440,000 TEU of mega vessel new orders confirmed
After being disciplined for the past two years （no new orders above 15k TEU），lines appear to be chasing mega vessels again. On September 19, CMA CGMsigned a contact with Chinese Shipbuilders （CSSC with its subsidiaries ShanghaiWaigaoqiao Shipbuilding Co. and Hudong-Zhonghua Shipbuilding Co.） for 9container vessels of 22,000 TEU each. The size of the vessel also tops allthe existing ones （the largest of 21,413 TEU）。 Interestingly, on the same day,Mediterranean Shipping Co. （MSC）， another major shipping line, also confirmedthat it has placed 11 same-sized ships at Daewoo Shipbuilding & MarineEngineering Co. These 20 ships with a total of 440,000 TEUs will be deliveredover 2019-20.
Chasing for mega vessels might heat up, leading to prolonged downcycle
While the absolute TEUs ordered by CMA CGM and MSC are not massive （15% oftotal current orderbook）， we are concerned that this might trigger another roundof ordering activity. The economies of scale of these mega boats are substantial,and along with recovery in earnings, we see a significant chance that otherlines might follow suit, ordering these 20k TEU plus vessels. Post this round ofnew orders, CMA CGM's controlled fleet will reach 2.8m TEUs, approaching thatof Cosco Shipping （3.1m TEUs including OOIL's, ranking No.3 globally）。 GivenCosco's ambitions, being No.3 globally is likely not the final goal. Small playersmight be forced to order mega vessels as well in order to survive. If this turns outto be the case, we expect the current downcycle to be prolonged.
Uncertainties on Cosco/OOIL deal remain
Cosco Shipping's acquisition of OOIL （announced in July 2017） is still pendinganti-trust and CFIUS approvals. Hence, uncertainties remain. Even if this dealis eventually approved, we believe the process may be time-consuming （givenCFIUS's cautious attitude on Chinese SOE's investment in the US）。 Whilemanagement guided for a 2-4% reduction in total combined costs of the twofirms, these benefits might take years to realize, and soft rates resulting fromchallenging S/D could easily outweigh. Our 2018E earnings for Cosco Shippingstay at RMB308m, 89% lower than the consensus forecast.
Now is a good time to Sell
4Q is the slow season for container shipping. In light of rising newbuild suppliesand downside risk to demand, seasonal weakness this year is likely to be moresevere than that of previous years. This in turn could heavily weigh on the stock,in our view. Some investors argued that post potential A-share placement, its P/B