1H22 results in line with our forecast
SITC announced 1H22 results: Revenue rose by 69% YoY to US$2.26bn. Net profit attributable to shareholders rose by 140% YoY to US$1.17bn, which is in line with our expectation. We believe the interim dividend payout ratio remains attractive at 70% (vs. 71% in 1H21), resulting in a dividend yield of 10%.
Container shipping volume rose 8% YoY in 1H22, implying 11% YoY growth in 2Q22 compared with 5% YoY in 1Q22, thanks to new-built vessel delivery. Average freight rates rose 57% YoY in 1H22, implying a 2% QoQ decline in 2Q22 compared with 42% YoY in 1H21. In 2Q22, the China containerized freight index (CCFI) index for routes to Japan went up 3%, but decreased by 3% and 17% for routes to South Korea and Southeast Asia. We believe SITC outperformed the market with comparatively stable freight rates due to its high-quality services and high proportion of long-term contracts signed. Costs increased 36% YoY in 1H22, lower than revenue growth, which we attribute to effective cost control. Gross profit accelerated 116% YoY and gross margin expanded by 12ppt to 53% in 1H22 (vs. 42% in 1H21).
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. In 1H22, there were seven new-built vessels delivered and 76% of the firm’s vessels were self-owned by the end of 1H22. We think new vessel deliveries along with a potential switch to smaller vessels with lower charter prices would help SITC keep costs at a controllable level and bode well for another year of strong earnings.
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 smaller than 3,000TEU fleet as of August 2022 compared with 35% for the larger than 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 keep our 2022 and 2023 revenue forecasts at US$4.34bn and US$3.75bn, and maintain our 2022 and 2023 attributable net profit forecasts of US$2.03bn and US$1.52bn. The stock is trading at 4.2x 2022 and 5.6x 2023 P/E. We maintain OUTPERFORM and our target price of HK$38.60 (7x 2022e P/E and 9x 2023e P/E), offering 56.9% upside from the current price. We assume the full-year dividend payout ratio to be 70%, implying a dividend yield of 17%. We think this leaves room for upside, especially in the case of a special dividend.
Risks
Capacity increase after port congestion relief or from new vessel delivery.