Despite being the strong season, severe loss persisted in 3Q
Net loss came at RMB2bn (+20% YoY). 9M net loss of RMB9.2bn has alreadyexceeded the Street’s full-year forecast (RMB7.2bn) and approached our fullyearestimate (RMB9.3bn). As 4Q is the traditional slow season, loss is likely towiden further in 4Q.
Weaker-than-expected rates largely drove the earnings downside in 3Q, in ourview. Although spot rates in 3Q rebounded a bit, the contract rates singed inMay for Transpacific routes plunged 40-50% YoY. Since nearly half of ChinaCosco’s Transpacific cargoes is under annual contracts, the profitability for thisroute probably deteriorated a lot in 3Q.
Quickly on key financials: due to rising operating scale on restructuring,volume rose 60% YoY, which drove 19% YoY growth in top line. However, thetotal cost was up 20% YoY and along with falling contribution from associatesand JVs (-8% YoY), net loss in 3Q rose YoY.
Container shipping downcycle is likely to be prolonged; SellThe global container trade is unlikely to be strong in light of several structuralheadwinds (incl. contraction in global value chain, change in cargo mix, andstagnant containerization ratio). Mega vessel deliveries are set to accelerate,which would drive 10% supply growth for Asia-Europe and Transpacific routesover 2017-18. The S/D for this sector is likely to get even worse in coming twoyears.
Given the severe loss, we estimate that its book value would shrink another40-50% from now till the end of 2017, lifting its 2017E P/B to 2.6x. As loss ishighly likely to carry on, we do not rule out the chance that delisting issuemight resurface ahead. The stock is our conviction sell in the shipping space.Target price of HK$1.10 based on 0.6x P/B.