Investment positives
Sinotrans Shipping (SSL) is one of China’s shipping SOEs, mainlyoperating dry bulk shipping and Intra-Asia container business.
Dry bulk shipping has huge upside space. We expect themarket to mildly recover in 2016 and enter an upcycle in 2017.SSL has strong profitability thanks to its low breakevenpoint at BDI 1,000, because ships were purchased at lowsand it has no financial cost. We believe dry bulk shipping will onlymake limited losses in 2015/16. In 2017, the business isexpected to turn profitable with large upside potential.We conservatively expect BDI to reach 1,500 in 2017. Each1,000pt increase in BDI will enhance earnings by US$40mn. IfSSL purchases dry bulk assets from China Merchants Group(CMG), it could enhance earnings by US$45mn.
Would benefit from integration of CMG and Sinotrans &CSC. SSL’s five LNG could generate US$9mn in stable profitseach year from 2018. If SSL takes shares of CMG’s six LNG and14 VLOC, it will add US$34mn in stable profits each year to forma US$43mn base in 2019. SSL may become the only dry bulkplatform of the two groups, and integrate CMG’s bulk assets,helping open upside room in the coming upcycle.
Container business is likely to grow stably.
Financials
We expect the company to record losses of US$53mn in 2015and US$26mn in 2016, bearable thanks to its sufficient net cashof US$642mn. In 2017, we expect profit of US$43mn. If BDIreaches 2,500 and SSL takes shares of large VLOC and acquiresCMG’s dry bulk assets, 2017 net profits could reach US$142mn.
Valuation and recommendation
Initiate with BUY, TP HK$2.17, or 0.5x 2016e P/B and31% upside room. Total replacement cost is HK$2.17/share(fleet value HK$1.51/sh, net cash HK$1.25/sh). Even consideringthe 2015 and 2016 losses, SSL is only trading at 0.4x 2016e P/B,much cheaper than its peers. Risk: freight rates.