Preannounced 1H22 earnings to grow 140% YoY
SITC released a positive profit alert. It expects 1H22 earnings to reach approximately US$1.17bn, up around 140% YoY, beating our expectation and market consensus. Bloomberg consensus for 2022 full year is about US$1.76bn. The 1H22 preannounced profit accounts for around 66% of the full year consensus and 2H is traditional peak season.
　　The company attributes the strong performance to a significant increase in freight rates and improved operating efficiency and cost control. We think it may have beat on the earnings contribution from renewed contract rates.
　　Trends to watch
　　Earnings boom extends into 2022 with more certainty. 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 costs may face sharp rises in 2022, we think SITC’s scheduled delivery of new low-cost self-owned vessels in 2022-2025 may reduce the firm’s use of charter-in vessels or result in a switch to smaller less-expensive vessels for charter. This would keep costs at a controllable level and boding well for another year of strong earnings. Although freight rates for linehaul routes such as trans-pacific or Europe are gradually declining, freight rate for intra-Asia routes have actually rebounded since June.
　　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. We think carbon-emission related regulations such as EEXI and CII will come into force that year and push older vessels into slow steaming transport and eventually result in them being scrapped earlier than scheduled. With a lower orderbook-to-fleet ratio for small vessels (15% for the <3,000TEU fleet as of June 2022 compared with 36% for the 8,000TEU+ fleet), we expect the intra-Asia market (where smaller vessels are mainly deployed) to outperform due to comparatively balanced supply and demand conditions. However, it remains to be seen how long capacity loss due to limited vessel orders can support freight rates at the current high level.
　　Financials and valuation
　　We lift our 2022 and 2023 earnings forecasts by 24% and 16% to US$2.0bn and US$1.5bn to reflect strong ASP. The stock is trading at 4.2x 2022e and 5.6x 2023e P/E. Due to weak risk appetite, we maintain OUTPERFORM and our target price of HK$38.60 (7x 2022e P/E and 9x 2023e P/E), offering 55.6% upside from the current price. We suggest investors to watch for buy-on-dips opportunities.
　　Risks
　　Capacity increase after port congestion relief or from new vessel delivery.