Final loss inline with previous guidance
2016 headline net loss came in at RMB9.9bn, exactly matching previouslyguided RMB9.9bn (vs. RMB0.5bn net profit in 2015 post restating). Excludingone-off items: mainly 1) disposals loss of RMB2.4bn for dry bulk segment andFCHL; 2) scrapping loss of RMB1.1bn; 3) government subsidies of RMB0.5bn,the core net loss was RMB7.1bn (-54% YoY). On QoQ basis, thanks to therebounds in container rates resulting from Hanjin's bankruptcy, 4Q core netloss narrowed to RMB0.3bn (vs. net loss of RMB2bn in 3Q).
Due to its rising operating scale, total volume rose 54% YoY while its Rev/TEUdeclined 13% YoY on rising operating expense (+37% YoY). The contributionfrom associates and JVs also fell 13% YoY.
Container downcycle not over yet; reiterate Sell
On the demand side, container trade might face headwinds given rising antiglobalizationlately. Our recent checks with SME exporters revealed that theirsentiment on export outlook has receded. The sharp rise in raw materialsforced exporters to reject some orders, which would weigh on shippingdemand. On the supply side, liners have activated their suspended vesselsduring the CNY holidays and mega vessel deliveries will reach 112k/134k TEUin Mar/Apr (vs. a total 38k TEU in Jan-Feb). Along with returning shipspreviously controlled by Hanjin, the S/D especially for long-haul routes is likelyto deteriorate further.
Indeed, rates have kept on falling ytd, with SCFI pulling back as much as 23%from its latest peak in mid-January. With new ship alliances adding morecapacity starting April 1 (Asia-Europe +10%, Transpacific +5%), we see moredownside potential for rates from here.
While the company might be able to book a small profit in Jan-Feb (thanks torobust volume and rates in Dec 16 and Jan 17), the loss in March can easilyoutpace any profit, leading to an overall loss for 1Q17.
Trading at 4.6x forward P/B, the stock looks too expensive, as we expect it willcontinue to post loss ahead. Our target price of HK$1.0 is based on 0.6x P/B.We think this is fair as we believe Cosco Shipping is highly likely to head intoanother year of loss. We reiterate our Sell rating. Key macro risk: strongerthan-expected global trade. Key company-specific risk is stronger-thanexpectedmerger synergies.