Loss at recurring level in 4Q12 masked by one-offs: CSCL’s 4Q12 reported net profit was RMB756m vs. a loss of RMB1.2bn in 4Q11. Stripping out non-recurring items (profit on sale of containers) we estimate CSCL incurred a recurring loss of RMB322m from a profit of RMB402m in 3Q12 and 36% higher losses than our forecast mainly due to a worse than expected decline in freight rates in our view. CSCL’s operating margin was below its Asian peers as it continues to focus on market share (volume grew 8% in 2012 vs. 4% by OOIL).
We forecast 2013 to be another disappointing year: While we make no significant changes to our 2013-14 earnings forecasts, the core is that 2013 will be another disappointing year for the industry. We continue to argue that rates are unlikely to go higher materially given record vessels deliveries over the next three quarters. More importantly, CSCL will receive 78,952 TEU of new vessel deliveries in 2013 (equivalent to 14% of existing fleet including charters). It may indeed continue to follow market share strategy.
We are now 24% below consensus in 2013e on lower rate assumptions, in our view. CSCL remains the most vulnerable to decline in rates given its high exposure to spot rates, although CSCL struggled to benefit significantly when rates were on the upside in 2012.
Reiterate UW(V) with unchanged TP of HKD1.70: CSCL’s share price has declined 19% from its recent peak in early January when the first set of rate hikes was implemented. However, we still believe that there is downside in the stock given its exposure to spot rates (volatile). The stock is currently trading at 0.8x 2013e PB (note that book value is overstated). Ne ws surrounding policies from Mini stry of transport China, a key upside risk.