China/Hong Kong Transportation/Shipping

Shipping update Shifting winds We revisit shipping fundamentals and expect the Baltic Dry Index (BDI) to increase in 2012, especially in 2H12, driven by a declining dry bulk supply surplus. However, we remain negative on the container shipping space given uncertain demand and increasing new capacity.





Dry bulk shipping rates to improve... We believe the next movement in freight rates will be determined by the incremental change in supply and demand, as opposed to the absolute surplus on which the street focuses. In 2011 the dry bulk shipping supply surplus has been 9%. In 2012 we expect it to be 7%, declining to 2% by 2013. Given vessel construction time of around 12-18 months and the current financing environment, the window for 2013 vessel deliveries is now nearly closed. We expect 2013 BDI to increase. Capesize freight rates will see the most improvement, as more capesize vessels were scrapped in 2011 and fewer deliveries are expected in the next two years. This will have a positive impact on the BDI given the greater weighting large vessels have within the BDI. …as new supply declines on shipyard concerns. We expect fewer dry bulk vessels to be delivered in 2012 than the official amount stated. Chinese shipyards, where 54% of dry bulk vessels are built, are seeing new orders dry up while low-priced orders under construction are depleting their working capital, leading to a decline in output and capacity utilization. These developments are largely overlooked by the street.




Prefer dry bulk to container. We remain negative on container shipping sector. End-user countries that drive container demand are running out of cash and the demand outlook for the sector is bleak. In addition, container vessel supply is increasingly being filled by more mature Korean shipyards likely to deliver on time.




Recommendation. BDI weakness in the near term represents a tempting entry point for the dry bulk shipping sector in view of the prospect of a stronger year-on-year 2H12 – including 3Q12 peak season – with further improvement in 2013.

We upgrade our rating on China COSCO (1919 HK), from Underperform to Outperform given the company’s potential earnings improvement, and upgrade China Shipping Development (1138 HK) and Pacific Basin (2343 HK) to Neutral. In general, we do not like container shipping stocks.

25 November 2011 Sector Rating:

Underweight (maintained)

Shipping sector year-to-date-performance OOIL

CSCL

NOL

CSD

SITC

CCH

PB

SSL

HSI

0%

(13)%

(26)%

(39)%

(52)%

(65)%

Source: Bloomberg, CCBIS

Shipping stocks beta and liquidity Beta 1.40 NOL

1.35

CCH 1.30

CSCL CSD

1.25

SITC

1.20 1.15 PB 1.10

OOIL

SS

1.05 0

1

2

3

4

5 6 Liquidity (US$m)

Source: Bloomberg, CCBIS

Winnie Guo (86 10) 6652 3729 [email protected]

Chou Xiao (86 755) 8826 6505 [email protected]

Tim Bacchus, CFA (852) 2532 2549 [email protected]

Please read the analyst certification and other important disclosures on last page

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25 November 2011

Table of Contents

Shifting winds ................................................................................................................................................................1

Executive summary.......................................................................................................................................................3

Share price leading fundamentals ................................................................................................................................6

Valuation .......................................................................................................................................................................8

Changing supply chain ...............................................................................................................................................12

Capesize balance improvement .................................................................................................................................17

Prefer dry bulk to container.........................................................................................................................................19

Dry bulk shipping outlook............................................................................................................................................21

Container shipping outlook .........................................................................................................................................27

China COSCO Holdings (1919 HK)............................................................................................................................34

China Shipping Development (1138 HK) ....................................................................................................................36

Sinotrans Shipping (368 HK) ......................................................................................................................................38

Pacific Basin Shipping (2343 HK)...............................................................................................................................40

Orient Overseas (International) (316 HK) ...................................................................................................................42

SITC International Holdings (1308 HK) ......................................................................................................................44

Neptune Orient Lines (NOL SP) .................................................................................................................................46

2

Transportation/Shipping

25 November 2011

Executive summary We revisit shipping market fundamentals and our outlook for the 2012 shipping market. Changes that have taken place in 2011 are likely to have an impact on the industry’s demand-and-supply dynamics in 2012. We expect dry bulk freight rates to see improvement in 2012 and further increase in 2013, driven by improvements in the demand-supply equilibrium. Container shipping is another story: given uncertain demand and increasing new capacity, we remain negative on the sector.

Shipping shares move ahead of fundamentals Shipping share prices tend to move ahead of industry fundamentals at the inflection points. With significant losses in 3Q11 and the continuing decline in 4Q11, we believe we are getting closer to another inflection point for shipping stock prices. 2012 is also likely to be another loss-making year for many shipping companies. However, even if profitability is flat year-on-year, shipping company earnings will improve on a quarter-on-quarter basis, in direct contrast to the deterioration in 2011’s quarter-on-quarter results. In our view, share prices are likely to reflect this earnings recovery.

