Core earnings re-dipped into red in 4Q
In CSH-H's earnings preview release, 4Q17 earnings were just breakeven （vs.RMB870m in 3Q）， but excluding one-off items （i.e. RMB200m subsidy andRMB80-90m scrapping loss）， core earnings turned to negative of RMB110m in4Q17. Falling container rates and a rising bunker price, in our view, largely drovethe negative earnings in 4Q. The composite SCFI in 4Q17 declined 9% both QoQand YoY. In addition, the bunker price in 4Q increased 14% QoQ.
Full-year earnings guidance came in at RMB2.7bn, which was below theconsensus forecast of RMB2.9bn. Excluding one-off items: 1） the disposal gainsof RMB2.1bn for Qiandao Qianwan container terminal; 2） government subsidiesof RMB1.17bn; and 3） scrapping loss of RMB91m, core net profit after tax wasabout RMB1bn, which also seems below market expectation.
Cloudy outlook; Reiterating Sell
We continue to be cautious on the container outlook. While the rising megavessel deliveries （about 1m in 2018 vs. 717k TEUs in 2017） is well known, weare concerned that ordering for mega vessels might heat up again post MSCand CMA CGM's new orders. On the demand side, China's imports and exportsin 4Q17 tapered off to 8.6% vs. 12% in 3Q17 and the risk of potential tradeconflicts between the US and China/Asia countries appears to be rising as well.While SCFI rebounded 4.2% YTD on pre-CNY peak season demand, we expectrates to quickly retreat in the coming weeks once pre-CNY shipments complete.Moreover, the bunker price has risen another 7% in Jan 2018, which will furtherweigh on liners' earnings ahead.
We reiterate Sell on CSH-H. Our target price of HK$1.8 is based on 0.8x forwardP/B, which looks fair considering the low-single-digit ROE in 2018. Trading at 1.7xP/B, the stocks looks expensive compared to its sister companies. The key macrorisk is stronger-than-expected global trade. The company specific risk is strongerthan-expected merger synergies with OOIL.