Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<ul>
<li>KLine is the cheapest of the three Japan majors in terms of forward consensus PER. And forward EPS ratios are improving as the company buys back shares. </li>
<li>The CEO mentioned in December the possibility of additional shareholder return this fiscal year based on cashflow. </li>
<li>In this insight, we look at what he knew then, and what he might know now, and the chances for an additional buyback (and how it might work).</li>
</ul>


KLine is the cheapest of the three Japan majors in terms of forward consensus PER. And forward EPS ratios are improving as the company buys back shares. 
The CEO mentioned in December the possibility of additional shareholder return this fiscal year based on cashflow. 
In this insight, we look at what he knew then, and what he might know now, and the chances for an additional buyback (and how it might work).


KLINE (9107) - Chances for an Additional Buyback At Q3 Earnings?

<ul>
<li>The Nikkei reported this AM that <a href="https://www.smartkarma.com/entities/kawasaki-kisen-kaisha-ltd" target="_blank" data-smartkarma-citation="entities:3548:1" rel="noopener">Kawasaki Kisen Kaisha (9107 JP)</a> CEO was considering increasing shareholder returns this fiscal year. It already has a juicy div and a ¥100bn buyback.</li>
<li>The company announced its buyback, and an agreement by two holders of 39% to sell in a ToSTNeT-3 buy, then started buying in the market. Results are impactful.</li>
<li>The shares are up today on this news, though they gave some back after the BOJ news. The outlook for more share price impact is not bad. </li>
</ul>


The Nikkei reported this AM that Kawasaki Kisen Kaisha (9107 JP) CEO was considering increasing shareholder returns this fiscal year. It already has a juicy div and a ¥100bn buyback.
The company announced its buyback, and an agreement by two holders of 39% to sell in a ToSTNeT-3 buy, then started buying in the market. Results are impactful.
The shares are up today on this news, though they gave some back after the BOJ news. The outlook for more share price impact is not bad. 


KLINE (9107) CEO Comes Out Swinging - More LPG Carriers and More Shareholder Returns THIS YEAR

<ul>
<li>Strong but slightly disappointing Q2 earnings from <a href="https://www.smartkarma.com/entities/kawasaki-kisen-kaisha-ltd" target="_blank" data-smartkarma-citation="entities:3548:1" rel="noopener">Kawasaki Kisen Kaisha (9107 JP)</a>, and full-year forecasts are higher, but not as high as consensus. </li>
<li>The company has announced a buyback, to be executed on ToSTNeT-3. Effissimo and Mizuho Bank will participate. Other crossholders could too. </li>
<li>Strategy depends on whether you think they will. If they do not, post-buyback float drops sharply.</li>
</ul>


Strong but slightly disappointing Q2 earnings from Kawasaki Kisen Kaisha (9107 JP), and full-year forecasts are higher, but not as high as consensus. 
The company has announced a buyback, to be executed on ToSTNeT-3. Effissimo and Mizuho Bank will participate. Other crossholders could too. 
Strategy depends on whether you think they will. If they do not, post-buyback float drops sharply.


KLine (Kawasaki Kisen 9107) Announced Q2 Earnings and Possibly Game-Able Buyback (And Index Impact)

HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

Orient Overseas (International) / Equity Bottom-Up

<ul>
<li>While <a href="https://www.smartkarma.com/entities/orient-overseas-international" target="_blank" data-smartkarma-citation="entities:801:1" rel="noopener">Orient Overseas International (316 HK)</a> will welcome its inclusion in Hang Seng Index, there is risk that it will follow the pattern that new inclusions performed badly post entry.</li>
<li>Globally, many container shipping stocks have retreated from their peaks in Mar this year, but OOIL is still hovering around its peak level, making is susceptible to a correction.</li>
<li>Challenging factors include softening sequential momentum, peaking out of spot rates, weaker demand picture, increase in supply pressure and declining earnings trend are weighing on the industry and the company.</li>
</ul>


While Orient Overseas International (316 HK) will welcome its inclusion in Hang Seng Index, there is risk that it will follow the pattern that new inclusions performed badly post entry.
Globally, many container shipping stocks have retreated from their peaks in Mar this year, but OOIL is still hovering around its peak level, making is susceptible to a correction.
Challenging factors include softening sequential momentum, peaking out of spot rates, weaker demand picture, increase in supply pressure and declining earnings trend are weighing on the industry and the company.


