Performance review
2023 results fall short of our expectations
The company announced its 2023 results: revenue of US$2,429 million, down 40.9% year on year; net profit to mother of US$531 million, corresponding to profit of $0.20 per share, a year-on-year decrease of 72.7%. The performance was lower than our expectations, which we believe was mainly due to declining market freight rates. In 2023, the company's annual cargo volume fell 1.1% year on year, and single box shipping revenue fell 41.0% year on year due to falling market freight rates.
4Q23 The company's cargo volume increased month-on-month, and freight rates in Southeast Asia improved month-on-month. The fourth quarter was the traditional peak season for the shipping market in the Asian region. 4Q23's container volume changed +4.0%/+24.7% year on month, and 4Q23's single container revenue was -28.2%/+1.2% year over month. 4Q23 SCFI's average freight rates for Southeast Asia, Japan and Korea routes were -31.3%, -1.2%, and -44.7%, respectively, with changes of +26.1%, -3.3%, and -3.2%, respectively.
The company's gross margin declined due to falling freight prices, but absolute costs are still being optimized. In 2023, the company's gross margin was 25.7%, down 22.4 ppts year on year. 2H23's gross margin was 24.7%, down 1.8 ppts from 1H23. We think it is mainly because some of the company's costs are rigid, such as transportation costs of the company's equipment and goods and depreciation costs of ships, which do not change with freight rates. However, in 2023, the company's sales cost fell 15% year on year, and 2H23 sales cost fell 4% month-on-month compared to 1H23. We think it was mainly due to the decline in the company's boat rental costs and fuel costs.
Development trends
Supply and demand in the Asian region improved in 2024, and freight rates may increase compared to 2H23. There are few new freight rates for small supply-side boats. According to Clarkson's monthly data, on-hand orders for small boats under 3,000 TEU account for 8.5% of capacity (while old boats aged 20 and over account for 24%), and ship dismantling has accelerated since 2023. 110,000 TEU of ships were scrapped in 2023, and 10,000 TEU of ships were scrapped from 2024 to now. 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. Demand side volume is expected to improve year on year. We believe that with the transfer of industries within the Asian region and the growth of Southeast Asian countries such as Vietnam, the company's cargo volume is expected to increase year over year. According to Clarksons forecast data, the capacity of 3,000 TEU small ships increased 2.1% year on year in 2024, while cargo volume demand in the Asian region increased by 3.7% year on year.
Profit forecasting and valuation
As freight rates fell short of expectations, we lowered our 2024 net profit by 23% to US$505 million, and introduced 2025 net profit of US$443 million for the first time. The current stock price corresponds to 8.4 times the 2024 price-earnings ratio and 9.6 times the 2025 price-earnings ratio. Maintaining an outperforming industry rating, the target price was lowered by 15.8% to HK$16 per share, corresponding to 11 times the 2024 price-earnings ratio and 12.5 times the 2025 price-earnings ratio. There is 30% room for growth compared to the current stock price. The company announced a dividend of $0.14 for the full year of 2023, corresponding to a dividend ratio of 70% in 2023. Assuming that the company maintains a 70% dividend rate, the corresponding dividend rate for 2024 is 8.3%, which is very attractive.
risks
Transportation and trade demand in the Asian market fell short of expectations; orders for new ships accumulated in large numbers.