The target of pure dry bulk shipping, is the world's largest portable bulk carrier operator. The rental level continues to outperform the market. As of 23Q3, the company controlled 129 small portable and 155 ultra-portable bulk carriers. The market share of capacity was 5% and 4%, respectively, with a total capacity of 5.4 million DWT. Small bulk goods and customers are widely distributed, and rent fluctuations are small. At the same time, it is conducive to integrating triangular routes to increase loading rates to increase rental income. Furthermore, by entering forward contracts to guarantee profits, the company's actual rent outperforms market rates all year round.
The reversal of supply and demand for dry bulk shipping is imminent. Small bulk cargo performance is expected to determine a downward trend, driving the industry cycle reversal: 1) A historically low level in the on-hand order market. As of January 2024, the ratio of overall on-hand orders for dry bulk carriers to current capacity was only 8.7%; 2) high shipping prices compounded uncertainty about future fuel technology paths or suppressed ship manufacturing intentions; 3) New environmental regulations forced deceleration to limit effective capacity. In addition, current ships are seriously aging, and the amount of dismantling in the past three years has been low, and there is room for further clearance of capacity.
There is no shortage of structural highlights on the demand side, and the conversion of old and new kinetic energy drives marginal improvements. 1) Inventory: Under steady domestic growth, infrastructure and manufacturing are partially hedging downside real estate risks. The US interest rate cut cycle is expected to start compounding “re-industrialization” to boost demand; 2) demand for new energy sources to make up for traditional construction needs; 3) the inventory replenishment cycle between China and the US is expected to resonate; 4) Increment: The urbanization process in India and the leading countries is accelerating, which is expected to relay new momentum for demand growth. 5) Distance effects that cannot be ignored: Taking bauxite as an example, the increase in exports from long-distance exporters is driving up demand for tons and nautical miles.
The outlook for small bulk goods demand is still optimistic, and the supply and demand pattern is better: small bulk commodities and customers are widely distributed and closely linked to the global economy. According to the World Bank's forecast of global economic growth, China's steady growth policy and demand from emerging markets such as India and leading countries are expected to hedge against the risk of economic recession in Europe and the US. According to Clarkson's forecast, the gap between supply and demand in the industry in 2024 is -0.7%, which is expected to reverse the cycle in 2025. The gap between supply and demand is 0.4%. Among them, the gap between supply and demand for small bulk goods performed better. The gap between supply and demand in 2024 and 2025 was 0.3% and 0.3%, respectively.
The freight center is expected to increase, providing flexibility in upward performance
BSI and BHSI rents have rebounded significantly since 23H2, and are significantly higher than the same period in 2023 since the beginning of 2024. Supply and demand performance in the small shipping market will be better in the next two years, and we expect the freight center to rise further.
The company's fleet size and core business lease days. Based on 23H1 operating data, we estimate that for every 1,000 US dollars increase in the average daily rent level, the company's profit will increase by 36.5-39.09 million US dollars.
Profit forecasting and valuation
Net profit for 2023-2025 is estimated to be US$1.74, 2.58, and 338 million US dollars, corresponding to EPS of 0.03, 0.05, and 0.06 US dollars, respectively, corresponding to 8.8 x, 5.9, and 4.5 x PE, respectively. We estimate the current P/NAV to be 0.85x.
The supply and demand for dry bulk shipping will improve in the next two years. The supply and demand pattern of the small bulk cargo segment that the company focuses on may be better. The company is expected to usher in the release of flexible profit, cover for the first time, and give it an “increase in weight” rating.
Risk warning
1) Global economic downturn; 2) large-scale shipbuilding by shipowners; 3) risk of measurement deviation, etc.