News
On Oct 22, Sinotrans Shipping announced the acquisition of four postPanamax dry bulk vessels from third-parties at US$17.3mn a piece.
Analysis
(1) We see the acquisition as an indication that management believes vessel prices have bottomed: As the company had not ordered or acquired any dry bulk vessels since 2010 in anticipation of falling vessel values at the time, we see the commencement of fleet acquisition as an indication that management believes vessel prices have bottomed. At its Aug 2013 interim briefing, management said they see now as a good time to optimize its fleet structure.
(2) Prices for the four vessels are below current 5-year secondhand price: The four 93k dwt vessels, which were built over 2009-2011 by Jiangsu Jinling Shipyard, had a price tag of >US$40mn a piece during that period. The current average 5-year secondhand Panamax vessel price is c.US$25mn vs. the price tag of US$17.3mn per vessel in this acquisition.
(3) Accretive earnings could be contributed from these vessels: We estimate accounting breakeven for these vessels to be c.US$9,500/day based on our calculation vs. current spot rates of US$16,299/day and 1-year TC rate of US$13,000/day. Upon physical delivery of these vessels, which the company expects by end of year, our analysis based on current 1-year TC rate implies a 7% annual return for this investment vs. our 2014E group ROE of 3% and cash interest rate of 3% for Sinotrans.
(4) We expect more orders to come: Given Sinotrans has US$1bn in net cash (as of 2013E), we expect more vessel orders to follow this US$69mn acquisition. At its 1H13 results briefing, management expressed interest in ordering new Karmsarmex, Panamax or Handymax vessels, and potentially acquiring its group’s dry bulk operating arm, sister company Sinochart.
Implications
Maintain Buy. Our earnings estimates and TP remain unchanged.