Dry bulk supply surplus to decline We expect the dry bulk supply surplus to decline, driving up freight rates in 2012 and 2013. In our view, the entire industry has put too much emphasis on the absolute amount of oversupply. Current freight rates are a result of the current amount of surplus, such that any improvement from surplus levels will improve freight rates. In our view, the incremental delta more than anything else is driving freight rates and share performance. Dry bulk surplus vs. freight rates

Container shipping surplus vs. freight rates 140%

4%

2%

120%

2%

0%

100%

4%

Demand surplus

18%

(2)%

12%

(4)%

6%

20%

(6)%

0%

0%

(8)%

(6)%

60%

(4)%

40% (6)% (8)% (10)%

(20)% Supply surplus

(12)%

(40)%

Trade balance (LHS)

Source: Clarksons, CCBIS

BDI growth (RHS)

2013F

2012F

2011F

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

(60)% 2000

(14)%

3

24% Demand surplus

0%

80%

(2)%

30%

(10)%

(12)% Supply surplus

(12)% (14)% 2005

(18)%

2006

2007 2008 2009 Trade balance changes (LHS)

2010

2011F 2012F CCFI growth (RHS)

Source: Shanghai Shipping Exchange, Clarksons, CCBIS

(24)% 2013F

Transportation/Shipping

25 November 2011

Capesize weighs more on the index – 2011 scrapping to help Vessel demolition increased significantly in 2011, with most of the scrapped vessels being capesize class vessels. Capesize freight rates were below cash operating costs 60% of the time in 2011. Meanwhile, the capesize orderbook-to-fleet ratio declined from its 2008 peak of 120% to 40%, signifying a significant reduction in future fleet growth. This change should have a positive impact on the BDI, as the larger vessels have a greater effect on index movements.

Shipyard deliveries to slow – dry bulk In the previous cycle trough in 2008-2009, shipowners were loss making and yards had a decade-high order backlog and deposits. Today’s shipbuilders have balance sheet positions that are much worse as working capital is drying up. This will slow down shipyard deliveries and limit supply surplus, a dynamic we believe the street has overlooked.

Container – too much uncertainty, too many deliveries In contrast to decelerating dry bulk deliveries, container shipping deliveries are likely to increase in 2012 and 2013, despite falling demand from Europe. The rate of decline in container freight rates has begun to slacken, driven by resilient US demand and an uptick in long-haul vessel lay-ups. But it would be premature to turn positive on the container shipping industry because even if there is a US recovery in 2012, it would not be enough to offset declining Europe demand.

Recommendations and valuations We expect dry bulk shipping to enjoy a significant recovery in 2013 given stated vessel deliveries decline to 115m dwt in 2012 and 47m dwt in 2013 from 120m dwt in 2011. The window to order for 2013 delivery has closed. As we believe equities will anticipate a recovery in advance, 1H12 would be a good time to accumulate dry bulk shipping stocks, as 2H12 is likely to see year-on-year improvement thanks to the low bar set in 2011. Freight rates are likely to weaken further in 1Q12, creating a good entry point for investors. We prefer dry bulk shipping to container shipping as the bulk shipping industry outlook is improving. We also like shipping companies that are close to or below their liquidation value, including SITC (1308 HK, Outperform) and China COSCO (1919 HK, Outperform). We upgrade our rating on China COSCO, from Underperform to Outperform, given the company’s potential earnings improvement; and upgrade China Shipping Development (1138 HK) and Pacific Basin (2343 HK) to Neutral. We have also updated our valuations and target prices as we roll over to 2012 book values from 2011. These changes are summarized below.

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25 November 2011

2012 earnings forecasts, target price and rating changes Company CCH

Stock code

Unit

1919 HK RMB m

Previous

Earnings Current

(7,940)

(5,952)

% change 25

Target price(local currency) Previous Current % change HK$3.60

HK$4.90

36.0

Ratings Previous

Current

Underperform

Outperform

CSD 1138 HK RMB m 1,119 1,119 0 HK$4.17 HK$4.21 1.0 Underperform Neutral PB 2343 HK US$m 64 99 55 HK$3.00 HK$3.10 3.0 Underperform Neutral SSL 368 HK US$m 89 67 (25) HK$2.10 HK$2.10 0.0 Neutral Neutral OOIL 316 HK US$m 114 (140) N/A HK$25.00 HK$25.00 0.0 Underperform Underperform NOL NOL SP US$m (155) (307) (50) S$0.77 S$0.77 0.0 Underperform Underperform SITC 1308 HK US$m 162 83 (49) HK$2.50 HK$2.50 0.0 Outperform Outperform Note: CCH – China COSCO; CSD – China Shipping Development; PB – Pacific Basin; SSL – Sinotrans Shipping; OOIL – Oriental Overseas; NOL – Neptune Orient Lines Price as at close on 24 November 2011 Source: Clarksons, Bloomberg, CCBIS

Risks

5




Upside risk: Should US and European demand recover faster-than-expected, container demand would rise in 2H12, with share prices following suit.




