Shipping update:Time to accumulate bulk shipping stocks

Accumulate bulk shipping stocks. BDI was up 10% since 17 April following its 43% decline beginning 20 March. We expect shipping stocks to follow the uptrend in the short term. In the medium term, we expect a further seasonal recovery in BDI in 3Q14F. We forecast BDI to average 1,300 in 2014F, up 7% YoY, representing a 27% upside from the current level. In the bulk shipping sector, Pacific Basin (PB, 2343 HK, Outperform) remains our sector top pick. PB had the highest correlation to BDI over the past twelve months (0.79) and is considered by many to be a bulk shipping pure play despite it operates smaller vessels such as handysize and handymax.

Container shipping stocks to be challenged by low freight rates. Although Asia-Europe rates were pushed up by container shipping companies in March and April, daily rates began falling once again since the beginning of May. We expect freight rates to be flat year-on-year in 2014F, with a 7% supply growth that outpaces a 6% demand growth. We believe the weak container shipping freight rates will remain a headwind for stock performances.

Recommendations. We reiterate our Underperform ratings on China COSCO (CCH, 1919 HK) and China Shipping Container Lines (CSCL, 2866 HK) in view of falling container shipping freight rates. In addition, we believe CCH’s share price deserves a de-rating given the company’s another year loss in 2014F and continuous write-off of its book value. On the other hand, we suggest investors to accumulate Pacific Basin on seasonal recovery of bulk shipping freight rates in 3Q14F.

Risks. Risks to our container shipping sector forecasts include a better-than-expected US economic performance and fewer-than-expected vessel deliveries. Risks to our dry-bulk shipping sector forecasts include vessel deliveries that were postponed in previous years suddenly being delivered in 2014F and a worse-than-expected slowdown in demand.