3Q22 revenue slightly missed our forecast
SITC announced 3Q22 operating data: Container shipping revenue rose 41% YoY (vs. 74% YoY in 2Q22) but fell 20% QoQ to US$980mn, slightly below our expectation due to lower volume growth, in our view. Container shipping volume was flat YoY and decreased 14% QoQ in 3Q22, mainly due to weaker demand. Average freight rates rose 41% YoY and decreased only 6% QoQ in 3Q22, which outperformed the Shanghai Export Containerized Freight Index (SCFI) due to SITC’s exposure to stable Japan and South Korea routes, and existing freight contracts.
Trends to watch
Freight rates dropped in the Intra-Asia market in 3Q22 due to changes in the competitive landscape and macro uncertainties. In 3Q22, the SCFI decreased by 8%, 9% and 29% QoQ for Japan, South Korea and Southeast Asia routes. We believe factors underlying the price drop in Southeast Asia were twofold: new players entered the market, and shipping demand declined due to inflation and destocking. In the past weeks, freight rates have been gradually stabilized from the previous deep drop after capacity control.
Supply-side constraints may contribute to supporting freight rates in the Intra-Asia market. Even factoring in more potential scrapping, Alphaliner forecasts 8% global net fleet growth in 2023. We think carbon-emission related regulations such as EEXI and CII will come into force next year and push older vessels into slow steaming transport, resulting in their earlier-than scheduled scrapping. With a lower orderbook-to-fleet ratio for small vessels (15% for the fleet smaller than 3,000TEU as of October 2022 vs. 34% for the fleet greater than 8,000TEU), 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 current high levels.
We believe SITC will continue to outperform the market; earnings boom may extend to 2022. In 3Q22, SITC outperformed the market with comparatively stable freight rates, which we mainly attribute to its high-quality services and high proportion of long-term contracts signed. We think SITC’s competitiveness will be further strengthened by new low-cost self-owned vessels delivered in 2022-2025. At end 1H22, there were seven new-built vessels delivered and 76% of the firm’s vessels were self-owned. We think new vessel deliveries along with a potential switch to smaller vessels with lower charter prices would help SITC control costs, which bodes well for another year of strong earnings.
Financials and valuation
Due to fluctuations in shipping volume, we lower our 2022 and 2023 revenue forecasts by 5% to US$4.12bn and by 10% to US$3.37bn, and our attributable net profit forecasts by 9% to US$1.86bn and by 19% to US$1.23bn. The stock is trading at 2.7x 2022 and 4.1x 2023 P/E. We maintain an OUTPERFORM rating. Considering weak market sentiment in the H-shares market, we lower our target price of by 44% to HK$21.60 (4.0x 2022e P/E and 6.1x 2023e P/E), offering 49% upside from the current price. We assume a full-year dividend payout ratio of 70% for 2022, implying a dividend yield of 26%. We think this leaves room for upside, especially in the case of a special dividend.
Risks
Lower-than-expected Intra-Asian shipping and trading demand; industry competition disappoints; accumulation of orders for new ships.