… Earnings are likely to fall substantially short of expectations
We are looking for RMB2bn plus net loss in 1Q. Consensus is forecasting aloss of RMB1.2bn for full year. Our full-year loss of RMB8.9bn translates intoROE of -44%, but the stock is trading at 1.8x P/B. Maersk is expected toproduce 6% ROE in 2016, but trading at 0.7x P/B. OOIL is at 0.5x P/B vs. ROEof 5%. The stock is our conviction Sell with target price of HK$1.10, based on0.6x forward P/B.
Strong China’s exports ≠ strong container rates
First of all, post restructuring, the company has become a container shippingline (plus some exposure in ports), hence recent pop-up in BDI is not relevantto it.
Secondly, yes, China’s exports in March positively surprised, but monthly datain 1Q historically has tended to be distorted, so sustainable recovery in China’sexports remains a question mark.
Thirdly, even let’s say China’s exports continue to recover going forward, itdoesn’t necessarily lead to the recovery in container rates ahead. We need tofactor in supply side.
The reality is that mega vessels deliveries are set to accelerate. Container rates,despite recovery in China’s exports in March, remained extremely depressedduring the whole month. Lines managed push up the rates in early April, butrates quickly retreated in last week. Latest Asia-Europe rates of US$291/TEUand Transpacific rates of US$849/FEU are both sustainably below the costs.
Valuation and risks.
We use P/B given the cyclical nature of shipping business. Our target price isbased on 0.6x P/B. We think this looks fair as we expect it to generate –44%ROE in 2016. Key macro risks: stronger-than-expected global trade; Companyspecific risk: stronger-than-expected merger synergies.