Net profit up 32% YoY, helped by cost efficiency. OOIL reported 1H15net profit of US$239mn, compared with US$181mn in 1H14. Averagefreight rate weakened 4.3% YoY and trade volume shrank 2.1% YoY,which caused revenue to decline 6% YoY to US$986mn in 1H15.Although trade demand was weaker than expected, OOIL delivered agross margin expansion by 4.4ppts YoY to 14.2% in 1H15. It wasbecause 1) bunker cost dropped 38% YoY significantly; 2) cargo cost thataccounted for 55% of overall operation cost also declined 4%, despite17% YoY increase in capacity. OOIL’s new shipbuildings has broughtinherent cost economies and the company also made continued efforts toimprove operating efficiency. OOIL reported an operating margin of 8.9%in 1H15 vs. 6.5% in 1H14.
2H15 outlook. We expect cost efficiency to be sustained in 2H15 withthe delivery of four 8,888 TEU vessels this year. Although supply /demand situation is expected to be more balanced in 2016, overcapacitywill be serious in 2H15. The overhang of freight rates is unlikely to beeased in 2H15. We project OOIL’s blended freight rate to decline 5.4%YoY in 2015E, mainly dragged down by a 12% freight rate decline in AEroutes. As we believe bunker price will remain stable in 2H15, we assumebunker cost of US$320mn in 2H15E, and total bunker cost of US$646mnin 2015E.
Maintain BUY rating. We upward revised 2015E/2016E gross marginforecasts to 13.4%/13.9%. Our operating costs forecasts are alsolowered by 10% for both 2015E/2016E. As a result, we revised down2015E/2016E net profits by 11.6%/13.4%, respectively. We continue tovalue the counter at 0.9x FY15E P/B, and maintain our BUYrecommendation on the stock and lower target price to HK$55.50/share.