What's new
　　SITC announced 1Q22 operating data: Container shipping volume growth slowed to 4.8% YoY in 1Q22, compared with 29% YoY in 1Q21 and 17.8% YoY in 4Q21, partly due to high base effect. Average freight rate per TEU (excluding slot exchange fee income) increased 62% YoY in 1Q22; including slot exchange fee income, ASP rose 58% YoY and 30% QoQ, which we think is mainly attributable to strong spot freight rate in the intra-Asia market and renewal of SITC’s contract freight rate. The China containerized freight index (CCFI) index for Japan, Korea and Southeast Asia routes went up 34%, 47%, and 45% YoY in 1Q22, thus resulting in SITC actually outperforming the broader market freight indexes. As a result, total revenue reached US$1,034mn, up 65% YoY and 6% QoQ.
　　Comments
　　Earnings boom extends into 2022 with more clarity. Because of current port congestion resulting from ongoing supply chain inefficiencies, we expect the spot freight rate to remain elevated in 2022, and the renewed contract rate to move upward accordingly. Although vessel charter cost may face sharp rises in 2022, we think SITC’s scheduled delivery of a total of 21 new vessels in 2022-2024 may reduce charter-in vessels or switch to smaller less-expensive vessels for charter, thus keeping costs at a controllable level and boding well for another year of earnings growth. In the short term, we suggest watch potential rebound in freight rate after COVID19 is better contained in the Chinese mainland.
　　Market uncertain about demand trend and vessel delivery in 2023-2024. Even taking more potential scrapping into account, Alphaliner forecasts 8% global net fleet growth in 2023. Carbon-emission related regulation rules such as EEXI and CII will come into force that year and push older vessels to slow steaming and eventually to be scrapped earlier. With a lower orderbook-to-fleet ratio for small vessels (15% for 3,000TEU) compared with 35% for 8,000TEU+ fleet, we expect supply-demand in SITC’s segment to outperform, providing balanced demand and supply conditions; however, it remains to be seen whether additional capacity loss due to this effect can support current freight rates.
　　Financials and valuation
　　We lift our 2022 and 2023 earnings forecasts by 12% and 9% to US$1.6bn and US$1.3bn to reflect strong ASP. The stock is trading at 5.5x 2022e and 6.9x 2023e P/E. Due to weak risk appetite, we maintain OUTPERFORM and our TP of HK$38.60 (8x 2022e P/E and 10x 2023e P/E), offering 47% upside from the current price.
　　Risks
　　Capacity addition after port congestion relief or from new vessel delivery.