HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

Orient Overseas International / Equity Bottom-Up

<ul>
<li>We believe the 11.4% decline in share price of <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> YTD is not sufficient to reflect the plunge in freight rate and weakened load performance.</li>
<li>Its 4Q22 average revenue/TEU of US$1,822.3 has returned to 2Q21 level; but with latest spot rate already plunged to early-2020 times, there is further downside for OOIL's realised rate.</li>
<li>Export outlook is uninspiring as well, indicating pressure on demand. With similar ROE, OOIL only trades at 0.3x P/B in FY20, that makes its current P/B of 0.9x expensive.</li>
</ul>


We believe the 11.4% decline in share price of Orient Overseas International (316 HK) YTD is not sufficient to reflect the plunge in freight rate and weakened load performance.
Its 4Q22 average revenue/TEU of US$1,822.3 has returned to 2Q21 level; but with latest spot rate already plunged to early-2020 times, there is further downside for OOIL's realised rate.
Export outlook is uninspiring as well, indicating pressure on demand. With similar ROE, OOIL only trades at 0.3x P/B in FY20, that makes its current P/B of 0.9x expensive.


Orient Overseas Intl (316 HK): Still Not Too Late to Be Bearish

Thematic (Sector/Industry)

<ul>
<li>There is no immediate impact of termination of 2M Alliance between <a href="https://www.smartkarma.com/entities/ap-moller-maersk-a-s" target="_blank" data-smartkarma-citation="entities:24755:1" rel="noopener">Ap Moller - Maersk A/S (MAERSKA DC)</a> and Mediterranean Shipping Company in 2025, but there are some long-term implications.</li>
<li>The change in competitive landscape will add uncertain operating variables to <a href="https://www.smartkarma.com/entities/china-cosco-holdings-h" target="_blank" data-smartkarma-citation="entities:286:1" rel="noopener">COSCO Shipping Holdings (1919 HK)</a> and <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> as there is possibility of stiffer industry competition. </li>
<li>Port companies like <a href="https://www.smartkarma.com/entities/cosco-shipping-ports-ltd" target="_blank" data-smartkarma-citation="entities:360:1" rel="noopener">Cosco Shipping Ports (1199 HK)</a> and <a href="https://www.smartkarma.com/entities/china-merchants-port-holdings-company-ltd" target="_blank" data-smartkarma-citation="entities:15155:1" rel="noopener">China Merchants Port (144 HK)</a> may see improvement in their relative bargaining power, with potentially lower bulk volume discounts offered. </li>
</ul>


There is no immediate impact of termination of 2M Alliance between Ap Moller - Maersk A/S (MAERSKA DC) and Mediterranean Shipping Company in 2025, but there are some long-term implications.
The change in competitive landscape will add uncertain operating variables to COSCO Shipping Holdings (1919 HK) and Orient Overseas International (316 HK) as there is possibility of stiffer industry competition. 
Port companies like Cosco Shipping Ports (1199 HK) and China Merchants Port (144 HK) may see improvement in their relative bargaining power, with potentially lower bulk volume discounts offered. 


China Shipping Sector: Impacts of the Termination of 2M Alliance

<a href="https://www.smartkarma.com/entities/sinotrans-limited-h" target="_blank" data-smartkarma-citation="entities:1321:1" rel="noopener">Sinotrans (598 HK)</a> posted another set of strong result in 3Q21 with recurring earnings grew by 34.2% YoY. The slow growth of 5.8% in reported earnings is distorted by an Rmb143m provision in litigation loss, and investors should not let this non-recurring figure mask the interpretation of good result. We saw healthy double-digit volume growth for logistics and e-commerce businesses in the quarter, and international express JV DHL-Sinotrans continued to stage a solid growth in profit contribution.We believe Sinotrans is deeply undervalued at 0.47x 12-month forward P/B given an 11.7% ROE and a 41% earnings growth for FY21F. The 21% pullback in share price along with the container shipping sector in a month's time looks unjustified, in our view. Sinotrans has a solid financial position with 3Q21 gearing of just 6.6%, and assume a stable dividend payout, it is sitting on an attractive dividend yield of 7.4% for this year.