Orient Overseas Intl (316 HK): Cursed by Index Inclusion?

David Blennerhassett

China Logistics Property Holdings / Event-Driven

China Logistics Property Holdings (1589 HK)

In Game Of Ports: China's "Suez Blockage" Disruption, I discussed Yantian International Container Terminals (YICT), operating at around 20% capacity amid stringent COVID-19 prevention and restriction measures.
YICT forms part of the third busiest gateway in the world.

Source: World Shipping Council
The good news is that YICT is back to normal operations as of yesterday. 
That appears to be all the good news. 

The Backlog
"Normal" does not, in this instance, mean standard operating procedures immediately resume. There still remains the yet-to-be serviced queue of ships to be unloaded and discharged, in tandem with the cargo backlog to be exported from Asia.

Lars Jensen, the CEO and Partner of Sea Intelligence Consulting, provides his back-of-the-napkin numbers as to when this backlog of boxes would be cleared.
YICT handled 13.3mn TEUs in 2020, or 36,400 TEUs/day.
YICT has officially operated at 30% capacity over the past month, or a shortfall of ~25,500 TEUs/day.
Multiply that by 30 days to get a rough number of 765,000 TEUs impacted.
IICT handled a record of 45,800 TEUs/day in August 2020. So at peak operating capabilities, the backlog could be cleared in 17 days (765,000/45,800).
HOWEVER, we need to factor in normal cargo flow as more cargo arrives to feed demand in both the US and Europe. Assume 36,400 TEUs/day, which leaves 9,400 TEUs/day of excess to chip away at the backlog - implying 82 days (765,000/9,400) to clear.
Those numbers are pretty simplified.  Q3 peak season will be well underway for Xmas.

It could be argued that the diversion of cargo will lessen the backlog, however, diversion has been ongoing in recent weeks, which in turn is causing operational efficiencies at those ports, and the general flow of cargo.



The Die Had Already Been Cast

When Covid first took hold, the fallout from Asia was unknown, as was the impact on factory output. This resulted in carriers canceling sailings. It is estimated some shipping companies cut capacity by ~20% around the spring of last year.
Then people stuck at home in the US and elsewhere started buying stuff. Lots of it. Both the Port of Los Angeles and Port of Long Beach, the first and second-largest in the US, recently set new cargo handling records. US Census Bureau also indicates the ratio between inventory sizes and sales for the US retailers declined to a new historical low in April. 

This surge in demand created a bottleneck, resulting in unloading time for containers actually exceeding the time it took the ship to sail across the Pacific. Ports are physically overwhelmed getting the containers off ships, and trucks and rail to clear the port.
Suez compounded matters.  The  Suez Canal got blocked 3 months ago on the 23rd of March. Ships sailing from Asia to Europe were rerouted around Africa, and in turn, some ports were omitted on the return legs. Specific data suggests delays of up to 2 months for certain cargo that was expected to be loaded and shipped, meaning the knock-on effect from the Suze blockage still lingers in the system. 

And it's not just the US that is congested.  Just this week Maersk stopped its AE7 service from calling in on Hamburg on account of congestion and exceptional waiting times, and will discharge cargo in Bremerhaven over the next month. Hapag-Lloyd has temporarily suspended its eastbound call in Rotterdam on its FE4 service to Asia due to congestion. Platts said the Port of Liverpool in the UK suffers congestion due to understaffing, an IT outage, and a high density of stock. Re-routing to other European ports is a bigger issue than say re-routing from Yantian to Nansha in Guangdong province, on account of different customs and duties imposed. 


Maersk also reports reliability issues in Australia and New Zealand due to berth congestion.

