3Q21 operations are steady. It is expected that 4Q21-2022 will basically target Haifeng International to release 3Q21 operating data: average freight rates rose 1.2% month-on-month, container traffic fell 4.8% month-on-month, and 3Q21 total revenue fell 0.8% month-on-month to 703 million US dollars (up 71.9% year on year).
The month-on-month decline in traffic volume was mainly due to the low season in the third quarter. We expect the peak season cargo volume to return to seasonal highs in the fourth quarter. Although the current freight rate remains strong, the market has turned its focus to the “dual control” and the negative impact of the power limit policy on demand. The company's stock price has fallen 30% since the September 24 high. We think this round of market pullback is excessive. Benefiting from strong market demand compounded by supply shortages in the Asian region, the company's fundamentals have maintained a positive trend. We expect a further increase in freight rates from industry leaders to boost the company's profits in 2022. We maintain our profit forecast (202E/202E/2023E EPS 0.36/0.37/$0.42) and target price of HK$43.60 unchanged (based on 15.6x 2021E PE, the average PE value in the company's history plus 1 standard deviation for three years) and reiterated “buy”.
Economic growth within the Asian region is strong, and demand for container trade is steady. Compared to the Asian-North American and Asian-to-European markets, demand for container trade within the Asian region is relatively strong. According to the latest International Monetary Fund forecast, the GDP of emerging markets in Asia will grow 7.2/6.3% in 2021/2022, while the GDP growth rate of advanced economies will be 5.2/4.5%. On the other hand, we believe that the power limit policy has a great impact on energy-intensive industries (such as chemicals and textiles), but the impact on the home appliances/FMC/retail industry should be limited.
Supply chain stability supports demand for contract goods
Entering the post-pandemic era, supply chain stability has become the primary consideration for enterprises. As shippers' willingness to sign long-term transportation contracts with container liner companies continues to rise, we expect Haifeng International's contract freight rates to rise further in 2022. In terms of the spot freight market, we expect that the problems of port congestion and labor shortages in Europe and the US may take a long time to ease. This will support the 2022 spot freight market.
Supply and demand are expected to improve in 2022, and the company's valuation is attractive
In terms of the Asian regional market, Clarkson expects container transportation demand to grow 5.7/5.0% in 2021/2022, exceeding the supply growth rate of 2.8/3.1%. There is a big discount on the company's current valuation compared to the historical three-year PE average of 13.4x. Our target price of HK$43.60 is based on 15.6 times the 2021 PE forecast (the company's three-year PE average plus 1 standard deviation. The valuation premium is mainly due to the current high mood of the industry).
Risk warning: 1) freight rates are lower than our expectations; 2) volume growth is lower than our expectations; and 3) fuel and charter costs are higher than our expectations.