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Inventories high; destocking continues
In this report, we revisit our macro view for Chinese ports following our bottomup
review of recent earnings/sales call transcripts from eight listed US and
European retailers and the release of April US retail sales and port volumes.
April US retail sales data derails recovery theory
Retail headline numbers were down 0.4% MoM. However, adjusting for the
revised March number, MoM sales were actually down 1.9%. Apparel and
furniture (46% of container volume to the US) continued to be weak, down 0.5%
MoM. Inventory sales data for March also showed rising inventory-to-sales ratio
as sales fell faster than inventory. This shows that destocking is not happening
fast enough and in turn will prevent restocking from taking place in the near term.
This is also evident in the weak Chinese export and port data (down 22.6% and
20–25% YoY, respectively), as well as recent surveys of Chinese factories which
highlighted weak order flow.
Bottom-up view – end-demand weak; retailers destocking
Our bottom-up analysis of earnings call transcripts from US retailers (see Figure 5)
also confirms the slow destocking and weak sales thesis. A review of the
transcripts suggests that retailers still see a weak sales outlook, with little
visibility into when things will improve. Against this backdrop, retailers suggest
that inventory destocking will remain a focus for the next two quarters.
Furthermore, while it may seem as though absolute inventories have declined,
retailers continue to note that they are unlikely to build up inventory levels again
given the uncertainty in the market. This means that the restocking effort that the
market is looking for is unlikely to materialise soon, hence resulting in market
disappointment.
Outlook for ports and shipping remains negative
While the port and shipping sectors have rallied on the back of less-worse macro
data, we believe that this is not a true representation of underlying drivers to
container traffic. Our analysis suggests that Chinese port performance is
sensitive to furniture and apparel exports. As such, looking at aggregate retail
sales data is not as relevant given that it includes a mixture of products that are
not significant volume contributors to China’s port throughput.
For the port operators, we believe that while volume may stabilise, the risk of
overcapacity and falling margins remains high. With utilisation rates at ports
having fallen from 95–100% in 2007 to 65–75% in 2009 YTD, container
volumes would have to grow by 40% for profitability to return to 2007 levels.
Given the dire state of the container industry, we see limited upside from
current prices and would see value below 0.5x P/BV in general. This thesis is
based on 20–30% equity losses from operations and dilutive equity issuances
over the next two years and lower-than-average future ROEs.
Inventories high; destocking continues
A spate of data over the last two weeks has started to show that the market may be too early
on the restocking theme – a key driver of a 50–70% rerating in the port and shipping stocks.
While the market has been focused on retail and absolute inventory data, deeper analysis
suggests trends that are likely to disappoint the market.
While retail sales for April have looked strong, most of this strength is being driven by food
sales. Meanwhile, products that are the key drivers to port and shipping throughput
continue to see weak sales. This is particularly the case for furniture and apparel sales,
which account for 25% and 26% of volumes into the US.
Retailers also seem to be suggesting that with end-demand continuing to be weak and
few signs of recovery in sale of discretionary items, the focus for them continues to be
destocking (rather than restocking). This can also be seen in the data released earlier this
week, which showed that China’s port throughput for April collapsed once again (down
25% YoY in Shenzhen and down 20% YoY in Shanghai). Similarly, exports also fell 22.6%
YoY in April.
While the market has started to discount 2009 and look out to 2010 earnings, we believe
that investors are still calling a bottom to the cycle too early. While things may not be
getting incrementally worse, neither are things looking to be getting substantially better on our
numbers. In the end, we believe that the market will find it difficult to justify the recent multiple
expansion seen in port and shipping companies, which as a result will likely be de-rated again.
Retailers still focused on destocking (not restocking!)
To better assess the level of restocking taking place amongst the US retailers, we have
looked at the earnings/sales conference call transcripts from eight US general and furniture
retailers (representing US$255bn in market capitalisation). The excerpts from each of the
retailers are discussed below (Figure 5). Our key findings were as follows:
The increase in retails sales that is spoken about is predominantly for non-discretionary
food items and electronic goods which have a shelf life (ie, where excess stock exists and
is more likely to become obsolete).
For furniture items and apparel, which make up 25% and 21% of volumes shipped from
China to the US, retail sales remained weak.
Most retailers noted that they had little visibility into when things would improve; however,
they were certain that the current weak operating environment would continue into 2Q09.
Retailers were hopeful that some signs of stabilisation/recovery would emerge in late
2H09.
With the above factors in mind, all retailers suggested that inventory management was a
key focus and that they were focusing on keeping inventory levels as low as possible.
Even if a restocking effort did take place, this would only be done with sporadic orders
(rather than long-term orders).
The above summary further affirms our view that the market is pricing in a recovery at a time
when the demand outlook remains uncertain. While the market is hoping for a restocking
effort to drive up container volumes, our research suggests that restocking efforts, while
sporadic, are unlikely to materialise in a meaningful pick-up to container volumes over the
near term. In the meantime, as 1H09 results come up, we expect that the port operators will
show deteriorating profit performance with margins coming under increasing pressure.
Headline – retail sales
As discussed further on in this report, we note that the Chinese port operators are most
sensitive to sales of furniture and apparel given it accounts for 46% of volume shipped out of
China. As such, we stress the fact that looking at aggregated macro data (such as retail sales
and PMI) is not as relevant as it provides little insight into the trends in products that drive
export volumes at ports.
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