Sheng Lion Container is the second largest container manufacturer in the world, with container sales of 540000 TEUs in 2016, accounting for about 15% of the global market share, second only to China International Marine Containers's 670000 TEUs.
In terms of industry environment-supply side: 1) some production capacity was withdrawn at the trough of the industry; 2) the container water-based paint policy was implemented in April this year, and some production lines were suspended; and 3) the production speed slowed down after the conversion was completed. resulting in a decline in supply in the container manufacturing industry. Demand side: 1) the container industry is aging, and the demand for aging container replacement increases after the consolidation of the collection and transportation industry; 2) the performance of downstream route operations and container leasing companies increases with the improvement of the gathering market, and the willingness to spend capital is strengthened; 3) the increase in new shipbuilding orders and the postponement of the dismantling of old ships will enhance the overall demand for containers in the industry, and the utilization rate of downstream leasing companies has been significantly improved to verify this view from the side. Coupled with a sharp increase in the price of corrosion-resistant steel, the main raw material for containers (a 39 per cent year-on-year increase in 1H17), it is expected to push up container prices sharply (currently at $2300 / TEU, higher than the company's 1H17 average price of $1902 / TEU 21 per cent).
In the first half of the year, the company's container sales increased by 28% compared with the same period last year, and the growth rate for the whole year is expected to be nearly 30%, leading to a 70% increase in capacity utilization (the 2016/1H17 utilization rate is 52% and 62% respectively), and then share the fixed expenses and further improve the profit margin. 1H17 gross profit margin is 13%, an expansion of 9% over the same period last year, and an increase of 8.6% over the whole of 2016. On the one hand, it is sufficient to prove the company's first-class cost control ability to resist the long downward cycle of the industry. On the other hand, it can also be seen that the company has the ability to transmit costs to the downstream. Driven by box prices to continue to rise, gross profit margin will further increase in the second half of the year.
As the second largest container manufacturer in the world, the company's production / storage yards in coastal areas are located near coastal ports, distributed in dense port areas such as Bohai Sea, Yangtze River Delta, Xiamen, Huizhou and so on. In addition, the company has a strong balance sheet with a net debt ratio of less than 30% in 2016, and there are sufficient resources to support the company to quickly seize opportunities (such as water paint policy, freezer shortage, etc.) in anticipation of a structural improvement in the industry. achieve faster growth than the industry. And the container business accounts for 96% of the company's income, which has greater performance flexibility compared with the same industry.
It is also worth noting that Taiping Shipping, a major shareholder, pledged 41.12% of Sheng Lion Container in July. The terms stipulate that Taiping Shipping must sell all or part of Shengli Container's equity at a price of not less than US $180 million within 20 months. Based on this, the lower price of Shengshi Container is calculated at HK $1.41. A discount of 18% to the current price (16.5% premium to the closing price of 1.21 on July 11, the day before the announcement). The announcement indicates that Taiping Shipping may seek refinancing to lift restrictions on the sale of shares.
Valuation
At present, the company expects the 12-month EV/EBITDA ratio to be only at the historical average. The average market target price is HK $2.30, with a potential increase of 33.7%. The estimated EV/EBITDA ratio in 2017 is 8.3 times, a discount of nearly 50% compared with the 16.3 times of industry leader China International Marine Containers. When the growth rate and ROE are higher than China International Marine Containers, the price-to-book ratio is lower than the latter. We believe that there is still room for further increase in the current market forecast, and there is a sufficient buffer range for the current price level.
