Excerpts from UOB Kayhian's June 3 Regional Morning Notes titled 'Sailing out of the storm' ....
Analysts: Lawrence Li & Aochao Wang
Recent share price correction has cut the P/B-based sector valuation (1.0x 2011F P/B) off to an attractive range. We have been seeing a fairly balanced supply/demand since 3Q09 on improving global trade activities, fewer-than-expected vessel deliveries and the carriers’ effective initiatives for capacitytightening.
The Asia-Europe rate has hit historical high and the transpacific rate also resumed to a high level. Carriers are planning a Peak Season Surcharge (PSS) of US$300-400/FEU and US$250-300/TEU on the transpacific (US West Coast) and Asia-Europe trade lanes from 1 Jun 10.
Action
• We upgrade the Asia-Pacific container shipping sector to OVERWEIGHT from UNDERWEIGHT on the good improvement in fundamentals from 2010 onwards. The 2011F sector P/B came off to 1.0x after a recent pullback, which we think is attractive as a mid-cycle valuation.
Orient Overseas International Limited: Buy, says UOB Kay Hian, with a target price of HK$77.30.
• We initiate coverage on Orient Overseas International Limited (OOIL) with a BUY rating and a target price of HK$77.30 based on sum-of-the-parts (SOTP) valuation. We believe OOIL deserves a valuation premium compared to its regional peers for its strong balance sheet, high fleet flexibility and outstanding management execution. Its current 2011F P/B of 0.8x is also very attractive.
• We add Neptune Orient Lines (NOL) to our regional container shipping coverage with a BUY rating and target price set at S$2.28, based on 1.4x 2011F P/B. We believe NOL can also enjoy a valuation premiumcompared to its peers due to its high value-added services, high operating flexibility and robust balance sheet.
• We upgrade China Shipping Container Lines (CSCL) to HOLD from SELL on recent pullback and maintain our fair price of HK$3.06, based on 1.2x 2011F P/B.
UOB Kayhian has a target price of $2.28 for Neptune Orient Lines stock
Sector Catalysts
• Economic indicators (retail sales, consumer confidence index and existing house sales) for US consumption on an uptrend and EU consumption sentiment remains strong despite the debt crisis.
• 2010 China Import and Export Fair Spring Session suggest a strong growth momentum in next six months for China’s exports. Contract amount grew 30.8% yoy and was 12.6% higher than the last session inautumn 09.
• Carriers are planning PSS of US$300-400/FEU and US$250-300/TEU on the transpacific (US West Coast) and Asia-Europe trade lanes from early-June after a successful transpacific contract rate increase.
Essentials
• US consumption is on a sequential recovery path thanks to continued restocking and EU consumption sentiment remaining strong despite the debt crisis. We believe the re-stocking will last for another 4-6 months. Taking into account the routine peak season starting from August, container cargo volume is likely to be stable and strong before the yearend.
• We expect the transpacific volume to gain a greater improvement of 7.0%, outpacing 6.0% in the Asia-Europe route in 2010. We have an optimistic outlook on intra-Asia trade volume given the stronger and faster recoveries of the Asia-Pacific countries, the setting up of the China-ASEAN Free Trade Zone, and stable demand from Australia.
• Huge order book remains a major concern, accounting for 35.4% of existing fleet. However, massive order cancellation and delivery slippage has been recorded worldwide since 4Q08. In our supply/demand model,we expected effective fleet growth over 2010-11 to be 7.0% and 9.3%, far below the nominal annual growth of 9.9% and 11.8% respectively, factoring in cancelled orders and postponed deliveries.
• Underpinned by narrowed supply/demand gap, we turn more positive on the freight rate going forward, which was already confirmed by strong 1Q10 figures. Transpacific services are very likely to turn a profit after the US$800-1,000 raise on the annual contract rate and we expect the transpacific rate to stay firm given a tight supply. For the Asia-Europe route, we believe rates will rebound on the upcoming peak season, but rapidly increasing capacity may cap the rate upside.
• We expect most carriers to turn black as early as 2Q10 with both the major trade lanes making money. The 1Q10 results announced have confirmed that the turnaround for the whole year is on track – some carriers turned profitable while others largely narrowed losses.
Risks
• Slower-than-expected economic recovery in the US and Europe, EU debt crisis to drag down consumption, container line operators re-activating laid-up vessels too early, and surge in oil prices to erode bottom line.
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