1H23's performance fell slightly short of our expectations
The company announced 1H23 results: revenue reached US$1,253 million, down 44.5% year on year; net profit of US$310 million, corresponding to profit of US$0.12 per share, down 73.4% year on year. The performance was slightly lower than our expectations, mainly due to declining market freight rates.
The reduction in costs was less than the decrease in revenue, and 1H23 gross margin declined. The gross profit margin of 1H23 was 26.5%, down 26.8 ppts from the previous year. We think it is mainly because some of the company's costs have some rigidity, such as the company's equipment and cargo transportation costs and ship depreciation costs that do not change with freight rates.
2Q23 The company's cargo volume increased month-on-month, and freight rates declined due to market influence. The 2Q23 company's container traffic volume changed month-on-month - 2.8%/+24%. According to Bloomberg data, 2Q23 Asian intra-regional container traffic changed -5.9%/+19.2% month-on-month. The company's cargo volume was better than the volume within the Asian region. We believe it was due to the company's efficient operation and quality service. Affected by the market, the company's single box freight rate fell by 45.7%/14% over the same period last month. 2Q23 SCFI's average freight rates for Southeast Asia, Japan and South Korea routes decreased by 82.9%, 4.0%, and 54.4%, respectively, and +3.4%, 0.0%, and -28.1% month-on-month, respectively.
Development trends
Additional capacity within the Asian region is limited, and the dismantling of small ships is accelerating, which may support freight rates. According to Clarksons data, as of August 16, orders for small vessels under 3,000 TEU accounted for 11% of capacity (overall container fleet was 28.3%), and since 2023, small ship dismantling has accelerated. From the beginning of the year to now, container ships less than 3,000 TEU have dismantled 45,400 TEU (10,300 TEU dismantled in 2022). Furthermore, considering the limited production capacity of shipyards and the impact of new environmental regulations on effective capacity, we believe that the future growth rate of small ships may be further limited.
The cost side has been further optimized, freight rates are expected to increase during peak season in the fourth quarter, and profitability will improve. 1H23 delivered 10 new ships to replace 4 old ships. The average age of ships decreased by 0.9 years, and the share of owned ships in capacity increased by 11.2%, which is conducive to cost optimization. The demand side is an important catalyst. According to IMF forecasts, in 2023, the GDP of China and ASEAN countries will increase by 5.2% and 4.6%, respectively. 1H23 China's exports to Japan and South Korea and imports and exports with ASEAN changed +3.5%/-5.0%/+6.1% year-on-year respectively. If traffic within the Asian region recovers relatively quickly during the peak season in the fourth quarter, freight rates are expected to rise, leading to improved profits.
Profit forecasting and valuation
Due to the year-to-date decline in freight rates, we reduced net profit in 2023 and 2024 by 18.0% and 12.2% to US$833 and US$659 million. The current stock price is 6.2 times/7.8 times the price-earnings ratio of 2023/2024. Maintaining an outperforming industry rating, the target price was lowered by 12% to HK$19 per share, corresponding to 11.2 times/14.2 times the price-earnings ratio of 2023/2024, with 28% room to rise from the current stock price. The company announced an interim dividend of HK60 cents, with a dividend ratio of 66%. Assuming that the company has a dividend distribution rate of 70% for the whole year, the company's dividend yield in 2023 is 11.4%, which is very attractive.
risks
Demand for transportation and trade in the Asian domestic market fell short of expectations; orders for new ships were accumulated in large numbers.