1H23 results slightly missed our expectations
　　SITC announced its 1H23 results: Revenue fell 44.5% YoY to US$1.25bn. Net profit attributable to shareholders was US$310mn, implying EPS of US$0.12 （down 73.4% YoY）， slightly missing our expectations due to falling freight rates.
　　Cost decline milder than revenue decline; GM fell. In 1H23, GM fell 26.8ppt YoY to 26.5%, which we attribute to fixed costs （e.g., the equipment and cargo transportation costs, and vessel depreciation costs do not change with freight rates）。
　　Freight volume increased QoQ in 2Q23, while freight rates declined due to market headwinds. In 2Q23, the container shipping volume changed -2.8% YoY and +24% QoQ. According to Bloomberg data, container shipping volume of intra-Asia routes changed -5.9% YoY and +19.2% QoQ in 2Q23. The company’s cargo shipping volume was better than intra-Asia cargo volume, which we attribute to its efficient operations and quality services. The company’s freight rate per container fell 45.7% YoY and 14% QoQ due to market headwinds. In 2Q23, average freight rates of SCFI routes to Southeast Asia, Japan, and South Korea fell 82.9%, 4.0%, and 54.4% YoY, with QoQ changes of +3.4%, 0.0%, and -28.1%.
　　Trends to watch
　　Limited new shipping capacity within Asia and accelerated dismantling of small vessels may support freight rates. Data from Clarksons shows that as of August 16, orders on hand for smaller vessels below 3,000 TEU accounted for 11% of shipping capacity （vs. 28.3% for the overall container fleet）， and dismantling of smaller vessels has accelerated since 2023, with 45,400 TEU of smaller vessels being dismantled YTD （10,300 TEU in 2022）。 In addition, considering the limited capacity of shipyards and the impact of new environmental regulations on effective shipping capacity, we believe the growth of smaller ships’ shipping capacity may be further limited.
　　Costs to further decline; freight rates to rise in 4Q peak season; profitability to improve. In 1H23, the company delivered 10 new vessels and replaced four old ones, with the average age of vessels down 0.9 years and the proportion of self-owned vessels in total capacity rising　　11.2%, which is conducive to cost reduction. According to IMF, GDP of China and the five ASEAN countries will grow 5.2% and 4.6% YoY in 2023, and China’s exports to Japan and South Korea as well as imports and exports to ASEAN will change 3.5%, -5.0% and 6.1% YoY in 1H23. If intra-Asia freight volume recovers rapidly in the 4Q peak season, we expect freight rates to rise on the back of limited new shipping capacity, thus boosting earnings.
　　Financials and valuation
　　Due to falling freight rates YTD, we lower our 2023 and 2024 earnings forecasts by 18.0% and 12.2% to US$833mn and US$659mn. The stock is trading at 6.2x 2023e and 7.8x 2024e P/E. We maintain OUTPERFORM rating and cut our target price 12% to HK$19, implying 11.2x 2023e and 14.2x 2024e P/E, offering 28% upside. The company announced an interim dividend of HK$60 cents, implying a dividend payout ratio of 66%. Assuming a dividend payout ratio of 70% for 2023, the dividend yield for 2023 may reach 11.4%, which is quite attractive.
　　Risks
　　Weaker-than-expected transport and trade demand in intra-Asia market; large backlog of new vessel orders.