Forecast that profit in 2021 will increase by about 225% compared with the same period last year.

SITC International Holdings expects net profit to grow 225 per cent year-on-year to $1.15 billion in 2021, better than our and market expectations of about 15 per cent. We believe that the better-than-expected results in the second half of the year are mainly due to freight rates, especially in the peak quarter of the fourth quarter.

Pay attention to the main points

Earnings are expected to remain strong in 2022, with increasing certainty. We noted in previous reports that investors may be waiting for more signals about performance growth in 2022. Considering that the current supply chain efficiency is still low and port congestion continues, we expect spot freight rates to remain high in 2022, and contract prices are expected to rise accordingly when the contract is renewed. Although chartering costs may also rise significantly in 2022, considering that the company is expected to deliver 21 new ships, we expect the company to reduce chartering or lower-cost small vessels, thus limiting costs to a manageable level, which is good for full-year performance growth.

The market is still divided on the demand trend and the delivery of new ships in 2023-2024. Even taking into account the potential increase in ship dismantling, Alphaliner still expects the global fleet to grow by 8 per cent year-on-year in 2023. New rules to reduce carbon emissions, such as the energy efficiency index EEXI and the carbon emissions index CII, will come into effect in 2023, which could lead to deceleration and early decommissioning of old ships. Considering that the order / capacity ratio of 3000 standard small vessels is lower than 8000 standard ships (12% vs. 31%), we expect that the supply and demand relationship in SITC International Holdings's market is expected to improve.

However, it remains to be seen whether the resulting effective capacity loss can support the freight rate.

Valuation and suggestion

We raised our 2021-2022 profit forecasts by 14 per cent and 49 per cent to $1.15 billion and $1.33 billion, mainly considering higher freight rates; we introduced a profit forecast of $1.04 billion in 2023, mainly because of the conservative assumption that freight rates fell 15 per cent year-on-year. With plenty of cash on hand and generous returns from shareholders, we think it is expected to support SITC International Holdings's long-term value: assuming the company maintains a regular dividend ratio of 70%, we expect dividend yields of 10.1% (taking into account announced special dividends) and 8.7% in 2021-2022, respectively, and we expect dividend yields to reach 6.8% in 2023, when the market is relatively normal.

At present, SITC International Holdings trades at 8 times, 10 times 2022, with a price-to-earnings ratio of 2323. We maintain our outperforming industry rating while raising our target price by 15% to HK $38.6, corresponding to 10 times 2022 price-to-earnings ratio (which is likely to be a peak earnings ratio) and 13 times 2023 price-to-earnings ratio, which has 25% upside from the current share price.

Risk

Port congestion is alleviated or new ships are delivered to release capacity.