20140502-高盛-Margins_improving_sequentially_but_market_expectations_look_high_12页_390kb

China Shipping Industry Summary (1Q14)

Core Content

The document provides an analysis of the performance and financial outlook of China's major shipping companies in the first quarter of 2014. It highlights the sequential improvement in margins, the impact of the new vessel scrapping subsidy policy, and the mixed results across different segments of the shipping industry.

Main Points

• Margin Improvements:

  • China COSCO, CSD, and CSCL all reported improved EBIT margins in 1Q14 compared to the same period in 2013. Specifically, China COSCO's EBIT margin increased by 7.3ppt, CSD's by 16.5ppt, and CSCL's by 5.0ppt.
  • However, the underlying performance for CSCL and China COSCO was still weak, with net losses reported despite the margin improvements.

• Net Profit Performance:

  • CSD reported a net profit of Rmb52mn in 1Q14, a significant turnaround from a Rmb483mn net loss in 1Q13, driven by improved freight rates and asset disposal gains.
  • CSCL reported a surprising net profit of Rmb61mn in 1Q14, but this was primarily due to port asset disposal gains rather than improved operating performance.
  • China COSCO recorded a weaker-than-expected net loss of Rmb1.9bn, attributed to asset write-downs and foreign exchange losses.

• Vessel Scrapping Subsidy Policy:

  • The Chinese government introduced a new scrapping policy in December 2013, offering higher subsidies for scrapping aged vessels and single-hull oil tankers.
  • Subsidies are structured as 50% upfront and 50% after a new vessel is constructed, which encourages scrapping and new orders.
  • The policy is expected to generate one-off subsidies of over Rmb1bn for the shipping companies over 2014-15E.

• Asset Quality Concerns:

  • Despite the subsidies, the net book value of the vessels is often higher than their demolition value, leading to asset write-downs.
  • CSD and China COSCO had already written down asset values for to-be-scrapped vessels, which exceeded the estimated subsidies.

• Investment Recommendations:

  • The report maintains a Neutral rating on China shipping H-shares and a Sell rating on CSD (A) and CSCL (A).
  • The 12-month target prices were revised for all companies, with CSD's target price increasing slightly, while CSCL's remained unchanged due to asset disposals.

Key Information

• Subsidy Impact:

  • China COSCO, CSD, and CSCL are expected to benefit from the scrapping subsidies, which could amount to Rmb1bn over 2014-15E.
  • The report estimates that the top three companies could receive a total of Rmb1.74bn in subsidies if all eligible vessels are scrapped.

• Performance Analysis:

  • CSD's 1Q14 results showed a net profit of Rmb52mn, with EBIT margin expanding to 9.1% from -7.4% in 1Q13.
  • CSCL's 1Q14 net profit was Rmb61mn, but underlying margins were weak.
  • China COSCO's EBIT margin improved to -1.5% in 1Q14, but the company still reported a net loss of Rmb1.9bn.

• Earnings Revisions:

  • The report revised its 2014E-16E EPS for China shipping companies by -39% to 35% based on 1Q14 results.
  • CSD's EPS estimates were increased by 35% for 2014E, 15% for 2015E, and 8% for 2016E.
  • China COSCO's EPS was revised to Rmb-0.25 for 2014E, down from Rmb-0.20.
  • CSCL's EPS was revised to Rmb-0.04 for 2014E, down from Rmb-0.01.

• Valuation Metrics:

  • The 12-month target prices were adjusted based on revised earnings estimates and the EV/GCI (Enterprise Value to Gross Capital Investment) ratio.
  • China COSCO (H) and (A) had target prices revised to HK$3.50 and Rmb2.80, respectively.
  • CSD (H) and (A) had target prices increased to HK$4.40 and Rmb3.50.
  • CSCL (H) and (A) maintained their target prices at HK$1.80 and Rmb1.40, respectively.

• Industry Risks:

  • Risks include macroeconomic conditions, freight rate fluctuations, supply discipline, scrapping delays, and volatile bunker fuel prices.
  • The report notes that the current market expectations may be overly optimistic, leading to a potential downside for consensus estimates.

Summary Table

Company	Ticker	Rating	Price (29-Apr-14)	EV/IGCI-based 12-m TP	Pot. Up/down	2014E P/B
OOIL	0316.HK	Buy*	37.2	59.0	59%	0.65X
PadBasin	2343.HK	Buy*	4.56	6.20	36%	0.84X
Sinotrans Shipping	0368.HK	Buy	2.23	2.80	26%	0.51X
China COSCO (H)	1919.HK	Neutral	3.14	3.50	11%	1.24X
CSCL (H)	2866.HK	Neutral	1.79	1.80	1%	0.70X
CSD (H)	1138.HK	Neutral	4.39	4.40	0%	0.56X
China COSCO (A)	601919.SS	Neutral	3.06	2.80	-8%	1.50X
CSD (A)	600026.SS	Sell	4.00	3.50	-13%	0.63X
CSCL (A)	601866.SS	Sell	2.09	1.40	-33%	1.01X

Additional Insights

• The report emphasizes the importance of the scrapping policy in improving the financial performance of shipping companies, but warns of asset quality issues.
• The financial performance of the companies is mixed, with some showing improvement and others still struggling with losses.
• The document highlights the need for investors to consider the impact of the scrapping subsidies and the underlying performance of the companies.