Asian Equities Analyst, Logistics & Transport, Tracking Traffic

Daniel Hellberg

Asian Equities Analyst, Logistics & Transport

Equity Bottom-Up

A brief congratulatory phone call from ROC President Tsai Ing-wen to US President-elect Trump last Friday has angered Chinese officials, who view the call (initiated by Tsai) as a departure from the United States' long-standing 'One-China' policy. The call from President Tsai, whose Democratic Progressive Party (DPP) openly seeks greater independence from China, will undoubtedly further damage already shaky relations between Taiwan and the Mainland in the near-term.We believe China will retaliate for this affront not against Trump or the US, but against Taiwanese interests, including Taiwanese airlines. A likely response from China would be to further slow the issuance of tourist visas to Chinese nationals hoping to visit Taiwan; Beijing could also delay the expansion of flights between Taiwan and China, which have grown dramatically in recent years. We believe either of these responses could have a material negative impact on <a href="https://www.smartkarma.com/entities/20645" target="_blank" data-smartkarma-citation="entities:20645:1">Eva Airways Corp (2618 TT)</a>'s passenger revenues in 2017. EVA has become increasingly reliant on passenger volume growth as its once-burgeoning cargo business has dramatically dwindled over the past decade.EVA may also come under pressure, indirectly, from poor profitability at parent <a href="https://www.smartkarma.com/entities/15428" target="_blank" data-smartkarma-citation="entities:15428:1">Evergreen Marine Corp Ltd (2603 TT)</a>, which retains a 16.3% stake in the airline. Due to weak demand and chronic industry over-capacity, Evergreen lost money in three of the last four years, and will likely lose money again in 2016. We believe Evergreen may be willing to sell down part of its remaining stake in EVA in order to offset losses in its core shipping business. In our view, the January 2016 death of Evergreen Group founder Chang Yung-fa and subsequent family squabbles over succession issues make the sale of Evergreen's EVA stake more likely. Trading at 1.16x NTA, and facing pressure from likely Chinese retaliation over 'The Trump Call', we recommend investors establish Short positions in EVA and use the proceeds to fund Long positions in Evergreen.Despite its heavy operating losses, we believe Evergreen Marine is becoming an attractive target in the rapidly consolidating container shipping sector. Long a global Top-3 container carrier by capacity, Evergreen now sits at number five behind the three large European carriers and <a href="https://www.smartkarma.com/entities/286" target="_blank" data-smartkarma-citation="entities:286:1">China COSCO Holdings (H) (1919 HK)</a> (Source: Alphaliner, December 2016). Soon, however, recently announced mergers and acquisitions within the container shipping space will push Evergreen down to a distant seventh in the tables. We believe Evergreen's large scale (among remaining independent carriers) and depressed valuation make it an logical merger or acquisition target; the early 2016 passing of its founder (and subsequent family squabbles) could potentially ease a sale of the business. And although core earnings remain under pressure, we believe Evergreen can and will resort to asset disposals in the near- to medium-term to help offset losses. Finally, compared to its Evergreen Group associate EVA, we believe Evergreen is much less vulnerable to retaliatory measures from China, as its business is less closely tied to Taiwan than EVA's.

