bad year of the cycle.
CSCL and Hanjin Shipping offer best risk/reward; key risks
The sector, excluding Taiwan carriers, is trading at 0.6x P/B (vs. trough of 0.5x
in 2008), which looks attractive in light of a sector bottoming-out ahead. We
upgrade CSCL and NOL from Hold to Buy and raise Hanjin Shipping to Buy
from Sell. Both CSCL and Hanjin are trading at a valuation discount to their
peers and their higher operating leverage should lead to a stronger recovery vs.
peers once the sector rebounds. The key risk is weaker-than-expected rates. A
1% drop in rates reduces 2012E earnings by 12-329% across our coverage.
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