Action
Freight rates measured by the Shanghai Containerized Freight Index（SCFI） for US routes have continued to hit new highs since weresumed coverage for COSCO Shipping Holdings on July 9. We thinkfreight rate hikes in September and higher-than-expected 3Q20earnings （CICC estimate at Rmb2.5-3.0bn） may serve as new catalystsfor share prices of the firm. We see stronger-than-expected supportfor freight rates after the peak season, which may lay a foundationfor the long-term freight contract negotiations in 2021 and improvethe competitive landscape and profitability.
Reasoning
Watch freight rates rise on stronger-than-expected demand inmid-September. SCFI freight rates rose 3% for US routes and 1% forEuropean routes on September 4. Idle capacity has quickly returnedto the market, and a small number of extra vessels has even beenadded to US routes （capacity rose 7% YoY in August）， while freightrates have increased sharply during this period thanks tostronger-than-expected demand.
We believe freight rates may beat expectations during the slackseason thanks to improving supply and demand conditions.
Shipping companies have adjusted their shipping capacity in order toavoid losses amid the COVID-19 outbreak since the beginning of2020, which we ascribe to the strong growth in industryconcentration and shift of leading companies’ strategic focus frommarket share to earnings.
Earnings forecast and valuation
We think COSCO Shipping Holdings has large earnings upside. Otherthings being equal, we estimate that each US$10/TEU or 1% rise inthe average freight rates on international routes will increase thefirm’s 2020 earnings by about Rmb1.3bn. As freight rates continue tobeat expectations recently and we are more optimistic about contractfreight rates in 2021, we raise our 2020-2021 earnings forecast 34%to Rmb4.52bn and 62% to Rmb5.69bn, much higher than consensusestimates for COSCO Shipping-A of Rmb3.12bn in 2020 andRmb3.97bn in 2021 by Wind Info, and for COSCO Shipping-H ofRmb2.27bn in 2020 and Rmb2.34bn in 2021 by Bloomberg. COSCOShipping A- and H-shares are trading at 12.0x and 7.5x 2021e P/E; wemaintain OUTPERFORM ratings for both and lift TP for A-shares 12%to Rmb6.96 （15x 2021e P/E and 1.9x 2021e P/B with 25% upside） andfor H-shares 7% to HK$5.38 （10x 2021e P/E and 1.2x 2021e P/B with37% upside）。 Risks: Lower-than-expected rates in slack season; surgein new ship orders.