Sinotrans (598 HK) posted another set of strong result in 3Q21 with recurring earnings grew by 34.2% YoY. The slow growth of 5.8% in reported earnings is distorted by an Rmb143m provision in litigation loss, and investors should not let this non-recurring figure mask the interpretation of good result. We saw healthy double-digit volume growth for logistics and e-commerce businesses in the quarter, and international express JV DHL-Sinotrans continued to stage a solid growth in profit contribution.We believe Sinotrans is deeply undervalued at 0.47x 12-month forward P/B given an 11.7% ROE and a 41% earnings growth for FY21F. The 21% pullback in share price along with the container shipping sector in a month's time looks unjustified, in our view. Sinotrans has a solid financial position with 3Q21 gearing of just 6.6%, and assume a stable dividend payout, it is sitting on an attractive dividend yield of 7.4% for this year.  

Sinotrans (598 HK): From Strength to Strength

Pacific Basin Shipping / Equity Bottom-Up

The 3Q21 trading update for <a href="https://www.smartkarma.com/entities/pacific-basin-shipping-ltd" target="_blank" data-smartkarma-citation="entities:929:1" rel="noopener">Pacific Basin Shipping (2343 HK)</a> painted a positive picture for the earnings performance for 2H21 and FY22. There is good QoQ improvement in time-charter equivalents for its Handysize and Supramax fleet in 3Q21, which are 69.3% and 98.6%, respectively, higher than 1H21. On such basis, we estimate that its 3Q21 profit may be some 33% more than 1H21, blowing away market consensus by sizeable margin.Additionally, the growth in minor bulk trade, particularly construction materials, cement and clinker and grains, has underpinned good Handysize and Supramax demand. The supply pressure is also light as net fleet growth is expected to be 3% and 1.8% for FY21 and FY22, respectively. We also think Pacific Basin may take opportunistic disposals of vessel to capture the favourable capital value movements. All in all, we think that having retreated 25% from the peak, the stock has returned to more attractive valuation multiples.

The 3Q21 trading update for Pacific Basin Shipping (2343 HK) painted a positive picture for the earnings performance for 2H21 and FY22. There is good QoQ improvement in time-charter equivalents for its Handysize and Supramax fleet in 3Q21, which are 69.3% and 98.6%, respectively, higher than 1H21. On such basis, we estimate that its 3Q21 profit may be some 33% more than 1H21, blowing away market consensus by sizeable margin.Additionally, the growth in minor bulk trade, particularly construction materials, cement and clinker and grains, has underpinned good Handysize and Supramax demand. The supply pressure is also light as net fleet growth is expected to be 3% and 1.8% for FY21 and FY22, respectively. We also think Pacific Basin may take opportunistic disposals of vessel to capture the favourable capital value movements. All in all, we think that having retreated 25% from the peak, the stock has returned to more attractive valuation multiples.

Pacific Basin Shipping (2343 HK): Stellar 2H21 in the Making

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

China Logistics Property Holdings / Event-Driven

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

China

COSCO SHIPPING Holdings Co., Ltd offers marine freight transportation services.  The Company offers container shipping, dry bulk shipping, logistics services, freight forwarding, and terminal and container leasing services internationally.  COSCO SHIPPING Holdings Co., Ltd operates container ships and terminals, and manufactures shipping containers.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

COSCO Shipping Holdings (1919 HK)

Orient Overseas Intl (316 HK): Still Not Too Late to Be Bearish

OOIL's 4Q22 average revenue/TEU has returned to 2Q21 level. As latest spot rate plunged to early-2020 level, there is further downside to realised...

Osbert Tang, CFA

China Shipping Sector: Impacts of the Termination of 2M Alliance

Termination of 2M Alliance may mean stiffer competition to be faced by Cosco Holdings and OOIL. Meanwhile, port companies like Cosco Shipping Port...

Osbert Tang, CFA

Sinotrans (598 HK): From Strength to Strength

Sinotrans' slower 3Q21 profit growth is due to non-recurring item; and excluding this, its growth was an impressive 34.2%. The 0.47x P/B has deeply...

Osbert Tang, CFA

Pacific Basin Shipping (2343 HK): Stellar 2H21 in the Making

Great 3Q21 trading update suggests 2H21 and FY22 outlook remain encouraging. Demand-supply dynamics remain favourable and there is room for...

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

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)