2022 results in line with our expectations
　　SITC International （SITC） announced 2022 results: Revenue rose 36.5% YoY to US$4.11bn, and net profit attributable to shareholders was US$1.94bn, implying an diluted EPS of US$0.72 （up 67.2% YoY）。 The firm’s 2022 results are in line with our expectations. Container shipping volume at SITC rose 18% QoQ in 4Q22.
　　Its 4Q22 revenue per container fell 24% QoQ due to declining freight rates. However, SITC freight rates outperformed its peers, which we attribute to the firm's stable freight rates on Japan and South Korea routes and high portion of long-term contracts. The firm’s full-year dividend payout ratio was 70% in 2022, and dividend per share was US$0.51, with a dividend yield of 21.7%, attractive, in our view.
　　Trends to watch
　　Sector-wide supply exceeding demand growth; overall freight rates in container shipping industry to be under pressure in 2023. The Shanghai Containerized Freight Index （SCFI） composite index has increased 15.8% YoY vs the 2019 level, largely recovering to the pre-COVID-19 level. Clarksons estimates that 2023 and 2024 demand in the container shipping industry will decline 2.2% and rise 3.3% YoY, while supply rises 6.6% and 5.7% YoY. We believe that freight rates in the container shipping industry will be under pressure in 2023 due to weak demand and a surplus in shipping capacity.
　　Limited new shipping capacity on Asian routes, accelerated dismantling of small vessels to support freight rates. On March 3, the SCFI Freight Index for Southeast Asia, Japan, and South Korea rose 19.6%, 45.1%, and 32.0% from the 2019 level. We think that this suggests strong freight rates for Asian routes, and we believe that shipping capacity on Asian routes is healthy. As of February, the order-book-to-fleet ratio of small vessels was lower than that of large vessels （13% for vessels less than 3,000 TEU vs. 38% for vessels exceeding 8,000 TEU）。 Small vessels have accelerated dismantling recently. About 32,400 TEU of small vessels below 3,000 TEU have been dismantled since 2H22, vs. 520 TEU in 1H22 and 2,090 TEU in 2H21.
　　On the demand side, the IMF estimates that in 2023 economic growth in Southeast Asia and China will outperform growth in Europe and the US.
　　We think this may support shipping volume. Thus, we expect the intra-Asia market （mainly involving small vessels） to outperform other markets given a better-balanced supply and demand. However, it remains to be seen whether the reduced effective shipping capacity due to limited new ship orders can stabilize freight rates.
　　Investment value awaiting confirmation from demand side; dividend yield attractive for long-term investment. SITC has gradually optimized its fleet structure, delivering 20 new vessels in 2022, and expecting to deliver 20 vessels in 2023. We believe that the firm’s replacement of leased and old vessels with self-owned new vessels is conducive to cost control and long-term growth, but we think that demand recovery remains to be seen. The cash and dividend payout ratio remain high. SITC had US$982mn cash on hand at end-2022. If the firm maintains a 70% dividend payout ratio in 2023, its dividend per share would be US$0.27, implying a dividend yield of 11.2%. We see high long-term investment value in the firm.
　　Financials and valuation
　　Due to the decline in industry freight rate, we cut our earnings forecast for 2023 by 17.2% to US$1.02bn, and for 2024 by 16.4% to US$751mn. The stock is trading at 6.3x 2023e and 8.5x 2024e P/E. Given the cost improvement under the optimized fleet structure and higher dividend level, we maintain OUTPERFORM and our target price of HK$21.60 （implying 7.4x 2023e P/E and 10.0x 2024e P/E） offering 17.6% upside.
　　Risks
　　Weaker-than-expected shipping and trading demand in intra-Asia market; large backlog of new vessel orders.