A brief congratulatory phone call from ROC President Tsai Ing-wen to US President-elect Trump last Friday has angered Chinese officials, who view the call (initiated by Tsai) as a departure from the United States' long-standing 'One-China' policy. The call from President Tsai, whose Democratic Progressive Party (DPP) openly seeks greater independence from China, will undoubtedly further damage already shaky relations between Taiwan and the Mainland in the near-term.We believe China will retaliate for this affront not against Trump or the US, but against Taiwanese interests, including Taiwanese airlines. A likely response from China would be to further slow the issuance of tourist visas to Chinese nationals hoping to visit Taiwan; Beijing could also delay the expansion of flights between Taiwan and China, which have grown dramatically in recent years. We believe either of these responses could have a material negative impact on Eva Airways Corp (2618 TT)'s passenger revenues in 2017. EVA has become increasingly reliant on passenger volume growth as its once-burgeoning cargo business has dramatically dwindled over the past decade.EVA may also come under pressure, indirectly, from poor profitability at parent Evergreen Marine Corp Ltd (2603 TT), which retains a 16.3% stake in the airline. Due to weak demand and chronic industry over-capacity, Evergreen lost money in three of the last four years, and will likely lose money again in 2016. We believe Evergreen may be willing to sell down part of its remaining stake in EVA in order to offset losses in its core shipping business. In our view, the January 2016 death of Evergreen Group founder Chang Yung-fa and subsequent family squabbles over succession issues make the sale of Evergreen's EVA stake more likely. Trading at 1.16x NTA, and facing pressure from likely Chinese retaliation over 'The Trump Call', we recommend investors establish Short positions in EVA and use the proceeds to fund Long positions in Evergreen.Despite its heavy operating losses, we believe Evergreen Marine is becoming an attractive target in the rapidly consolidating container shipping sector. Long a global Top-3 container carrier by capacity, Evergreen now sits at number five behind the three large European carriers and China COSCO Holdings (H) (1919 HK) (Source: Alphaliner, December 2016). Soon, however, recently announced mergers and acquisitions within the container shipping space will push Evergreen down to a distant seventh in the tables. We believe Evergreen's large scale (among remaining independent carriers) and depressed valuation make it an logical merger or acquisition target; the early 2016 passing of its founder (and subsequent family squabbles) could potentially ease a sale of the business. And although core earnings remain under pressure, we believe Evergreen can and will resort to asset disposals in the near- to medium-term to help offset losses. Finally, compared to its Evergreen Group associate EVA, we believe Evergreen is much less vulnerable to retaliatory measures from China, as its business is less closely tied to Taiwan than EVA's. 

'The Trump Call' May See Taiwan Airlines Hurt; Short EVA Against Long Position in Evergreen Marine

Equity Research Analyst, Maritime sector, Drewry Maritime Financial Research

Ankush Kathuria CFA, FRM

Equity Research Analyst, Maritime sector

Maritime Sector, Equity & Credit Research

Drewry Maritime Financial Research

With no ties to other players in the shipping, finance or banking world, we provide a uniquely impartial view of the markets and companies we cover. Our parent organization, Drewry is a leading independent provider of research services to the maritime and shipping industry, employing over 100 professionals across an international network of offices in London, Delhi, Singapore and Shanghai. Combining our market-leading resources with seasoned sector expertise DFRS offers a highly differentiated and comprehensive range of investment and financial research services to lenders and prospective investors in publicly listed maritime and shipping companies. The full service of reports, supporting resources and sector orientated webinars provides our clients with the most complete picture of the organisations under coverage as is possible. We have been charting and analysing the world’s maritime markets for more than 40 years. This unrivalled intelligence and understanding provides the foundation of our research service. Our analysts have access to one of the most up-to-date, comprehensive and reliable sources of market insight and research data available today. We look at globally listed companies within the following sectors: Port Operators, Container Shipping, Container Manufacturing & Leasing, LNG Shipping, Dry Bulk Shipping and Tanker Shipping. Combine in-depth sector expertise with financial analysis focusing on over 50 stocks globally.

Thematic (Sector/Industry)

Ominous start to the year for container shipping with Drewry forecasting container shipping profitability to deteriorate in 2016. Ocean freight rates for cargo moving under contracts on the major East-West trade routes witnessing another reduction in the last quarter of 2015, according to Drewry’s Benchmarking Club, a closed user group of multinational retailers and manufacturers who closely monitor their contract freight rates. The Drewry Benchmarking Club Contract Rate Index, based on Trans…

Ominous start to the year for container shipping with Drewry forecasting container shipping profitability to deteriorate in 2016. Ocean freight rates for cargo moving under contracts on the major East-West trade routes witnessing another reduction in the last quarter of 2015, according to Drewry’s Benchmarking Club, a closed user group of multinational retailers and manufacturers who closely monitor their contract freight rates. The Drewry Benchmarking Club Contract Rate Index, based on Trans…

2016 - Washout Year for Container Shipping

Taiwan

China Airlines Limited provides scheduled international air transportation for passengers and cargo freight throughout cities in Europe, America, Asia, and Australia.

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China Airlines (2610 TT)

'The Trump Call' May See Taiwan Airlines Hurt; Short EVA Against Long Position in Evergreen Marine

A brief congratulatory phone call from ROC President Tsai Ing-wen to US President-elect Trump last Friday has angered Chinese officials, who view...

Daniel Hellberg

2016 - Washout Year for Container Shipping

Ominous start to the year for container shipping with Drewry forecasting container shipping profitability to deteriorate in 2016. Ocean freight...

Drewry Maritime Financial Research

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