2023 results miss our expectations
SITC announced its 2023 results: Revenue fell 40.9% YoY to US$2.43bn. Attributable net profit was US$531mn, implying EPS of US$0.20, down 72.7% YoY, missing our expectations due to falling freight rates. In 2023, the firm's container shipping volume fell 1.1% YoY, and its per-container shipping revenue declined 41.0% YoY due to falling freight rates.
Container shipping volume increased QoQ in 4Q23; freight rates in Southeast Asia rose QoQ. As 4Q is the traditional peak season for the intra-Asia container shipping market, the firm's container shipping volume rose 4.0% YoY and 24.7% QoQ in 4Q23, and its revenue per container fell 28.2% YoY and grew 1.2% QoQ. In 4Q23, average freight rates of SCFI routes to Southeast Asia, Japan and South Korea fell 31.3%, 1.2% and 44.7% YoY, with QoQ changes of +26.1%, -3.3% and -3.2%.
GM fell due to falling freight rates; costs continue to optimize. The firm's GM fell 22.4ppt YoY to 25.7% in 2023, and dropped 1.8ppt HoH to 24.7% in 2H23. We attribute the declines to the firm’s certain fixed costs, such as its equipment and cargo transportation as well as ship depreciation costs, which do not change with freight rates. However, the firm's cost of sales fell 15% YoY in 2023 and 4% HoH in 2H23, which we attribute to lower vessel leasing costs and fuel costs.
Trends to watch
Supply and demand conditions to improve within Asia in 2024; freight rates to rise HoH from 2H23. On the supply side, we see limited new shipping capacity. Data from Clarksons shows that in March, orders on hand for smaller vessels below 3,000 TEU accounted for 8.5% of shipping capacity (vs. 24% for vessels aged over 20). Moreover, the dismantling of smaller vessels has accelerated since 2023, with 110,435 TEU of smaller vessels being dismantled in 2023 (10,325TEU YTD in 2024). 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.
On the demand side, we expect container shipping volume to improve YoY amid industrial shift within Asia and growth in Southeast Asian countries such as Vietnam. Clarksons estimates that the shipping capacity of 3,000TEU small vessels may grow 2.1% YoY in 2024, while intra-Asia cargo demand is likely to grow 3.7% YoY.
Financials and valuation
Due to lower-than-expected freight rates, we cut our 2024 net profit forecast 23% to US$505mn. We introduce our 2025 net profit forecast of US$443mn. The stock is trading at 8.4x 2024e and 9.6x 2025e P/E. We maintain OUTPERFORM and cut our target price by 15.8% to HK$16, implying 11x 2024e and 12.5x 2025e P/E, offering 30% upside. The firm announced a final dividend of US$0.14, implying a dividend payout ratio of 70% for 2023. Assuming that the firm maintains a dividend payout ratio of 70%, the dividend yield for 2024 may reach 8.3%, which we believe is quite attractive.
Risks
Weaker-than-expected transport and trade demand in intra-Asia market; large backlog of new vessel orders.