1H net loss > consensus full-year forecast
1H headline net loss was RMB7.2bn (vs. RMB1.9bn net profit for 1H15). Thishas already exceeded full-year net loss (RMB5.7bn) anticipated by the Street.Stripping out one-off items (mainly dry bulk disposal loss), core loss wasRMB4.8bn.
Following disappointing 1Q, 2Q core loss of RMB2.8bn again missed. Whiledry bulk no longer contributed loss since March (disposed), the newly acquiredcontainer assets (from CSCL) added another layer of loss. The overall containerloss in 2Q reached RMB2.2bn, even worse than in 1Q (RMB2bn). The weakerthan-expected container rates largely drove the negative surprise in 2Q. Apartfrom extremely soft Asia-Europe rates during the period, the contract ratessigned for Transpacific routes in May also disappointed (-40% YoY).
P/B at 1.5x now, but sets to exceed 2x by mid-2017; Sell
The 3Q peak season this year was not great. This along with much lowercontract rates for Transpacific routes suggests that the company is unlikely toturn around in 3Q. 4Q is the traditional slow season and loss would widenagain. Although our current net loss forecast (RMB9.2bn) already tops theStreet, we see further downside risk to our forecasts. We understand thatsome synergies might be created post merger, but given the rising deliveries ofmega vessels and soft prospect of global trade, we expect the company tocontinue to post loss over 2017-18.
Currently, the equity attributable to shareholders stands at RMB20bn, whichwe expect to slash by another 40-50% in coming 12 months due to continuedheavy loss. This in turn would push up P/B above 2x by mid-2017. As loss ishighly likely to continue in 2017-18 period, we see the chance that de-listing ofits A shares may re-surface down the road. The stock is our conviction sell ideain the shipping space. Target price of HK$1.10 is based on 0.6x P/B.