The company's recent situation
As of July 5, 2024, the SCFI Composite Freight Index was 3,734 points, a year-on-year increase of 300.7%. Among them, the Western US freight rate was close to the 2022 high in the previous cycle. At the end of April, we indicated that freight rates may continue to rise due to Red Sea detours consuming effective capacity, overseas import demand exceeding expectations, and congestion at some ports.
reviews
Market consensus: This round of freight rate increases include supply-side factors (Red Sea detour), supply-side factors that are expected to gradually ease as new ships continue to be delivered, and demand-side factors (inventory replenishment and early shipment due to concerns about tariffs); the difference lies in the duration of the above factors. Referring to 2020-2023, the sharp drop in freight rates (3Q22) was caused by rapid and significant weakening of demand (inventory removal), not by factors such as port congestion relief (which occurred in early '22), new ship deliveries (more than 22 years), because these factors are all “slow” variables that gradually change; in this round of the market, if the Red Sea continues to detour and there is no rapid or significant drop on the demand side, the period when freight rates remain high may exceed expectations.
Supply: The Red Sea bypass continues to consume effective capacity, and the water supply gap is expected to gradually ease with subsequent capacity. Container ship traffic on the Suez Canal (7-day average) fell 90% year over year. According to Clarksons data, container ship delivery capacity accounted for 5.1% of the capacity at the beginning of the year in the second half of the year. We believe that the capacity gap is expected to gradually ease, but other factors disrupting supply, such as dockworkers' strikes, are not ruled out.
Demand: The traditional peak season for ocean routes is approaching. The demand side is expected to remain strong in July-August, but it is still necessary to track demand after the peak season. Since the beginning of the year, demand for European and American routes has increased rapidly year on year. According to Alphaliner data, demand for Europe/US routes increased 6.9%/16.7% year on year. Currently, it has entered the traditional peak import season for ocean routes. According to the forecast data of the American Retailers Association, US port import volume increased 9.9%/10.7%/1.5% year on year respectively in July-September, changing -0.5%/+3.3%/-5.1% from the previous month, respectively.
Higher freight rates boosted the company's profit and dividend expectations, and cash on book and dividend ratios provided bottom support. As of 1Q24, the company's cash balance was 174.4 billion yuan (market value of A/H shares was 227.1/181.7 billion yuan, respectively), which will increase further by the end of the year. According to our profit forecast and 50% dividend ratio, the company's dividend ratio for 2024 A/H shares is 10.8%/14.3%, respectively, which is attractive. Potential catalysts are increasing balance sheets by overseas peers raising profit forecasts (such as Hapag-Lloyd) and delaying the fall in freight rates.
Profit forecasting and valuation
Considering the increase in spot freight rates, we raised our 2024/2025 profit of 122.4%/55.8% to 49.13 billion yuan/23.85 billion yuan. The current A share price corresponds to 4.6/9.5 times the 2024/2025 price-earnings ratio, and the H share price corresponds to 3.5/7.2 times the 2024/2025 price-earnings ratio. We maintained our industry performance rating, raised the target price of A-shares by 42.3% to 18.5 yuan/share, raised the target price of H shares by 39.1% to HK$16 per share, the target price for A-shares corresponds to 6.0/12.4 times the 2024/2025 price-earnings ratio, and the target price for H shares corresponds to 4.7/9.7 times the 2024/2025 price-earnings ratio, with room for improvement of 30.3%/34.2%, respectively.
risks
Risk of geopolitical changes, traffic resumed in the Red Sea; orders for new ships accumulated in large numbers.