All of this has an accordion or squeeze box effect. A two-week delay in the US will have result in a two-week delay on the return leg, which may well be following a ship that itself may also have been delayed. This could lead to the carrier canceling the ship an exporter was expecting to load its goods onto, forcing that customers to seek a replacement elsewhere, at a cost. 
When the Yantian backlog is gradually cleared, what will be the knock-on effect? 
And there is a lack of containers. Apart from ships being delayed, and anchored, waiting to be unloaded in the US and Europe, a lot of these containers don't make the return leg to Asia. According to FreightWaves, import volume from China into the US via ocean shipping is up 54% year-on-year, whereas exports are up by 4.4%.   Ideally, carriers need to carry more empty containers.


The Indices

The China (Export) Containerized Freight Index (CCFI) recorded its ninth consecutive weekly increase, and is now up 200% from a year ago, and 36% since mid-April, subsequent to which the Suez blockage occurred, followed by the Yantian slowdown. 
The CCFI is a composite index. Separate trade routes are up even more - the contract index for Asia-North Europe is up 310% compared to last year – more than quadrupling from a year ago.


Source: SSE


The World Container Index eked out its largest increase since its 2012 inception. The rates from Shanghai to Los Angeles increased 34% in the past week, to $8,548/FFE (Forty Foot container Equivalent unit) from $6,358/FFE. From Shanghai to New York, the weekly increase was 39%, from $8,017/FFE to $11,180/FFE.


Source: World Container Index, Lars Jensen

There are no indications that the rates are about to level off.


Contracts

Ocean container rates are either fixed-rates (“contract rates”), or variable-rates (“spot rates”).  If you are a large player like Walmart or Target, you're probably on a Tier-1 contract, meaning you need 10,000+ TEUs annually or roughly 200 TEUs per week.
On the 21st of June, Mitsui Osk Lines (9104 JP) published a revision to its H1 (Apr-Sep) forecast, raising Net Profit Forecast by 240% because container business profits from its One Ocean Network affiliate are vastly above expectations . This comes 7 weeks after the company made its original forecast for the fiscal year. They did not revise H2 at all, meaning the guidance is a stale number still. Other companies are likely to see similar effects, depending on their split of contract vs spot.
Transpacific contracts show no sign of abating, with carriers asking ~$17,000 per 40ft container for US east coast ports, a 1,000% increase year on year. US$20,000 appears within reach.
Not surprisingly, carriers are increasingly leaning towards spot versus contract given the current trajectory. Data is difficult to come by but I understand spot rates now exceed 50% of containers on ships, up from the teens a few years ago.
To this, based on Xeneta's data, the gap between contract and spot is widening on the Asia-Europe trade, and often exceeds US$10,000/FFE, when comparing the spot rates of small shippers compared to contract rates with large shippers. This suggests smaller import/export players are getting the short end of the stick.
Also, entering into contracts is not a water-tight guarantee you will move your cargo. Reportedly shippers are being forced to pay additional surcharges over and above contracted box prices to move goods.


Blank Sailings

A liner service is allocated a certain number of days to complete a full rotation covering all the ports of call on a schedule. When a ship does not call at one or more of its scheduled intermediate ports - due to weather issues, strikes, or what transpired at YICT - it is called a blank sailing or void sailing from these ports. This avoids the congestion and knock-on waiting time.

project44 estimates container lines blanked 298 sailings globally between 1 – 15 June with a combined vessel capacity of over 3m TEUs. This is a 300% increase in one month. The disruption at YICT did not cause all of these bank sailings, but the vast majority.

There are also planned blank sailings, wherein a ship is simply taken out of a group loop to reduce capacity on certain trade routes.  For example, if a shipping company has eight ships plying a particular transpacific route in a loop formation, if a blank sailing does occur, that liner may opt to put that ship at the back of the loop, so as to not disrupt the natural flow of capacity.  That is also removing (temporarily) supply from the system.
You can observe this by looking at the number of vessels laid up outside Yantian and other congested ports which are primary source ports (rather than destination ports). 


