OOIL’s 2015 recurring profit was USD221m, down 5% y-o-y. 2015 results were11% below our forecast (15% below consensus) on higher than expected operatingexpenses which more than offset the higher revenues from other container transportand logistics services. This implies a marginal loss of USD2m in 2H15 vs. profit ofUSD223m in 1H15 due to lower freight rates (down 10% h-o-h). OOIL’s operatingmargins declined 6ppt h-o-h. This was not surprising to us given a weak 2H15,particularly 4Q15 when even the industry bell weather Maersk Line (MAERSKB DC,BR, CMP: DKK9,540, NR) incurred a loss, its first since 1Q12; Maersk Line’s operatingmargin eroded 9ppt h-o-h in 2H15.
Management cautioned that freight rates could decline further in 2016e onexpectations of low growth in Europe, slowdown in China and continued supply of newvessels, though lower compared to 2015. In 1Q16 to date, the China containerisedfreight index (CCFI) is down 2% vs. average of 2H15. We argue that demand outlookfor peak season this year too remains weak given headwinds from a potentialunwinding of high inventory build-up in the US and a continued contraction in the CaixinChina Manufacturing PMI (below 50 for 12 consecutive months) and export orders.
On alliance structures, OOIL said that it is satisfied with the competitive positioning ofits current G6 alliance. However with recent M&A in the industry, potential new alliancestructures could face regulatory hurdles. In our recent report, Alliance reshuffle? Weidentify the winners and losers (18 February 2016), we had argued that any potentialcooperation of OOIL with relatively bigger players holding stronger balance sheets vs.its current alliance partners (some facing financial difficulties) would be slightly positive.
Earnings cut: In 2015, OOIL’s earnings deteriorated sharply during 2H after a solid1H. However this year, OOIL will likely face a challenging environment all through theyear. We therefore lower our 2016e and 2017e earnings by 46% and 27% to reflect asharper deterioration in freight rates. We are 56% below consensus on 2016e profit.
Reiterate Buy with lower TP of HKD40 (from HKD41): In the y-t-d, OOIL’s shareprice declined by 20% vs. an 8% decline in the Hang Seng index. However the stockhas also recovered 12% from its recent low in February 2016 (vs. 10% for the localindex). The stock remains attractively valued, trading at 0.47x 12-month forward PBclose to the five year low. We value OOIL based on an unchanged 2016e PB of 0.66xand lower our TP to HKD40 (from HKD41) on lower BVPS estimate, which is in turnpartly driven by our lower earnings forecasts. We reiterate our Buy rating.