…1Q net loss RMB4.4bn, 2x of consensus full-year forecast
We did expect net loss to exceed RMB2bn in 1Q, but the number apparentlywas even worse. Container and dry bulk rates hit the all-time low during theperiod, which we believe was the major driver behind this disappointing 1Q.Specially, the 1Q loss can be divided three portions:
1) Dry bulk loss – although it has been disposed, the company still needs tosustain loss before the asset transfer. The Jan-Feb loss amounted RMB0.8bn.
2) Container loss – more than its existing containers, its newly acquiredcontainer from CSCL has also started contributing loss in March. The twoportions added up together reached RMB1.4bn.
3) Disposal loss – mainly resulted from the disposal loss of its Cosco Bulk andFlorens. RMB1.1bn gain incurred as transaction price came higher thandisposed net assets. However, RMB3.6bn translation difference (previouslyincluded in the comprehensive income of these two subsidiaries) wastransferred to PL of China Cosco, per relevant accounting standards. So thenet loss from the disposal was RMB2.4bn.
How do we come up RMB8.9bn net loss for 2016?
Yes, we have built in a bearish scenario for container rates going forward. Wehave good reasons. Not just weak demand, the mega vessel deliveries areaccelerating, which would prevent rates rebounding substantially ahead.Here is the strong evidence - despite being late April, container rates still failedto pick up. Asia-Europe rates remained below US$300/TEU while Transpacificrates also dropped to merely US$700/FEU, both of which are substantiallybelow the cash costs. Given the extremely depressed Transpacific spot rates,we expect the annual contracts to be renewed in coming May.
CCEO alliance – the lifeboat?
True, some synergy might be created via CCEO mega alliance, but on-goingtop-line weakness might outweigh, in our view. In addition, industry pricingcompetition might intensify as result of the forming of CCEO. The capacity ofCCEO is more or less similar to 2M, hence the two mega alliances are likely tocompete aggressively, in order to preserve market share. Moreover, as CKYHE,G6 and Ocean 3 all set to break up, those smaller players left outside 2M andCCEO alliances would become even less competitive vs. 2M and CCEO. Pricingprobably is the last resort for them to survive the competition.
2016E ROE of -44%, but stock is till trading at 1.7x P/B
Maersk is expected to produce 6% ROE, but trading at 0.8x P/B while OOIL istrading at 0.5x P/B vs. ROE of 5%. We maintained our Sell rating with targetprice of HK$1.10, based on 0.6x P/B. Key risk: stronger-than-expected rates.