Main points of investment
The recovery of the container transportation market and property appreciation have pushed the company to turn losses into profits. In 2017, the company completed revenue of $6.11 billion and realized a net profit attributable to shareholders of $138 million, in line with our previous expectations of a loss of $220 million in the same period last year. The turnround was mainly due to the rebound in freight charges in the container market and exchange gains on some non-dollar assets as a result of the depreciation of the dollar. In addition, the rise in the valuation of the company's Wall Street Square property in New York contributed a net profit of $43.4 million in fair value, up from $18.52 million in 2016. In terms of business, the main business made a pre-tax profit of $42.3 million in 2017, compared with a loss of $264 million in the same period last year, but its performance was still lower than expected.
The overall revenue per box is + 11%, and the centralized delivery of large ships on the European line leads to the lack of freight flexibility. In 2017, the company completed 629.8 million TEUs, an increase of 3.6 percent over the same period last year. Revenue from completed routes was 5.43 billion US dollars, an increase of 15.4 percent over the same period last year. Revenue from Pacific / Eurasian / Atlantic / Asia-Pacific routes increased by + 20%, 40%, 44%, 4.3% and 3.9% respectively, and revenue per box increased by + 3.2%, 20.2%, 11.9% and 13.1%, respectively. In terms of quarter-to-quarter, overall revenue per box rose 21% in the third quarter, 10% in the fourth quarter, and 6% in the fourth quarter. The rise in volume and prices in Europe and the increase in the proportion of high freight rates in the United States have contributed to a rebound in per-box income. The increase in the company's freight rates on the European line is significantly lower than the 35% and 45% average annual increases in the CCFI and CICFI indices, mainly because the company received a total of five 21000-box ships last year and all of them were put into the European line. The concentrated release of transport capacity led to increased pressure on the carrying rate and insufficient flexibility in freight rates. It is expected that there will still be a large number of shipments in the industry in 2018, and European freight rates will still be under pressure.
Higher oil prices, higher transshipment costs and lower loading rates have pushed up the cost per case by 6%. In 2017, the company's operating expenditure was US $5.53 billion, an increase of 9.9%, of which fuel costs increased by 51%. We estimate that the cost per case will increase by 6.2% compared with the same period last year. Except the 46% increase in fuel cost per container compared with the same period last year is basically consistent with the increase in oil price, the cost of handling per container / voyage cost per container / cost per container per container is + 1.8% / 1.8% / 5.6% respectively compared with the same period last year. On the one hand, the increase in unit cost is related to the increase in freight transshipment costs, the increase in the number of self-built containers and the increase in time charter for short-term charters. On the other hand, affected by the centralized delivery of large ships, the decrease in the carrying rate has led to a rise in unit costs. Last year, the company's average daily capacity was about 645,000 TEUs, which was + 11.5% compared with the same period last year, much higher than the growth of less than 4%. Considering that the company expects only one new ship to be delivered in 2018 and the cost prices tend to be stable, the cost per box after deducting fuel is expected to fall steadily in the future.
COSCO Shipping Holdings's tender offer still needs to be approved by the Ministry of Commerce, waiting for the synergy effect to play. In July 2017, COSCO Shipping Holdings and Shanghai Group issued a comprehensive tender offer for the company's shareholders with HK $78.67 per share in cash. At present, they have completed the approval of the shareholders' meeting of COSCO Shipping Holdings, the antitrust review in the United States and the antitrust review in the European Union. It is still necessary to go through the antitrust investigation of the Ministry of Commerce of China to meet the conditions of the tender offer. As the company and COSCO Shipping Holdings route overlap is high, if the successful completion of the acquisition will be conducive to the synergy between the two sides.
Risk hint. 1. The global economy and trade are in the doldrums. New ship orders increased sharply; 3. The tender offer failed.
Profit forecast and valuation. Taking into account the concentrated delivery of industry capacity in 2018 and the higher-than-expected increase in company costs, as well as the upside cycle of freight rates and profits after the short-term supply of the industry is cleared in 2019. We adjust our 19-year EPS forecast for 2018 to 1.3xpx 6.1 yuan (originally 2.56 plum 5.79 yuan), and increase the forecast for 2020 to 8.50 yuan. The offer price has 12% room to rise from the stock price, maintaining the "overweight" rating.