What surprised us
On March 10, Sinotrans Shipping reported 2013 net profit of US$4.3mn, below GS/Bloomberg consensus forecasts of US$13mn/US$26mn, mainly due to lower-than-expected realized timecharter (TCE) rates in 2H13 and a decline in interest income. Dry bulk: Despite a strong pick-up in dry bulk spot rates in 2H13 with BDI averaging 1,588 (vs. 842 in 1H13), Sinotrans’ realized TCE rates picked up only 11% hoh in 2H13 because there is a time lag between the pick-up in timecharter and spot rates. Interest income: Due to a decline in deposit interest rates, and as the company started utilizing its cash for vessel acquisitions, interest income fell 17% yoy to US$23mn in 2013. Nevertheless, total operating cash flow rose by 21% yoy to US$71.4mn, suggesting continued cash generation. Takeaways from analyst briefing: (1) over 50% contract coverage to lead to stronger earnings in 2014: >50% of Sinotrans’ dry bulk fleet operating days have already been covered for 2014 at profitable rates of >US$11,000/day, implying a >25% increase in rates vs. 2013; (2) eyes on further expansion: Management intends to acquire more vessels, including Handy dry bulk vessels, and sees potential asset injections from parent Sinotrans Group; (3) reiterated dividend payout policy: While the company did not declare a dividend for 2013 due to very low profits, management reiterated plans to maintain a 30% dividend payout ratio when earnings resume.
What to do with the stock
Maintain Buy given its strong earnings visibility into 2014, robust cash position (net cash of HK$1.7 per share), and ongoing potential for more acquisitions. Our 2014-15E EPS are broadly unchanged, and 2016E EPS moves to US$0.026 (from US$0.03) after factoring in recent realized TCE trend. We maintain our 12-m Director’s Cut-based TP of HK$2.80. Key risks: Prolonged bulker downturn, counterparty risks, cost pressure.