Downside risk: If the drop-off in demand from Europe gets any worse and drags global demand down farther than anticipated – bringing down demand growth from China in the process – bulk shipping freight rates could fall lower than we expect.

Transportation/Shipping

25 November 2011

Share price leading fundamentals Shipping share prices are generally correlated with freight rates and earnings; however, at the inflection points, the equity market tends to lead both earnings and freight rates.

Freight rates Container shipping share prices typically lead freight rates by three-to-seven months at the inflection points. Dry bulk shipping share prices have not correlated with the BDI in the recent years on a day-to-day basis, but reflect the BDI three-month moving trend. In our view, container shipping freight rates will remain at low levels over the next 12 months due to weak demand and increasing vessel deliveries. We are unlikely to see container shipping share prices reach an inflection point in the next six months. Our new 2011F average forecast for BDI is 1,500, and the year-to-date average BDI is 1,519. We expect average BDI for 2012 to rise to 1,700, along with further improvements to the dry bulk shipping supply-demand balance in 2013. The positive industry outlook is likely to lift share prices in the next 12 months. Container relative performance vs. share performance

Dry bulk performance vs. BDI

1,250

600

460

1,200

550

420

1,150

500

500

380

1,100

340

1,050

300 1,000

260

950

220

900

180

8,500

400 350

6,500

300 250

4,500

200

850

150

100

800

100

Source: Shanghai Shipping Exchange, Bloomberg, CCBIS

10,500

450

140

60 750 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Container shipping relative performance (LHS) CCFI (RHS)

12,500

50 Jan-04

2,500 500 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Nov-09 Nov-10 Nov-11 Dry bulk shares relative performance (LHS) BDI (RHS)

Source: Bloomberg, CCBIS

In the table below we show by how much container shipping share prices lead or lag container shipping freight rates. Container shipping share prices leading/lagging container freight rates at the inflection point Peak

Months lead/lag*

Trough

Months lead/lag*

Peak

Months lead/lag*

Trough

Months lead/lag*

CCFI Oct 2004 Mar 2007 Feb 2008 Jun 2009 CSCL Mar 2005 5 Dec 2006 (3) Oct 2007 (4) Oct 2008 (8) OOIL Apr 2005 6 Oct 2006 (5) Jul 2007 (7) Nov 2008 (7) NOL Jun 2005 8 Dec 2006 (3) Jul 2007 (7) Nov 2008 (7) * A negative number indicates container shipping share prices leading container freight rates, while a positive number indicates a lag Source: Bloomberg, Shanghai Shipping Exchange, CCBIS

6

Peak

Months lead/lag*

Aug 2010 Feb 2011 Mar 2011 Jan 2011

6 7 5

Transportation/Shipping

25 November 2011

Earnings The previous cycle told us that shipping share prices tend to bottom before earnings do, especially in the case of dry bulk shipping stocks. Investors tend to accumulate dry bulk shipping stocks when earnings are falling, long before they rebound. Bulk – EPS vs. share performance

Container – earnings vs. share performance US$ 1.6

370

US$ 0.15

670

320

0.14 0.13

570

1.4 1.2

0.12

1.0

270

0.8 220 0.6 0.4

170

470

0.09

370

0.08 0.07 0.06

270

0.05

0.2 120 0.0 (0.2) Jan-07

0.11 0.10

Sep-07 May-08 Jan-09 Weighted average EPS (LHS)

70 Oct-09 Jun-10 Feb-11 Nov-11 Container relative return (RHS)

Source: Bloomberg, CCBIS

170

0.04 0.03 0.02 Jan-06

Sep-06 Jun-07 Mar-08 Dec-08 Weighted average EPS (LHS)

70 Aug-09 May-10 Feb-11 Nov-11 Dry bulk relative return (RHS)

Source: Bloomberg, CCBIS

In the table below we show individual company share prices leading and lagging earnings. Company earnings leading/lagging the share price at inflection points Peak Share price

