Key points of investment
The recovery in freight rates, property value-added, and exchange earnings helped the interim report turn a loss into a profit, but the main shipping business fell short of expectations.
In the first half of this year, the company completed revenue of nearly 3 billion US dollars, achieving net profit attributable to the company's shareholders of 53.61 million US dollars. The loss was 54.66 million US dollars in the same period last year. The interim report turned a loss into a profit mainly due to a recovery in freight charges in the shipping market. The company's Wall Street Plaza property in New York increased by 27.69 million US dollars, and exchange income obtained by some non-US dollar assets under the depreciation of the US dollar of 11.93 million US dollars. By business, the main shipping business still lost 20.94 million US dollars in the first half of the year. Although the loss was drastically reduced compared to the same period last year, the performance was still lower than expected.
Overall single-box revenue was +7.9%. The volume and price of European routes rose sharply, but freight rate flexibility was insufficient. In the first half of the year, the company carried a total of 3,087 million TEUs, an increase of 6.8% over the previous year; completed route revenue was 2.59 billion US dollars, an increase of 15.2% over the previous year; overall single box revenue was 839 US dollars, an increase of 7.9% over the same period last year. By route, revenue from the Pacific/Asia/Europe/Atlantic/Asia Pacific routes increased by +21%/48.5%/-6.9%/+2.3%, respectively. Single box revenue increased -1.7%/21.5%/-13.8%/+7.9% respectively. On a quarterly basis, overall single-box revenue fell 0.5% in the first quarter; in the second quarter, it rose 16% year on year and 8% month on month. The high volume and price of European routes and the increase in the share of US routes with high freight rates after the adjustment of the alliance routes drove a recovery in single-box revenue, but the increase in the company's European single-box revenue was far less than the half-year average of the CCFI and CICFI index on European routes of about 50% compared to the year-on-year average of about 50%, indicating that the company's freight rate flexibility on the East-West trunk line increased rapidly in the first half of the year. The company's market share in Europe was at a disadvantage, and pricing power was weak.
Higher oil prices are driving up costs, and the cost of a single container is expected to decline after the delivery of six 20,000 boxes of giant ships. The company's operating expenses in the first half of the year were US$2.64 billion, an increase of 9.6% over the same period, including a 64% increase in fuel costs. We estimate that the cost of a single container increased 2.6% year over year, which is expected to be due to higher fuel and container costs due to higher oil prices and higher container rents. According to Alphaliner statistics, as of the end of June, the company operated 104 ships with a total of 670,000 TEU, including 432,000 TEU of its own capacity. In the first half of the year, the company received the first 20,000 boxes of the giant ship “Oriental Overseas Hong Kong”. Before 2018Q1, the company is expected to accept the remaining 5 ships of the same type for operation on routes between Asia and Europe. After the fleet structure is upgraded, economies of scale are expected to drive down single box costs.
COSCO Marine Holdings has offered a takeover, waiting for synergies to unleash. At the beginning of July, COSCO Marine Holdings and SIPG issued a comprehensive offer to the company's shareholders at HK$78.67 per share in cash. If approved by regulators and shareholders' meetings, the company will become a subsidiary of COSCO Offshore Holdings in the future. Considering that the company and COSCO Marine Control belong to the same maritime alliance, there is a high degree of route coincidence, and we expect strong synergies after future integration.
Risk warning. 1. The global economy and trade are sluggish; 2. New ship orders have increased dramatically; 3. The tender offer failed.
Profit forecasts, valuations, and investment ratings. Continued recovery in the global economy and trade is driving improvements in marginal supply and demand in the logistics industry, and the freight rate center is expected to gradually rise in the future. We adjusted the company's 2017/2018/2019 EPS forecast to 1.3/2.56/2.79 yuan (the original 2017/2018 was 1.36/1.88 yuan, 2019 was a new forecast). According to the current stock price, there is room for 9% increase in the bid price, maintaining the “increase in holdings” rating.