[vc_row][vc_column][vc_column_text]2016 was the year for miners. How about the unloved shippers? Is 2017 the year for them? Recently, China’s shipping companies soared. COSCO Shipping (1919.HongKong), for instance, rallied 11.5% in just one day, bringing this
year’s gain to 22%.
Investors are latching onto Maersk Line‘s comments at its December quarter earnings call that the shipping industry has reached an
inflection point in 2017. Jefferies‘ Andrew Lee noted: (see chart).[Maersk] expects ‘improvement in excess of US$1 bn in underlying
profit’ this year, which implies the container business will be profitable in 2017. Further, Maersk expects ‘gradual improvement in
freight rates is expected in 2017 from 4Q16′.
Despite the impact of Chinese New Year, container spot freight rates have declined only -4.3% since the YTD high on 13 January 2017. In
fact, freight rates are tracking ahead of expectations given averag spot rates are currently 67.2% higher y-y with YTD average spot rates
81.1% and 16.8% higher than 1Q16 and 4Q16 average spot rates. We are currently forecasting 2017 average freight rates increasing 8.6% y-y.
We upgraded the container shipping sector on 5 January 2017 as theHanjin-receivership was a blessing in disguise as this shifted
pricingmattitudes – shippers willing to pay higher rates to prevent another carrier bankruptcy and container lines shifting DNA to focus on
reducing losses/restore profitability.
But after yesterday’s rally, does COSCO Shipping have more upside left? JP Morgan this morning upgraded the stock to Buy with a price
target of 4 Hong Kong dollars, implying another 20% upside. Analyst Karen Li wrote:
COSCO has <50% volumes on contract on Asia-U.S. trade and largely spotexposure on Asia-Europe trade. Spot freight rates have risen 47-116%
on key A-E and Asia-U.S. routes. Further, COSCO also has a largeproportion of its fleet off-balance-sheet (72% vs. sector average of
c.53%), with lease payments fixed for five years, providing protection
from any increase in charter rates going forward.
We see COSCO Shipping as one of the key beneficiaries on the back ofimproving fundamentals, given its higher operating leverage, arising
from higher exposure to spot rates vs. contract rates and fixed charter rates. Our 2017-18E are 98% ahead of consensus on average,
driven mainly by higher freight rates.[/vc_column_text][/vc_column][/vc_row]