EPS

Trough Leading/ lagging*

Share price

EPS

Peak Leading/ lagging*

Share price

EPS

Trough Leading/ lagging*

Share price

EPS

Peak Leading/ lagging*

Share price

EPS

CSCL Mar 05 Dec 04 4 Dec 06 Jun 06 6 Oct 07 Dec 07 (2) Oct 08 Jun 09 (8) Feb 11 Dec 10 OOIL Apr 05 Dec 04 5 Oct 06 Dec 06 (2) Jul 07 Dec 07 (5) Nov 08 Jun 09 (7) Mar 11 Dec 10 NOL Mar 05 Dec 04 4 Dec 06 Mar 07 (3) Jul 07 Dec 07 (5) Nov 08 Mar 09 (4) Jan 11 Sep 10 CCH Oct 07 Dec 07 (2) Oct 08 Jun 09 (8) Aug 09 Jun 10 CSD Jul 05 Mar 05 4 Jun 06 Dec 05 6 Apr 08 Dec 07 4 Oct 08 Jan 10 (15) Jan 10 Jun 10 PB Jun 05 Jun 05 – May 06 Jun 06 (1) Oct 07 Dec 07 (1) Oct 08 Jan 10 (15) Jan 10 Jun 10 SSL Nov 07 Dec 07 – Oct 08 Jan 10 (15) Jan 10 Jan 11 Note: CSCL – China Shipping Container Lines; OOIL – Oriental Overseas; NOL – Neptune Orient Lines; CCH – China COSCO; CSD – China Shipping Development; PB – Pacific Basin; SSL – Sinotrans Shipping * A negative number indicates container shipping share prices leading container freight rates, while a positive number indicates a lag Source: Bloomberg, Shanghai Shipping Exchange, CCBIS

7

Leading/ lagging* 2 3 4 (10) (5) (5) (12)

Transportation/Shipping

25 November 2011

Valuation We expect dry bulk shipping companies to see valuation improvements in the next 12-months due to a brighter sector outlook and better earnings. In contrast, the valuations of container shipping companies are unlikely to improve given the deterioration in freight rates. Shipping company valuations

Company CCH

Stock code

Price (local currency)

Rating

1919 HK

3.29

Outperform

Upside/ Market Target price downside cap Turnover P/NAV P/E (x) (HK$) (%) (US$m) (US$m) (x) 2011F 2012F 4.90

49

8,518

10

0.4

N/A

N/A

P/BV (x) 2011F 2012F 0.7

0.8

EV/EBITDA (x) ROE (%) 2011F 2012F 2011F N/A

CSD 1138 HK 4.44 Neutral 4.21 (5) 3,028 8 0.8 10.8 11.3 0.5 0.5 12 PB 2343 HK 3.31 Neutral 3.10 (6) 822 2 0.6 23.4 8.4 0.6 0.5 7 SSL 368 HK 1.93 Neutral 2.10 9 988 1 0.5 10.7 14.8 0.5 0.4 1 CSCL 2866 HK 1.29 Not Rated N/A N/A 4,236 7 0.5 N/A N/A 0.5 0.5 N/A OOIL 316 HK 33.75 Underperform 25.00 (26) 2,709 5 0.6 27.8 N/A 0.6 0.7 7 NOL NOL SP 1.03 Underperform 0.77 (25) 2,028 10 0.6 N/A N/A 0.7 0.8 31 SITC 1308 HK 1.66 Outperform 2.50 51 554 4 0.8 6.5 6.8 0.8 0.7 3 Average 0.6 15.8 10.3 0.6 0.6 10 Note: CCH – China COSCO; CSD – China Shipping Development; PB – Pacific Basin; SSL – Sinotrans Shipping; CSCL – China Shipping Container Lines; OOIL – Oriental Overseas; NOL – Neptune Orient Lines Price as at close on 24 November 2011 Source: Bloomberg, CCBIS

30

(12)

9 6 1 47 6 11 3 14

5 2 4 (8) 1 (9) 13 (1)

Where are we in terms of valuation? The majority of shipping stocks are still above their previous cycle trough share prices and valuations. In the table below, we provide a comparison of current share prices with previous trough valuations. Valuation comparisons with the previous cycle trough Company

Stock code

Current

Share price (local currency) 2008-2009 trough Downside/upside (%)

Current

PBR (x) 2008-2009 trough

Downside/upside (%)

