China Shipping Container Lines (2866 HK):Stuck on a sandbar

Big loss in 2013. CSCL’s RMB2.6b loss in 2013 came asno surprise to the market in view of the company’s profitalert in January. Container shipping volume increased2% YoY while average freight rates declined 8% YoY. CSCLunderperformed some of its peers in 2013 (OOIL andMaersk even managed to turn a profit). We cut our 2014Fearnings forecast for CSCL from a net profit of RMB430mto a RMB1.8b loss on our lower freight rate forecasts.

More vessel deliveries… CSCL had four 4,700 TEUvessels delivered in 2013. It has a further ten deliveriesslated for 2014 (8 x 10,000 TEU and 2 x 19,000 TEU) and3 x 19,000 TEU vessels in 2015. Total capex commitmentfor new deliveries in 2014-2015 is RMB5b.

…raising financing requirements. To meet its capitalcommitments, CSCL has been selling assets, including itscontainer boxes in 2012, which brought in RMB1b. In 2013,it disposed of its terminal and container storage assets forRMB1b, of which around RMB900m is to be recognized in2014. CSCL had a net debt-to-equity ratio of 41% in 2013and will have to continue to seek debt financing.

Industry over-supply still pressuring freight rates.Container shipping companies have begun annualtranspacific freight rate negotiations. Shippers are pushinga rate increase forward from 1 May to 15 April. In addition,daily container freight rates indicate Asia-to-Europe ratesincreased 11% and 23% day-on-day in the past two days,yet even the concerted effort of shipping companies topush up rates will ultimately prove short lived in our view,given weak industry fundamentals.

Valuation. We maintain our Underperform rating but lowerour price target from HK$1.37 to HK$1.20 on the back ofour earnings downgrade. Our target price is based on0.5x 2014 P/B with CSCL trading on 0.7x 2014 P/B. Thedivergence we see in the financials of the containershippers indicates to us that the industry solidarity that hadfor so long supported freight rates will erode.

Risks to our call. Better global trade would boost CSCLearnings. Should there be further vessel lay-ups, containerfreight rates will be higher than we anticipate.