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China Shipping Development (1138 HK) Summary

Core Content

China Shipping Development (1138 HK) is a shipping company that has shown signs of a potential earnings turnaround in FY14F. The company's share price is currently at HKD5.16, with a target price of HKD6.65, representing a 29% increase. The market capitalization is USD2.3B, and the average daily trading volume is USD10M.

The report reiterates a BUY rating based on the expectation of a solid earnings turnaround in FY14F and the potential for continued growth in the coming years. The company's performance in January 2014 showed a 21% YoY increase in revenue, driven by higher freight rates and traffic growth, which is seen as a good start for the year. The domestic coal freight rate rebounded by 21-42% after the Chinese New Year (CNY), alleviating concerns about a weak rate trend. Additionally, the VLCC rate saw a 300% YoY increase in the first two months of 2014, which is expected to significantly narrow losses in the international oil transportation segment.

Key Highlights

• Earnings Recovery: The company is expected to have a significant earnings turnaround in FY14F, with a forecasted core net profit of CNY106.8M and a projected core net profit of CNY690M in FY15F.
• Revenue Growth: FY14F revenue is forecasted at CNY13,132.3M, with a 21% YoY increase in January 2014.
• Rate Trends: The domestic coal spot rate rebounded 21-42% post-CNY, and the VLCC rate increased by 300% YoY in Jan-Feb 2014.
• Fleet Expansion: CSD is expected to expand its VLCC fleet by 15% YoY in FY14F, which should support international oil traffic growth.
• LNG Business Potential: The company has 10 LNG carriers on order and is optimistic about the growth of the LNG sector in China, which is expected to rise to 6% of the energy mix by 2025 and 8.4% by 2040.

Key Figures

Key Data

• 52-week high/low (HKD): 6.23/2.99
• Free float (%): 53.6
• Issued shares (m): 3,405
• Market Capitalization (HKD): 17.6B
• Major Shareholders:
  • China Shipping Group: 46%
  • GIC Pte Ltd. (Investment Management): 9%
  • Templeton Asset Management Ltd. (Hong Kong): 6%

Key Viewpoints

• The company's performance in January 2014 was solid, with a 21% YoY revenue increase, driven by both higher freight rates and traffic growth.
• The domestic coal spot rate rebounded post-CNY, indicating a positive trend for the year.
• The VLCC rate increased by 300% YoY in the first two months, which should help narrow losses in international oil transportation.
• The company is optimistic about the LNG business, which is expected to be a medium-term earnings driver.
• The current P/BV ratio of 0.64x is considered too low, given the potential for earnings recovery.
• The report reiterates a BUY rating due to the anticipated earnings turnaround and growth potential in the bulk shipping sector.

Outlook

• Earnings Recovery: The company is expected to resume earnings growth in FY15F.
• Fleet Expansion: Continued fleet expansion is expected to support growth in various segments, including LNG.
• Market Position: The company's performance and growth potential are seen as competitive within the regional peers.
• Valuation: The current valuation is considered attractive, with a target PB of 0.82x, representing a 10% discount to the five-year average PB of 0.91x.

Conclusion

China Shipping Development (1138 HK) is showing promising signs of recovery, with a solid start in FY14F and potential for continued growth in the coming years. The company's focus on bulk shipping, along with the expansion of its LNG fleet, is expected to drive earnings and improve profitability. The current valuation is seen as attractive, and the report reiterates a BUY rating with a target price of HKD6.65.