CCH 1919 HK 3.29 2.62 (20) 0.7 0.4 (43) CSD 1138 HK 4.44 4.50 1 0.5 0.7 40 PB 2343 HK 3.31 2.89 (13) 0.6 0.5 （17） SSL 368 HK 1.93 1.00 (48) 0.5 0.3 (40) CSCL 2866 HK 1.29 0.65 (50) 0.5 0.2 (60) OOIL 316 HK 33.75 9.94 (71) 0.6 0.2 (67) NOL NOL SP 1.03 0.78 (26) 0.7 0.3 (57) Note: CCH – China COSCO; CSD – China Shipping Development; PB – Pacific Basin; SSL – Sinotrans Shipping; CSCL – China Shipping Container Lines; OOIL – Oriental Overseas; NOL – Neptune Orient Lines Price as at close on 24 November 2011 Source: Bloomberg, CCBIS

Different cycles have different trough valuations so it is not a good idea to model a current trough on a previous trough. In general, it is tough to figure out a trough valuation when a company is loss making and trades on market outlook. To provide safe supporting levels for the names in our universe, we use liquidation values. We consider a company’s liquidation value as its distressed value for shipping companies and a supporting level for all the shipping names.

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Transportation/Shipping

25 November 2011

Liquidation value assigns the ship a residual value. In a very negative environment, the second-hand vessel market is illiquid and vessels can be sold at a large discount to market value, often close to scrap value, which is the residual value of the ship. Distressed valuation (trading currency per share) Company

Stock code

Book value

NAV

Liquidation value

Current share price

1919 HK

4.1

8.43

2.89

3.29

CCH

Difference from liquidation value 14

CSD 1138 HK 8.4 5.33 (4.12) 4.44 PB 2343 HK 6.2 5.10 0.35 3.31 SSL 368 HK 4.4 3.74 2.07 1.93 OOIL 316 HK 51.3 57.59 29.05 33.75 CSCL 2866 HK 3.6 2.74 0.82 1.29 NOL NOL SP 1.3 1.87 0.46 1.04 SITC 1308 HK 2.3 2.20 1.78 1.66 Note: CCH – China COSCO; CSD – China Shipping Development; PB – Pacific Basin; SSL – Sinotrans Shipping; OOIL – Oriental Overseas; CSCL – China Shipping Container Lines; NOL – Neptune Orient Lines Source: Clarksons, Bloomberg, CCBIS

N/A 845 (7) 16 58 127 (7)

In the table below, we elaborate how we calculated liquidation value for the Chinese shipping companies in our universe. Liquidation value is calculated by assuming 10% of off-balance-sheet liability will be paid and the remainder will default. We consider operating leases and vessel-under-construction payments as off-balance sheet liabilities for shipping companies. China COSCO’s recent failure to renegotiate its charter contracts tells us that it is not easy to get rid of all off-balance sheet liabilities; therefore, we assume companies need to partially pay these liabilities even under extreme circumstances. How we calculated liquidation value (trading currency per share) Company

Stock code

Fleet market value ①

Fleet residual value* Other assets ③ ②

Net cash ④

Capital commitment ⑤

NAV = ①+③+④

Liquidation value1 = ② + ③ + ④ - 10% x ⑤

CCH 1919 HK 6.42 1.89 4.52 (2.51) 10.02 8.43 2.89 CSD 1138 HK 11.56 2.68 0.00 (6.22) 5.75 5.33 (4.12) PB 2343 HK 5.99 1.41 0.00 (0.89) 1.73 5.10 0.35 SSL 368 HK 2.20 0.54 0.00 1.54 0.11 3.74 2.07 CSCL 2866 HK 2.60 0.76 0.58 (0.44) 0.79 2.74 0.82 OOIL 316 HK 37.63 10.81 25.00 (5.04) 17.15 57.59 29.05 NOL NOL SP 2.33 1.06 0.00 (0.46) 1.43 1.87 0.46 SITC 1308 HK 0.59 0.23 0.56 1.05 0.64 2.20 1.78 Note: CCH – China COSCO; CSD – China Shipping Development; PB – Pacific Basin; SSL – Sinotrans Shipping; CSCL – China Shipping Container Lines; OOIL – Oriental Overseas; NOL – Neptune Orient Lines * Residual value = scrap value Source: Clarksons, Bloomberg, CCBIS

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Transportation/Shipping

25 November 2011

The chart below shows liquidation value as percentage of the company’s current share price. In our view, a company that is trading close to its liquidation value, or a company for which the liquidation value accounts for a higher percentage of its current share price, has a solid valuation. Liquidation value as percentage of current share price 120% 100% 80% 60% 40% 20% 0% (20)% (40)% (60)% (80)% (100)% CSD

