3Q net loss was down 30% QoQ on higher rates
CSCL reported unaudited 3Q13 results under Chinese GAAP. The company turned to a net loss of RMB404m in 3Q13 from a net profit of RMB991m in 3Q12 as freight rates dropped YoY. The average Asia-Europe and Transpacific rates were down 19.5% and 23.9% YoY, respectively. On QoQ basis, net loss was reduced by 30%, largely on the back of rates recovery. While Transpacific rates remained flat QoQ, Asia-Europe rates in 3Q was 50% higher than in 2Q as the industry successfully pushed th rough the rate hike of US$900/TEU in early July.
9M13 total net loss of RMB1,670m has exceeded our full year estimate of RMB1,620m. As Asia-Europe rates totally collapsed recently, our full year earnings forecast now looks optimistic.
Maintain Buy because the stock historically performs well in 4Q
While 4Q is the traditional slack season for container shipping, CSCL in fact registered positive returns in 4Q in la st 8 years except 2007. This was mainly because container stocks historically ha ve tended to move 3-6 months ahead of rates. Due to demand seasonality, co ntainer rates typically would trough in 1Q each year. If history still holds, we would expect the stock to perform over the coming couple of months.
In addition, as carriers have once again started burning cash on Asia-Europe rates, we see good chance that carriers should pass through some of the rate hike for this route on Nov 1(the industry is looking for US$900-1000/TEU rate hike). The coming spike of rates should be a positive catalyst for the stock. In terms of 2014, we expect global demand to accelerate on the back of G3 recovery. This along with drop of supply growth should drive earnings recovery for this industry. The stock is now trading at 0.7x 2014E P/B, which looks inexpensive. Buy with a TP of HK$2.8 based on 1x 2014E P/B.