1H22 results beat our expectation
　　Pacific Basin Shipping (PBS) announced 1H22 results: Revenue grew 51% YoY to US$1.72bn and attributable net profit totaled US$465mn, implying an EPS of $0.09, up 191% YoY, slightly beating our expectation. We attribute this to continuously optimized supply-demand conditions in the dry bulk market, as well as the firm’s improved actual delivery due to its advantages in fleet and network. The firm outperformed the market index in 2Q22: The average daily time-charter equivalent (TCE) of Handysize and Supramax vessels outperformed the market index by US$5,460 and US$7,790.
　　The firm had returned to a net cash position by end-1H22, and increased shareholder returns, as its profitability continued to rise, while also reducing purchases of used vessels and selling some older vessels to improve funding. The firm declared an interim dividend (50%) and a special dividend (25%) for a combined dividend of US$348mn, implying a higher-than-expected payout ratio of 75%. The dividend yield is 15%.
　　Trends to watch
　　Freight rates may have bottomed out since the decline in May; watch performance in peak season. Dry bulk demand has been weakening since 2Q22 due to the impact from the resurgence of COVID-19 in China. Meanwhile, grain exports decreased in the Black Sea region due to the impact of the Russia-Ukraine conflict. As a result, freight rates in the dry bulk market declined. Small vessels were also affected, though to a lesser extent than larger crafts. However, we suggest watching three factors in the dry bulk market during the peak season in 2H22 following the gradual easing of domestic COVID-19 conditions: 1) The peak season of grain exports in the Americas in 2H22, 2) Increased coal imports in Europe due to the energy shortage, and 3) the support of China's pro-growth policy for dry bulk demand.
　　Long-term supply and demand conditions in the dry bulk market continue to improve. We note that there have been concerns about demand in the market, but the supply of the dry bulk fleet continues to optimize, laying the foundation for a steadily growing market. New shipbuilding orders in 1H22 fell 60% YoY, and the orderbook to fleet ratio is at a record low of 7%, as of July 2022. We believe that until the new technology matures, carbon-emission related regulation rules (such as EEXI and CII, which will come into force in 2023) and tight shipyard capacity (due to strong container shipping earnings and increased shipbuilding orders) would further dampen the appetite for shipbuilding among small bulk operators. We believe the shipping capacity would further decline with higher environmental regulations, due to the higher proportion of older small vessels (old vessels aged over 20 years representing 14% and 9% of Handysize and Supramax fleets, as of June 2022).
　　Financials and valuation
　　As supply and demand conditions in the dry bulk market continue to improve, we raise our 2022 and 2023 net profit forecasts 17% and 17% to US$0.96bn and US$1.04bn. The stock is trading at 2.4x and 2.2x 2022e and 2023e P/E, 1.0x and 0.8x 2022e and 2023e P/B. We maintain OUTPERFORM and TP of HK$5.37, implying 1.6x 2022e P/B and 1.3x 2023e P/B with 56.6% upside, considering demand concerns and decreasing risk tolerance in the current market. The firm’s dividend yield in 1H22 reached 15%. We estimate it’s full-year dividend yields at 21%, assuming a conservative payout ratio of 50%; the yields could reach 30%, if it maintains a full-year payout ratio of 75%.
　　Risks
　　Weakening dry bulk demand due to economic recession.