PB

CSCL

NOL

OOIL

CCH

SITC

SSL

Source: Clarksons, Bloomberg, CCBIS

Liquidation value is the most bearish case at which a shipping company could be traded at. As the market is unlikely to reach this distressed point we see no point in deriving our target prices from liquidation value. However, we believe it is a value that must be considered as a supporting level for shipping stocks and a data point that investors should bear in mind. Shipping companies with low trading liquidity have in the past fallen below their liquidation values – this happened to Sinotrans Shipping (368 HK, Neutral). We would be buyers of liquid large market cap shipping names should they trade close to supporting levels. Scrap value vs. market value of a 15-year vessel US$m 24 20 16 12 8 4 0 Capesize bulk

Panamax bulk Handysize bulk Scrap

Source: Clarksons, CCBIS

10

VLCC tanker Suezmax tanker Aframax tanker

Market value of 15-year vessel

Market value of 20-year vessel

Handysize tanker

Transportation/Shipping

25 November 2011

A glance at NAV We examine shipping company NAVs to assess the current economic value of company assets. Among the shipping names we cover, SITC and SS are net cash. CSD’s book value has deviated farthest from its NAV, primarily due to the expensive vessels the company acquired at the market peak. NAV compared with BVPS

Composite of NAV 100%

HK$ 9

80%

8

60%

7 6

40%

5 20%

4

0%

3 2

(20)%

1

(40)%

0 CCH

CSD

PB SSL Fleet value

Source: Bloomberg, Clarksons, CCBIS

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CSCL Net cash

NOL

SITC

NOL

SITC

CSCL SSL 2012F book value/share

Source: Bloomberg, Clarksons, CCBIS

PB NAV/share

CSD

CCH

Transportation/Shipping

25 November 2011

Changing supply chain We expect increasing delivery delays from Chinese shipyards in 2012 resulting in fewer-than-expected vessel deliveries, especially dry-bulk vessel deliveries. We assume 30% delivery slippage in our 2012 dry bulk shipping model, compared with slippage of 28% and 21% in 2010 and 2011, respectively. We see potential upside to our freight rate forecast should fewer vessels be delivered in 2012.

Yards, cash flow dry up Listed Chinese yards, including China Rongsheng (1101 HK, Outperform), Cosco Corporation (COS SP, Not Rated) and Yangzijiang Shipbuilding (YZJ SP, Not Rated), reported cash flow deterioration in 2Q11 and 3Q11. Because these yards are the leading yards in China, they are more likely to get financing from the government. Smaller Chinese yards, unable to secure financing, are likely to see cash flow dry up in 2012, mainly due to:


Lower-priced vessels putting pressure on margins. This trend is likely to worsen in 2012-2013 as the mismatch between high labor and material costs and lower-priced orders under construction becomes more acute. Our estimate has the current price for vessels under construction at 26% below what it was in 2010, while the price of steel increased 32% even after recent weakness.

Vessel price vs. steel costs RMB/tonne 7,000

Margin squeeze 32%

Vessel price -26%

200 190

6,300

27%

180 170

5,600

160 4,900

22%

150 140

4,200

17%

130 120

3,500

12%

110

Steel plate +32% 2,800 100 2003 2004 2005 2006 2007 2008 2009 2010 2011 China steel plate price (LHS) New build price index moving 2-year forward (RHS)

Source: Bloomberg, Clarksons, CCBIS

Apr-06

May-07 Jun-08 Jul-09 Chinese yard average gross margin

Aug-10

Sep-11

* Average includes Yangzijiang, COSCO Corporation, China State Shipbuilding Corp. and China Shipbuilding Industry Co. Source: Bloomberg, CCBIS


12

7% Mar-05

Difficulty collecting payments. Amid tighter financing, declining freight rates reduced shipowner profitability and unfavorable contract terms for shipbuilders in 2009-2010, shipyards saw receivables growth outpace sales growth in 2011 while shipbuilder operating cash flow turned negative. In another words, yards are recognizing revenue faster than cash flow collected and need cash to support further deliveries. Our channel check indicates most yards in China can only collect 30-50% of the vessel price in cash once the vessel reaches the launching stage.

