|Asia Pacific||Sector Flash Note|
Container shipping share prices reacted very positively in Tuesday afternoon trading after news emerged that the top three liners will be forming a mega-alliance on the three main trades. Meanwhile, the 1 July rate hikes are expected to be partially successful.
But without more serious capacity discipline, the rate hikes could fade quickly. As a result, we maintain our Neutral sector rating, with OOIL and SITC as our top Outperform picks given their lower-risk profiles. In the short term, high-beta CSCL may do well but investors trading the sector need to be nimble as valuations are not as attractive as in late-2011. Also, CIMB and consensus EPS forecasts will likely need downgrading to reflect the very poor spot rates.
The announcement of the proposed alliance between Maersk, MSC and CMA CGM triggered a very strong share price response for the Asian container shipping names, with CSCL up 13.7% yesterday, OOIL up 8.1% and NOL up 4.3%. This alliance comes on top of large general rate increases planned for 1 July on all the major trades, with Asia-Europe to rise up to US$1,000/teu and Asia-USWC to rise US$400/feu.
What We Think
The mega-alliance is beneficial for the sanity of the industry but it is not a panacea for the current weak freight rates as it will only take effect earliest in 2Q14. And while spot freight rates are expected to rise significantly on 1 July given the current desperate situation, their sustainability is in question as carriers have barely reduced their capacity deployment in any material sense. The contrast to late-2011, when carriers made massive capacity adjustments that set the stage for a powerful five-month rate rally, is too glaring to ignore.
What You Should Do
From a purely trading perspective, we prefer CSCL to OOIL or SITC as it has a higher adjusted beta of 1.6x against 1-1.1x for the latter two. Furthermore, CSCL is currently trading at a historical P/BV of 0.74x, which is 26% below the peak P/BV of 1x in March 2012.
On the other hand, OOIL is currently trading at a historical P/BV of 0.93x, which is merely 15% below the peak P/BV of 1.1x in April 2012. Assuming that both stocks trade to 90% of the early-2012 peak multiple, CSCL’s share price could reach HK$2.54 in the very near term (22% upside) while OOIL’s could reach HK$55.30 (6% upside). These are not substantial upsides for such a volatile and risky sector. (Read Report)
Source : CIMB Research