BUY China Shipping Development (1138) ahead of consensus revision
China Shipping Development (1138, CSD, $5.62) outperformed the HSI and HSCEI by 11% and 13% respectively
since our BUY recommendation dated 2 December 2013. Comment: Mainland government announced scrapping
policy on Monday which is expected to reduce at least 10% of dry bulk vessels operating in China’s coastline. Under
the policy, ship owners are subsidized RMB750 per gross tonnage to scrap old ships and received another RMB750
per gross tonnage to order new ships. Vessels eligible for the policy must be at least 21-year-old for tankers, 23
year-old for dry bulk vessels and 24-year-old for containers. CSD is a major beneficiary of this plan, in our view, as
the company operates crude oil and refined oil shipment, coal shipment and dry bulk shipment along the PRC’s
coast. While CSD’s incentive to scrap vessels is limited given rates rebound, the counter will be benefited on the
reduced supply of the industry.
The policy gives another boost to the counter’s share price performance which was bolstered by strengthening of
China’s coastal freight rates, VLCC rates and strong run of Baltic Dry Index, in our view. These indicators point to a fundamental change that the company is likely to turn profitable in 4Q13, which is ahead of market consensus. As a
recap, CSD recorded a loss of RMB929mn in 1H13 and RMB247mn in 3Q13, since freight rates continued to decline
as a result of oversupply.
Looking forward, CSD’s coal shipping business is most critical to the counter’s profitability as it accounted for 63% of
operating loss in 1H13. Based on market consensus, CSD is expected to post net profit of RMB110mn in 2014,
compared to net loss of RMB2,524mn in 2013. This implies the counter is traded at 0.66x 2014 PBR with ROE of
0.9%. We believe the consensus numbers lagged behind to capture dramatic changes of freight rates quarter-todate.
More than half of the estimates have not updated since late September while coal freight rates surged by 21%-
40% quarter-to-date. Remarkably, Qinghuangdao-Guangzhou rates jumped to RMB68.5 per tonne since late October
versus CSD’s breakeven level of RMB40 per tonne. In addition, CSD will negotiate with her customers and finalize
coal shipping annual contract negotiation in 1Q14. A strong run of coastal freight rates lately shall bolster the
company’s bargaining power in our view.
At the meantime, Dirty VLCC Arabian Gulf to Japan Tanker Rate, which reflects demand and supply dynamics of
international crude oil shipping (~15% of CSD’s 1H revenue), was doubled since mid-September, thanks to
restocking demand during winter. This shall give another boost to the counter’s bottom line in 4Q13. Notably, the
counter’s valuation multiple tends to expand when Baltic Dry Index (BDI), the gauge of dry bulk shipping rates, is on
uptrend. BDI surged by 51% in past one month. The surge was backboned by increasing commodities trade in
The said positives have developed a pressure on earnings upgrade in our view. We recommend investors to BUY
CSD ahead of consensus revision. Our six-month target price is $6.70, equivalent to 0.8x 2014 PBR which is
conservative compared to CSD’s historical average PBR of 1.4x in the past seven years.