Transportation/Shipping

25 November 2011

Receivables at worrying level

Weighted-average operating cash flow per share

1.65x

US$/share 0.14 0.12

1.35x

0.10 0.08

1.05x

0.06 0.04

0.75x

0.02 0.00

0.45x

(0.02) (0.04) (0.06) Dec 07 May 08 Oct 08 Mar 09 Aug 09 Jan 10 Jun 10 Nov 10 Apr 11 Sep 11

Average of Yangzijiang, COSCO Corporation, China State Shipbuilding Corp., China Shipbuilding Industry Co. Source: Bloomberg, CCBIS


0.15x Mar-05

Jan-06

Nov-06

Sep-07 Jun-08 Apr-09 Feb-10 Chinese shipyards receivable to revenue

Dec-10

Sep-11

Average of Yangzijiang, COSCO Corporation, China State Shipbuilding Corp., China Shipbuilding Industry Co. Source: Bloomberg, CCBIS

Declining new orders. Global shipbuilding new orders declined in 2011. Chinese yards were hit particularly hard, which resulted in fewer downpayments collected.

Decline in new orders…

… resulted in fewer down payments collected

m CGT 3.5 From the recent peak: China -60 % 3.0 Japan-12% Korea -31% 2.5

US$b 16.5

13.2

9.9 2.0 6.6

1.5 1.0

3.3

0.5 0.0 0.0 2004

2005

2006 Japan

2007 China

* Six-month rolling average new order volume Source: Clarksons, CCBIS

2008 2009 2010 Korea Others

2011

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD Down payment collected at Chinese yards

Source: Clarksons, CCBIS

As most down payments have already paid for next year’s deliveries, we doubt there will be order cancellations. Deliveries may be deferred to 2013, which would water down actual supply growth in 2012.

13

Transportation/Shipping

25 November 2011

Smaller yards have more trouble The top-30 Chinese yards won more than 50% of all new orders in 2011 with the remaining 350 yards left to fight over 3.7m CGT in new orders, the equivalent of about 314 x 30k dwt handysize bulk vessels. The upshot is that smaller yards did not get many orders in 2011. Smaller yards struggling in the shadow of the larger yards are likely to encounter severe cash flow problems. Smaller yards delivered more ships and contracted fewer ships 0.85% 0.75% 0.65% 0.55% 0.45% 0.35% 0.25% Jun-05

Apr-06 Mar-07 Feb-08 Chinese yards deliveries by top 30 yards

Jan-09 Dec-09 Nov-10 Chinese yards new order by top 30 yards

Sep-11

Source: Clarksons, CCBIS

Output increase unlikely Shipbuilding is a capital-intensive industry. Even without capacity expansion, maintenance costs for a five-year-old dry dock amount to around RMB0.5m/year. Deteriorating working capital and balance sheets are making it difficult for yards to secure to the financing needed to fuel capital expenditure, making it that much more difficult to increase output. Challenges expanding capacity aside, we also expect current capacity utilization at Chinese shipyards to suffer due to:

14




Unwillingness on the part of shipowners to receive vessels and their tendency to slow down payments to the yards, with the result that the construction progress is often brought to a standstill. Built vessels languishing in the yards take up space that could be put towards the construction of other ships.




Large-scale capacity expansion in 2007-2008 and a dearth of new orders secured in subsequent years is likely to lower output, leaving some capacity slots idle. Yards tend to spread out delivery times in an effort to optimize capacity. Shutting down capacity and reactivating comes with a cost and yards would lose market share if they chose that route.




Working capital drying up – the more ships that are build, the greater the need for cash.

Transportation/Shipping

25 November 2011

… because backlog peaked

Output peaked… m CGT 20

m CGT 75

18 16

60

14 12

45

10 8

30

6 4

15

2 0 2004

2005

2006

Source: Clarksons, CCBIS

2007

0 Jan-96

2008 2009 2010 2011F 2012F 2013F 2014F China shipbuilding output

Mar-99

May-02 Japan

Jul-05 China

Sep-08

Nov-11

Korea

Source: Clarksons, CCBIS

Why is delivery important? Cancellation and deliveries were a hot topic in 2008-2009 even though widespread cancellations never did take effect. Even the cancellations that did take place were insufficient to save the industry from a precipitous decline. Delivery delays in 2012 are likely to be worse than they were in 2009 with more devastating results. Orderbook declines – stated orderbooks for 2012 deliveries are already smaller than they were in 2011. A small change in deliveries could have a significant impact on industry equilibrium and freight rates. Such was the size of the orderbook in 2009 that even a significant cancellation was insufficient to allay the over-supply problem. 68m dwt in dry bulk orders were to be delivered in 2009 but ultimately only 43m were actually delivered to customers. Although 36% of the deliveries were cancelled or delayed, 2009 deliveries almost doubled from 24m dwt in 2008, and resulted in fleet growth of 10% in 2009 and 17% in 2010.




