2022 results in line with our expectations
　　Pacific Basin Shipping (PBS) announced its 2022 results: In 2022, revenue rose 10.4% YoY to US$3.28bn, and attributable net profit fell 16.9% YoY to US$702mn, in line with our expectations. We think attributable net profit declined in 2022 due to falling global demand for dry bulk shipping since 2H22, which has led to lower spot freight rates in the market. However, the average daily time-charter equivalent (TCE) of the firm's fleet was better than the industry average. Its average daily TCE of Handysize and Supramax vessels outperformed the industry average by US$5,210 and US$7,080 in 2022, which we attribute to its global operations and high fleet operating efficiency.
　　Dividend yields attractive. In 2022, PBS’s board of directors proposed a final basic dividend of HK$0.17/sh and an additional final special dividend of HK$0.09/sh. Given the interim dividend of HK$0.52/sh, the firm expects a full-year dividend of HK$0.78/sh in 2022, accounting for 75% of its full-year net profit with an attractive dividend yield of 25.1%.
　　Trends to watch
　　Industry demand bottoming out and supply growth still limited; upbeat on supply-demand conditions in dry bulk market in long term. Demand: In 2H22, demand for dry bulk shipping bottomed due to weak global economic growth, and freight rates continued to decline. However, we expect infrastructure investment to accelerate amid China's pro-growth policies and demand from emerging market countries such as India and Southeast Asia. We expect these to boost demand for transportation of minor bulk, such as nonferrous metals and timber, and for industry demand to bottom out. Clarksons estimates that global dry bulk shipping demand may grow 2.0% in 2023.
　　Supply: The supply of the dry bulk fleet continues to optimize, laying the foundation for a steadily growing market. In January 2023, the ratio of dry bulk carrier orders on hand and fleet size fell 0.3ppt MoM to a low of 7.24%. We think shipping capacity may decline further with the tightening of environmental regulations. In addition, supply may face constraints as existing fleets need to upgrade or operate at lower speeds to meet environmental protection requirements.
　　Continuing to expand fleet size and optimize fleet structure; counter-cyclical investments to benefit from future sector uptrend. PBS maintains its long-term strategy of expanding Supramax fleets and upgrading Handysize fleets. In mid-2022, the firm sold some older and smaller Handysize vessels at the peak of vessel prices, and purchased nine second-hand vessels (seven Handymax, two Supramax and one Handysize) after vessel prices fell, all of which are scheduled for delivery in 1H23.
　　Financials and valuation
　　Due to lower-than-expected average freight rate in 2023 and possible increase in average freight rate in 2024, we cut our 2023 net profit forecast 24.6% to US$454mn, and introduce 2024 earnings forecast at US$567mn. The stock is trading at 4.6x 2023e and 3.7x 2024e P/E. Maintain OUTPERFORM. Given the weak demand in the short term and improving supply and demand conditions in dry bulk market in the long term, we raise our TP 10% to HK$3.21/sh based on 2024 valuation, implying 4.8x 2023e and 3.8x 2024e P/E with 3.6% upside.
　　Risks
　　Global economy slows; COVID-19 resurgence.