HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

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

<a href="https://www.smartkarma.com/entities/sitc-international-holdings" target="_blank" data-smartkarma-citation="entities:15301:1" rel="noopener">SITC International (1308 HK)</a> has a very spectacular 1H21, achieving a 309.4% YoY growth in net profit, even better than the high-end of the range indicated in the positive profit alert. The strength is driven by improvements in both volume (+29.4%) and freight rate (+42.3%), which supported a 6.9pp increase in dividend payout ratio to 70.6%. It is now yielding 7.8% for FY21F.While the result is good and management continued to be positive towards the volume and rate outlook, we think that the market seems to have well-factored in such expectations. In fact, we expect earnings to peak in FY21, with ROE to average at 45% for FY22-23. While this is still very decent return levels, its 12-month forward P/B of 6.3x looks to leave limited further upside. Meanwhile, we see risks that the market has overlooked the negative swing factors.

SITC International (1308 HK) has a very spectacular 1H21, achieving a 309.4% YoY growth in net profit, even better than the high-end of the range indicated in the positive profit alert. The strength is driven by improvements in both volume (+29.4%) and freight rate (+42.3%), which supported a 6.9pp increase in dividend payout ratio to 70.6%. It is now yielding 7.8% for FY21F.While the result is good and management continued to be positive towards the volume and rate outlook, we think that the market seems to have well-factored in such expectations. In fact, we expect earnings to peak in FY21, with ROE to average at 45% for FY22-23. While this is still very decent return levels, its 12-month forward P/B of 6.3x looks to leave limited further upside. Meanwhile, we see risks that the market has overlooked the negative swing factors. 

SITC International (1308 HK): Takeaways from Call, and We Are Cautious on the Downside Risk

<a href="https://www.smartkarma.com/entities/sitc-international-holdings" target="_blank" data-smartkarma-citation="entities:15301:1" rel="noopener">SITC International (1308 HK)</a> again posted a good set of result with a 59.8% YoY growth in earnings in FY20 on the back of volume growth, higher freight rate and lower costs. Gross margin expanded a massive 7.2pp YoY in the year to record high level of 26.4%. Fuel and charter costs decreased US$54m YoY but we believe such savings will not be recurrent in FY21.In the post-FY20 call, management maintains a positive view for FY21, guiding for good rate increase and volume growth. The key challenges in this year, however, are the surge in fuel and charter costs. We expect its momentum to stay good in 1H21, but will moderate in 2H21 due to a high base. Given the share price's 151% rally since 2020 and 30% YTD, SITC is highly vulnerable to profit-taking, especially as its 12-month P/B of 6.2x is more than 3SD above its historical average.

SITC International (1308 HK) again posted a good set of result with a 59.8% YoY growth in earnings in FY20 on the back of volume growth, higher freight rate and lower costs. Gross margin expanded a massive 7.2pp YoY in the year to record high level of 26.4%. Fuel and charter costs decreased US$54m YoY but we believe such savings will not be recurrent in FY21.In the post-FY20 call, management maintains a positive view for FY21, guiding for good rate increase and volume growth. The key challenges in this year, however, are the surge in fuel and charter costs. We expect its momentum to stay good in 1H21, but will moderate in 2H21 due to a high base. Given the share price's 151% rally since 2020 and 30% YTD, SITC is highly vulnerable to profit-taking, especially as its 12-month P/B of 6.2x is more than 3SD above its historical average.

SITC International (1308 HK): Good Result Priced In, Challenges from Higher Costs

With a 51% surge in share price since Oct on the back of the strengths in intra-Asia freight rates and the positive news on signing of the Regional Comprehensive Economic Partnership (RCEP), <a href="https://www.smartkarma.com/entities/sitc-international-holdings" target="_blank" data-smartkarma-citation="entities:15301:1" rel="noopener">SITC International (1308 HK</a>)'s valuations have entered into historical high levels. Despite a projected high ROE of 29% for FY21, its P/B multiple of 4.65x has already blown through the roof. We still think that SITC is a very quality company with solid fundamentals, but the current valuations look to have overweighed the positive factors but turned a blind eye on the risks. These include the sustainability of elevated freight rates, potentially higher charter costs and remote contribution from RCEP; and we believe it is prudent to lighten position in SITC now. Meanwhile, the key upside risks are a better-than-expected volume, declaration of special dividends and further spike in freight rates.

With a 51% surge in share price since Oct on the back of the strengths in intra-Asia freight rates and the positive news on signing of the Regional Comprehensive Economic Partnership (RCEP), SITC International (1308 HK)'s valuations have entered into historical high levels. Despite a projected high ROE of 29% for FY21, its P/B multiple of 4.65x has already blown through the roof. We still think that SITC is a very quality company with solid fundamentals, but the current valuations look to have overweighed the positive factors but turned a blind eye on the risks. These include the sustainability of elevated freight rates, potentially higher charter costs and remote contribution from RCEP; and we believe it is prudent to lighten position in SITC now. Meanwhile, the key upside risks are a better-than-expected volume, declaration of special dividends and further spike in freight rates. 

SITC International (1308 HK): Well, a Very Quality Company but Too Much Too Fast

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<a href="https://www.smartkarma.com/entities/sitc-international-holdings" target="_blank" data-smartkarma-citation="entities:15301:1" rel="noopener">SITC International (1308 HK)</a>'s operating statistics showed that 3Q20 achieved the highest quarterly revenue and volume growth since 1Q19, and we believe this was built on solid cargo demand and its niche presence in the booming intra-Asia market. While average freight rates came down by 6.3% in 3Q20 and 3% in 9M20, this is more than offset by the 36.5% decline in average bunker price YTD, and should lead to good margin expansion in this year.
The strong 3Q20 operating data suggested that SITC is on track to reach a record profit in FY20. Even better, we expect ROE for the next two years to stay at levels of over 25% while maintaining a net cash position. Despite having rallied by 41.5% YTD, we continue to like its quality management, strong intra-Asia franchise, solid financial position and willingness to share success with shareholders (average dividend payout ratio of 82% in the last four years). 
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SITC International (1308 HK)'s operating statistics showed that 3Q20 achieved the highest quarterly revenue and volume growth since 1Q19, and we believe this was built on solid cargo demand and its niche presence in the booming intra-Asia market. While average freight rates came down by 6.3% in 3Q20 and 3% in 9M20, this is more than offset by the 36.5% decline in average bunker price YTD, and should lead to good margin expansion in this year.
The strong 3Q20 operating data suggested that SITC is on track to reach a record profit in FY20. Even better, we expect ROE for the next two years to stay at levels of over 25% while maintaining a net cash position. Despite having rallied by 41.5% YTD, we continue to like its quality management, strong intra-Asia franchise, solid financial position and willingness to share success with shareholders (average dividend payout ratio of 82% in the last four years). 


SITC International (1308 HK): Impressive 3Q20 to Support a Record Year in FY20

Hong Kong

SITC International Holdings Co., Ltd. is a leading shipping logistics company in the intra-Asia area. It provides integrated transportation and logistics solutions, including container liner shipping, freight forwarding, shipping agency, and warehousing services. The company was founded in 1991 and is headquartered in Hong Kong.

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SITC International (1308 HK)

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