Alliances

The three large alliances account for 80-85% of the shipping market and include all of the top 10 container lines.
2M was formed by the two world leaders in the sector, the Ap Moller - Maersk A/S (MAERSKA DC) and the Italian-Mediterranean Mediterranean Shipping Company (MSC);
The Ocean Alliance formed by COSCO Shipping Holdings Co., Ltd (H) (1919 HK) (together with OOCL), France's CMA CGM, and Evergreen Marine Corp (2603 TT), which are the third, fourth, and seventh largest in the sector;
And THE Alliance formed by Hapag-Lloyd AG (HLAG GR),  Japan's Ocean Network Express (ONE), and Yang Ming Marine Transport (2609 TT), who are the fifth, sixth, and eighth companies in the market.
Ships are getting larger on average. But given tight margins, these massive ships often need to be at ~90% capacity in the past in order to keep these carriers in the black.
With box spot prices skyrocketing, accusations of a cartel are being fielded. That's probably a stretch - given any vessel that can be used, is probably being used. Arguably, the current supply/demand situation is out of the hands of carriers.
Carriers could keep a fixed price and simply reject some shippers (customers). But we are not seeing this.
But as and when box spot prices do eventually level off, expect those accusations to become louder.  To what degree can carriers enforce higher contractual rates once the market normalises?



Filling The Void

American Shipper reported a 5,060-TEUs was chartered at $135,000/day per day for 45-90 days. Alphaliner subsequently reported that the 4,506-TEUs was chartered for two months at $125,000/day.
MPC Container also reported it just chartered out a 2,800-TEUs vessel at above $100,000/day for 65 to 80 days. That ship, built in 2008, was bought for US$8mn. The charter alone covers that $8mn cost.
If we assume that last ship is put into the transpacific route, you're looking at ~US$3,000/FFE for the round trip, at ~80 days. And that's just the vessel cost. There will be all the other costs added on top - fuel, etc. So with spot rates at US$7,000/FFE, the chartering company is probably still making decent coin.
The flipside is that this vessel was probably plying a regional route. By taking that volume out of the equation, that regional route cost will then be hit. 


Chassis

To get an idea of the contagion effect at work here, there is currently a shortage of chassis in the US. These are the truck beds a container is placed on.
As a guide, chassis have a normal turnaround time (say 80% of chassis) of 11 days or less. That number is down to 60%. That means the ports are struggling to clear containers, resulting in a build of containers at the ports. Shippers then occur fees for storage, not to mention the delay in picking up their containers. The return of those empty containers is similarly compounded.
This week, the US International Trade Commission applied anti-dumping duties on CIMC's chassis. Ironically, this only exacerbates the shortage of chassis in the system.


What Else? How About Vessel Collisions



This video show's the Hamburg Süd vessel Cap San Antonio sustaining damage after colliding with a pier in Santos.
At ~10,000TEUs and ~50% of the weekly capacity between  East Coast South America to North Europe, taking this ship out of the loop will impact this trade route.

Again, this serves to illustrate factors that could aggravate an already existing stretched logistic situation. 





Where to Invest?

The shipping liners are making money hand over fist. 
Container manufacturers
Warehouse operators
Chassis manufacturers - although no pure listed players as far as I'm aware.


Shipping Liners

I still like COSCO Shipping Holdings Co., Ltd (H) (1919 HK) here.


        



Trading Comps


Mkt Cap (USDm)


PER (E)


EV/EBITDA (E)


P/B



Hapag-Lloyd Aktiengesellschaft
39,752
8.2x
7.0x
4.8x


A.P. Møller - Mærsk A/S
54,484
5.8x
4.1x
1.8x


DSV Panalpina A/S
52,810
37.0x
21.1x
6.8x


Kuehne + Nagel International AG
41,586
33.3x
15.7x
15.3x


Atlas Corp.
3,545
10.9x
8.6x
1.0x


COSCO SHIPPING Holdings Co., Ltd.
46,062
3.9x
5.2x
6.8x


Nippon Yusen Kabushiki Kaisha
8,576
2.8x
10.2x
1.5x


Kawasaki Kisen Kaisha, Ltd.
3,281
2.1x
20.1x
1.7x


Mitsui O.S.K. Lines, Ltd.
5,643
3.0x
15.9x
1.1x


Yang Ming Marine Transport Corporation
17,728
4.6x
3.7x
14.0x


Evergreen Marine Corporation (Taiwan) Ltd.
28,609
6.0x
4.8x
8.5x


Max
54,484
37.0x
21.1x
15.3x


Median
28,609
5.8x
8.6x
4.8x


Min 
3,281
2.1x
3.7x
1.0x


Mean
27,461
10.7x
10.6x
5.8x


Source: CapIQ



 

