2016 net loss c. RMB10bn
Its shareholders’ equity was RMB25bn at the end of 2015, which will shrink toRMB15bn by the end of 2016. ROE in 2016 will be negative 50.2%. Yet, thestock held up well, still trading at 1.8x 2016A P/B (3.0x 2017E). We arestruggling to understand why this has been the case. While merger can bringin some synergies, the soft demand and rates driven by downcycle can easilyoutweigh. We maintain our Sell rating on the stock, with target price of HK$1,based on 0.6x P/B. In light of continued downturn of container shipping, we donot rule out the chance that de-listing issue will re-surface down the road. Sell.
Quickly on 2016 earningsNet loss in 2016 is estimated to reach RMB9.9bn (vs. RMB0.3bn net profit in2015). 9M net loss of RMB9.2bn, which means loss carried on in 4Q althoughnarrowing a bit. The number was worse than the Street’s forecast (RMB9bn)but better than DBe (RMB11.2bn). Although spot rates for both Asia-Europeand Transpacific routes rallied in 4Q, the lower contract rates signed (down 40-50% YoY) in May for Transpacific continued to weigh on earnings.
Buying OOIL.Possible, but now seems not a good timing, in our view
For line shipping, scale does bring benefit. So, from this perspective, we thinkacquiring OOIL remain possible. If this proceeds, Cosco’s global market sharewould move up to 10.5% (vs. 7.7% currently), taking up No. 3 spot (vs. thefourth largest line now). However, we think now might not be a good timing.The sector is still at downturn, which may last another 1-2 years and the stockis trading at only 0.7x P/B. We think it makes a lot of sense that Tung familywould just wait till cycle picks up, which would sell at a better price.
Prolonged container downcycle; Sell
On demand side, the potential trade wars between US and China could bringin downside risk. In terms of supply, the mega (>12k TEU) deliveries areaccelerating and over 800k TEU is scheduled to hit the water in 2017 and 2018(vs. 436k TEU in 2016). The S/D especially for long-haul routes is likely todeteriorate further. In addition, industry competition might become evenfiercer post Hanjin’s bankruptcy.
Our target price of HKD1.0 is based on 0.6x P/B. We think this is fair as loss ishighly likely to continue in 2017-2018. Key macro risk is stronger-thanexpectedglobal trade. Company specific risk is stronger-than-expected mergersynergies.