What's new
　　We invited the management of SITC International (SITC) to an offline non- deal roadshow to discuss the reasons for the recent rise in freight rates in Southeast Asia, port congestion in Singapore, and supply and demand fundamentals in the intra-Asia container shipping market. Container shipping rates in Southeast Asia have been rising rapidly since the end of April, and the SCFI Southeast Asia (Singapore) freight rate was US$627/TEU as of June 7, up 14.6% WoW, 275.4% YoY, and 87.1% YTD.
　　With a strong presence in the Southeast Asian market, the firm continues to open up new route networks and maintain its competitive advantages in high-quality services and low costs. We expect the firm to benefit from rising freight rates and to realize higher earnings and dividends.
　　Comments Freight rates have been rising recently as many ships have been bypassing the Suez Canal due to security threats in the Red Sea, leading to port congestion in Singapore and tight shipping capacityin Southeast Asia. Increased orders from Europe and the US have boosted demand for cargo volume. The bypass of the Red Sea has resulted in a shortage of shipping capacity in markets outside Asia, and some shipping capacity in Southeast Asia has been diverted to the Middle East, the Mediterranean, or ocean routes to replenish shipping capacity, thereby indirectly reducing the supply within Southeast Asia.
　　Additionally, due to shipping delays caused by capacity shortages on European routes, some large ships have skipped ports and instead transit at the Port of Singapore, resulting in congestion at the port and consuming effective shipping capacity, leading to a shortage for some regional routes in Southeast Asia. Moreover, the earlier peak season for ocean routes and increased demand from Europe and the US have also boosted demand for cargo transport within Southeast Asia. Freight rates remain strong in the slack season, as it is still a traditional slack season in Asia. We expect freight rates to rise further with the upcoming peak season in 4Q24.
　　In the long term, we believe that new shipping capacity in the intra- Asia market is limited, and the proportion of old vessels is high. We expect demand to continue growing due to industry relocation within the region, and we anticipate supply and demand conditions toimprove year by year. According to Clarksons data, the capacity of small　vessels with less than 3,000TEU will grow by 4.3% this year, and 1.7% of new capacity is likely to be delivered in 2025. Older vessels, aged over 20 years, will account for 24% of the total capacity. We believe the growth rate of effective capacity may decelerate further as older vessels are dismantled and slow sailing increases due to environmental regulations.
　　On the demand side, we expect intra-Asia cargo volume to maintain growth thanks to industry relocations between China and Southeast Asian countries. Clarksons estimates that intra-Asia container shipping capacity will grow by 4.2% in 2024 and by 3.2% in 2025. According to iFinD, total imports and exports between China and ASEAN countries grew by 10.8% YoY from January to May 2024.
　　Financials and valuation
　　Given the rising freight rates in Southeast Asia, we raise our 2024 earnings forecast 33.4% to US$674mn and 2025 earnings forecast 13.3% to US$502mn. The stock is trading at 11.1x 2024e and 14.8x 2025e P/E.
　　We maintain an OUTPERFORM rating and raise our target price 51.9% to HK$24.3/sh, implying 12.5x 2024e and 16.7x 2025e P/E and offering 12.8% upside, given the market's increased risk appetite for the container shipping sector. The firm has a healthy balance sheet and ample cash flow, implying a dividend yield of 6.3% if it pays dividends at the promised minimum level of 70% in 2024.
　　Risks
　　Changes in geopolitical risks; slowdown in global economic growth.