      



Trading Comps


One-Mth


Three-Mth


Six-Mth


One-YR



Hapag-Lloyd Aktiengesellschaft
19%
49%
119%
291%


A.P. Møller - Mærsk A/S
5%
27%
29%
153%


DSV Panalpina A/S
-1%
24%
44%
102%


Kuehne + Nagel International AG
2%
22%
54%
113%


Atlas Corp.
6%
1%
36%
97%


COSCO SHIPPING Holdings Co., Ltd.
28%
104%
133%
739%


Nippon Yusen Kabushiki Kaisha
22%
37%
116%
256%


Kawasaki Kisen Kaisha, Ltd.
31%
49%
76%
247%


Mitsui O.S.K. Lines, Ltd.
14%
24%
51%
160%


Yang Ming Marine Transport Corporation
54%
360%
561%
2367%


Evergreen Marine Corporation (Taiwan) Ltd.
84%
278%
374%
1460%


Max
84%
360%
561%
2367%


Median
19%
37%
76%
247%


Min 
-1%
1%
29%
97%


Mean
24%
88%
145%
544%



Source: CapIQ 




Containers

The three key Chinese container manufacturing companies are China International Marine Cntnrs Gp (2039 HK), Singamas Container Hldgs (716 HK), and unlisted CXIC.
Container manufacturing accounts for around 23%/33% of CIMC's revs/NPBT. So not a clean player. A mentioned above, it also makes chassis.
And Singamas is tiny - around US$200mn market cap.

Warehousing

When Global Logistics Properties, the logistic giant and largest operator of warehouse space in China, was privatised in 2017, Prologis Inc (PLD US) and Goodman Group (GMG AU) were cited as GLP's closest peers at the time
As discussed in CLPH (1589 HK): Free Float Breached As JD.com Bumps Stake, China Logistics Property Holdings (1589 HK) has also been in the news recently over possible interest from JD.com Inc. (9618 HK).
Separately, Kerry Logistics Network (636 HK)'s independent shareholders approved last month the sale of its Hong Kong and Taiwan warehouse businesses to Kerry Holdings. See  Kerry Logistics (636 HK): SF Holdings' Pre-Conditional Partial Offer. That looks to be a fortuitous transaction for Kery Holdings.



"Squeezebox" is a slang term for accordion.



Squeeze Box: The Port Congestion Contagion

Denmark

A.P. Moller - Maersk A/S operates as an integrated transport and logistics company. The Company offers container vessels, supply ships, special vessels, terminals, tug boat activities and reefer container box manufacturing. A.P. Moller-Maersk serves clients worldwide.

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AP Moller - Maersk A/S (MAERSKA DC)

KLINE (9107) - Chances for an Additional Buyback At Q3 Earnings?

KLine (9107) will report earnings on 3 Feb at lunchtime. By that time, Q3 results for ONE should be known and the existing ¥100bn buyback should be...

Travis Lundy

KLINE (9107) CEO Comes Out Swinging - More LPG Carriers and More Shareholder Returns THIS YEAR

K-Line's CEO in a Nikkei interview said they would expand their LNG carrier fleet by 60% from here to 2026. And they said they are considering...

Travis Lundy

KLine (Kawasaki Kisen 9107) Announced Q2 Earnings and Possibly Game-Able Buyback (And Index Impact)

KLine has ridden shipping rates' rise. Rates are falling. EPS falls will be slower, but will come. Today, a 12.4% buyback announced. Stock is <1x...

Travis Lundy

Orient Overseas Intl (316 HK): Cursed by Index Inclusion?

While news of HSI inclusion is positive, OOIL is now open to the pattern of post-entry weakness. It is facing more challenges and outperformance...

Osbert Tang, CFA

Squeeze Box: The Port Congestion Contagion

For now, we have a cargo boom, a shortage of capacity, falling inventories, as we head into the peak season, There appears minimal leeway for a...

David Blennerhassett

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