The current situation of the company
SITC International Holdings released the operating data for the third quarter of 2021, and we held a conference call with the management of the company. Due to the base effect, the company's container freight growth slowed to 7.7% year-on-year in the third quarter of 2021, compared with 29.7% in the second quarter of 2021. The volume fell by 5% month-on-month, slightly lower than we expected. The management attributed it to the reduction of SITC International Holdings's effective transport capacity due to the repeated COVID-19 epidemic in Southeast Asia and the sharp rise in charter costs. In the third quarter of 2021, the average freight rate increased by 60% year-on-year, 4% month-on-month, and 45% year-on-year in the second quarter of 2021. The company's total revenue reached $703 million, up 72 per cent from a year earlier and down 1 per cent from a month earlier.
Comment
In the short term, both realized freight volume and average freight rates will rise in the peak season in the fourth quarter of 2021. While China's recent "dual control" policy may affect short-term shipping demand and volume, we believe that the marginal effect has been alleviated and the reopening of manufacturing factories in Southeast Asian countries should help boost traffic. As the Asian internal market enters the peak season, we have seen early signs of rising prices.
Management expects the long-term supply and demand situation to tighten, but investors may need more data to judge the future trend of freight rates. Some investors may worry about when freight rates will return to reasonable levels. At present, the order / capacity ratio of small boats under 3000TEU is only 11%, and 21% of the existing fleet is over 20 years old. If demand grows steadily, management believes that average freight rates may be on an upward trend in 2022, mainly because contract rates will rise. But investors may need more data to make a clearer judgment on freight rates, such as spot rates in the fourth quarter of 2021 and new contract rates in the first quarter of 2021.
Valuation and suggestion
We maintain our profit forecasts for 2021 and 2022, with year-on-year growth of 15% and 15% respectively, and average freight rates up 40% and 10% respectively. We maintain our outperform industry rating and maintain our target price of HK $33.50, corresponding to a price-to-earnings ratio of 13 times 2022, which is 35% upside from the current share price. Assuming a dividend yield of 70%, we estimate dividend yields of 8.3% and 7.3% in 2021 and 2022, respectively, with the possibility of special dividend payouts.
Risk.
Lower-than-expected demand led to a sharp fall in freight rates. .