Weak Global Trade Outlook More Than Priced In
Recent economic indicators point to a subdued 2H23 global trade outlook. However, we think the global trade weakness is more than priced in by the cheap valuation of our port and container shipping coverage. CSH’s preliminary results guidance significantly beat our expectations, implying that container shipping players’ earnings may stabilise at levels better than our previous projections. Maintain MARKET WEIGHT. Top picks: CSH (1919 HK/BUY/Target: HK$9.71) and CSP (1199 HK/BUY/Target: HK6.65).
WHAT’S NEW
• Update on several economic indicators for global trade outlook and sector statistics.
• Adjustment of earnings projections following COSCO SHIPPING Holdings’ (CSH) recent release of preliminary 1H23 results on 3 Jul 23.
ESSENTIALS
• Most leading economic indicators point to a subdued global trade outlook.
- China’s official manufacturing PMI stayed in the contractionary territory in Jun 23, at 49.0. Sub-indices for new export order and import dipped mom to 46.4 and 47.0 respectively, from 47.2 and 48.6 in May, indicating weakening foreign trade activities of manufacturing enterprises in China.
- Global manufacturing PMI, a composite index compiled by S&P Global and JP Morgan tracking 29 major manufacturing economies, declined to 48.8 in Jun 23 from 49.6 in May 23, indicating slowing global economic growth. The new export order sub-index dipped mom to 47.1 from 47.3 in May, indicating a further slowdown in global trade demand.
- Retail confidence in the EU has been on a weakening trend in recent months, with more retailers interviewed indicating that they have sufficient inventory stock and hence less urgent need to place new orders with their suppliers.
- Consumer sentiment in the US picked up mom in Jun 23 thanks to the recent resolution of the debt-ceiling impasse. However, the recently released Apr 23 data showed that US retail inventory-to-sales ratio of 1.29 is still on the high side compared with most of the months in the past three years. In addition, the US’ de-risking initiative to reduce supply chain exposure to China does not bode well for the trade outlook between the US and China.
• China port container throughput growth has bottomed out since Mar 23. Despite the subdued global trade outlook, we believe the worst time for Chinese ports is likely over. 1Q23 was likely the trough due to the disruption of manufacturing activities from the COVID19 outbreak post China’s reopening, coupled with weak seasonality. At the national level, Chinese ports’ container throughput growth has bottomed out since Mar 23, achieving midto-high single-digit yoy growth in Mar to May 23. The growth has been led by ports/terminals with more domestic and RCEP exposure, including ports in the Bohai Rim cluster (Qingdao, Tianjin, Dalian, etc). Ports that have relatively higher exposure to US and Europe trades saw more moderate container throughput growth (Shanghai, Ningbo, Guangzhou, Xiamen, etc), or even yoy decline (Shenzhen).
• Container shipping freight rates largely flatlined in recent months. After 14 consecutive months’ decline, Shanghai Containerised Freight Index (SCFI), a proxy for spot container freight rates, has more or less stabilised since Apr 23, hovering between 900-1,000. Although the China Containerised Freight Index (CCFI), a proxy reflecting both spot and contract rates, is still in a slightly downward trend, it is also likely to stabilise in the near term, as we enter the seasonally strong 3Q. In spite of signs of stabilisation, we reckon that a strong rebound of freight rates is unlikely, given the subdued global trade outlook and the likely overcapacity situation of the container shipping sector in the medium term.
• CSH’s 1H23 preliminary results guidance significantly beat our expectations.
CSH’s preliminary 1H23 net profit estimate of Rmb16.6b (-74.9% yoy) came in significantly above our expectations, having already achieved 92% of our full-year forecast.
While we are lacking clarity about CSH’s detailed 1H23 financials at this juncture, we think the strong beat may be attributable to: a) better-than-expected cost management, b) CSH still benefitting from some tail effects of long-term contracts whose rates were locked in at higher levels, and c) some translational forex gains with recent renminbi depreciation.
As container shipping freight rates have largely flatlined since Apr 23, 2Q23 net profit estimate of Rmb9.4b may have set a good reference base for the rest of 2023, in our view.
The strong preliminary results of CSH are also a positive read-through for its subsidiary company Orient Overseas (OOIL, 316 HK).
We have made tentative earnings adjustments for CSH and OOIL, raising our 2023-25 net profit projections by 78-90% for CSH and 127-138% for OOIL (see earnings table on the next page). Our earnings projections are subject to further refinement, pending more financial clarities to be disclosed in the two companies’ results releases in Aug 23.
ACTION
Maintain BUY on COSCO SHIPPING Ports (CSP/1199 HK/Target: HK$6.65). Our target price is pegged to 10.3x 2024F PE (the ports segment’s historical mean).
- CSP is our top pick in the Chinese ports segment.
- We like CSP for its: a) global market leadership (one of the global top five port/terminal operators by container throughput), b) well-diversified investment portfolio across Asia, the Middle East and Europe with good asset quality, and c) strong backing from its parent company CSH, which is China’s largest and a globally leading container shipping group with large cargo flow.
- Its current price implies PE of 7.2x/7.0x on our conservative 2023/24F earnings estimates and sustainable dividend yields of 5.5%/5.7% (based on a 40% payout ratio). 2023F P/B is standing at an undemanding 0.36x.
- Share price downside is limited by its cash-rich parent CSH’s proactive purchase of CSP shares in the open market. Since 2 Sep 22, CSH has bought 340m shares (about 9% of CSP’s issued capital) from the open market, with the latest purchase price of HK$5.90 on 10 May 23 representing a 30% upside to CSP’s current price.
• Maintain BUY on China Merchants Port (CMP/144 HK/Target: HK$13.04). Our target
price is pegged to 10.3x 2024F PE (port segment historical mean).
- CMP is more of an independent port/terminal operator (not part of a large container liner company) and its overseas portfolio is more geared towards developing markets (Sri Lanka, Brazil, Togo, to name a few). CMP also has sizeable indirect earnings exposure to non-port businesses/investments including: a) shipping, b) property development and c) banking via its 28.05% associate (single largest profit contributor to CMP), Shanghai International Shipping Group (SIPG, 600018 CN).
- CMP is on track to dispose its 45% stake in Ningbo Daxie terminal to Ningbo Port (601018
CN) at a consideration of Rmb1,845m, equivalent to 10.2x 2022 PE and 2.2x trailing P/B.
Based on our estimate, the disposal will lead to a one-time disposal gain of about HK$1.1b
to be recognised in 2023, while lowering our forward projection of CMP’s recurring
earnings by about 3%. - CMP currently trades at 7.1x/8.5x 2023/24F PE and provides decent dividend yields of
6.3%/5.3% (based on a 45% payout ratio). Its current price implies 0.43x 2023F P/B.
• Maintain BUY on COSCO SHIPPING Holdings (1919 HK/Target: HK$9.71). Our target price is based on 0.68x 2023F P/B (conservatively pegged to 2SD below the container shipping segment historical mean of 1.03x), adjusted for prospective dividend payments between now and end-23.
- CSH is our top pick for the container shipping segment.
- CSH currently trades at 0.57x 2023F P/B, 2.6SD below the segment’s historical mean P/B. Based on our raised earnings forecasts, current price implies 2023/24F PE of 3.6x/8.8x.
- With the better-than-expected earnings outlook, we optimistically project higher dividend of Rmb1.00 and Rmb0.41 for CSH in 2023 and 2024, respectively, based on a 50% payout ratio (topping CSH’s guided 30-50% range stated in its dividend policy). Our projected 2023F dividend of Rmb1.00 leads to an outsized dividend yield of 13.9% based on CSH’s current share price.
- We estimate that CSH has net cash of over Rmb100b on its balance sheet, which is more than sufficient to cover its outstanding capital commitment of Rmb43.3b. The large cash pile would allow CSH to navigate the container shipping segment downcycle with flexibility while keeping an eye out for M&A opportunities to strengthen its position in the logistic ecosystem.
• Maintain HOLD on OOIL (316 HK/Target: HK$115.6). Our target price is based on 0.76x 2023F P/B (pegged to 1.5SD below the container shipping segment historical mean of 1.03x), adjusted for prospective dividend payments between now and end-23.
- OOIL is a 71%-owned subsidiary of CSH. Compared with CSH’s vision to become a platform play with investments extending into the larger supply chain eco-system, OOIL is more of a pure-play container shipping operator.
- OOIL has over US$7b net cash on its balance sheet by our estimate, which is more than sufficient to cover the US$4.1b capital commitment for its large new container vessel orders (the orderbook capacity is equivalent to about 80% of OOIL’s existing operating capacity).
- OOIL has been generous in paying dividends, having paid out 70% of its 2022 net profit as dividend. We expect the 70% payout ratio to be sustained in 2023, leading to an outsized dividend yield of 15.5% by our estimate.
- Valuation-wise, OOIL is trading at 0.80x 2023F P/B, 1.3SD below the segment historical mean of 1.03x. While this P/B multiple by itself is not overly rich, it is still a 40% premium over its parent company CSH’s 0.57x 2023F P/B. We think the valuation of OOIL and CSH is likely to gradually converge and this may add some gravity to OOIL’s share price performance.