Stated deliveries vs. actual deliveries m DWT 140 But it might help here 120 100 80

Cancellation did not help due to the big stated orderbook

60 40 20 0 2008

Source: Clarksons, CCBIS

15

2009

2010 Stated deliveries

2011F Actual deliveries

2012F

2013F

Transportation/Shipping

25 November 2011




The yards are in trouble. In the 2008-2009 cycle trough, shipowners struggled while builders had their hands full with new orders. Yards were generating good profit building high-priced orders secured one-to-two years before, leading to solid cash flow despite the downturn. At the time, the backlog of the yards was long tailed, with most yards working through two-to-three years of backlog.

Dry bulk orders are most vulnerable Most bulk orders are placed in China while most shipping orders are ordered by European shipowners. With the economic backdrop at best uncertain and likely deteriorating, we expect actual deliveries for dry bulk to be much lower than stated by official numbers. Order backlog by country (October 2011)

Who is building what? (2011) 100%

Greece 11% Others 28%

80%

Germany 8%

60%

Norway 7%

40%

Denmark 3%

Brazil 5%

20%

Other Europe 11%

US 7% 0% Tanker

Source: Clarksons, CCBIS

16

Bulk Japan Korea

Containers China Others

Others

Korea 4%

Source: Clarksons, CCBIS

Japan 7%

China 9%

Transportation/Shipping

25 November 2011

Capesize balance improvement Capesize scrap increased Year-to-date, half of all dry bulk vessels scrapped were capesize vessels, compared with 14% in 2009 and 43% in 2010. This is primarily because of the unprofitable capesize freight rates in 2011. The year-to-date lowest capesize freight rate was US$9,750/day, well below the US$15,000/day cash cost to run a capesize vessel. Low capesize freight rates…

… resulted in more capesize vessels being scrapped

US$/dav 66,000

m DWT 21

57,000

18

48,000

15

39,000

Capesize cash break even

12

30,000

9

21,000

6

12,000

3

3,000 Jan-09

0 May-09

Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 Capesize 150,000 dwt 6-month time charter rate

Oct-11

Source: Clarksons, CCBIS

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Capesize Panamax Handymax Handysize

Source: Clarksons, CCBIS

Most capesize vessels ordered in recent years were delivered in 2011, which will result in a deceleration in the hitherto rapid decline in fleet growth in follow years. Given the improving industry equilibrium, capesize freight rates are likely to see some improvement in 2012. Orderbook to fleet (by dwt) 125%

Fleet growth (by dwt) 25% 20%

100%

15% 75% 10% 50% 5% 25%

0% Jan-96 Oct-97

0%

Jul-99 Apr-01 Jan-03 Oct-04 Jul-06 Apr-08 Jan-10 Oct-11 Capesize Panamax Handymax Hanysize

Source: Clarksons, CCBIS

17

(5)% Jan-97 Nov-98 Oct-00 Aug-02 Jul-04 May-06 Apr-08 Feb-10 Jan-12 Nov-13 Capesize Panamax Handymax Handysize

Source: Clarksons, CCBIS

Transportation/Shipping

25 November 2011

Size matters The improving capesize supply-demand equilibrium will have a positive impact on the BDI. The BDI is the equal weighted average of every vessel type’s freight index. However, as capesize freight rates have a larger value due to the larger size of capsize vessels, a one percentage point change in capesize freight rates has a greater impact on BDI than the other vessel types. The chart below shows BDI changes given a 10% change in the each of the vessel sub-type indices. A 10% change in the BCI capsize index has around a 4.7% change in the BDI, almost double the impact of a similar change in the Panamax index. BDI is most sensitive to capesize freight rate changes 5%

4%

3%

2%

1%

0% BCI +10%

BPI +10%

BSI +10%

BHI +10%

BCI: Baltic Capesize Index; BPI: Baltic Panamax Index; BSI: Baltic Supramax Index; BHI: Baltic Handysize Index Source: Bloomberg, CCBIS

18

Transportation/Shipping

25 November 2011

Prefer dry bulk to container In our view, dry bulk shipping has a better outlook in 2012 than container shipping.

Bulk shipping vessel deliveries to decelerate We believe dry bulk shipping deliveries peaked in 2011. Heading into 2012, fleet growth will decelerate, which is good for the supply-demand equilibrium. At the same time, we anticipate container shipping deliveries will continue to increase in 2012 and 2013, with fleet growth maintaining its current space. Different delivery growth…

… results in different fleet growth

m DWT 270

Bulk deliveries peaked

240

'000 TEU 14

14%

17%

12

12%

14%

10%

11%

8%

8%

6%

5%

4%

2%

210 10

180 150

8

120

6

90

4

60

Source: Clarksons, CCBIS

Container fleet growth (LHS)

2013F

2012F

2011F

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

Container deliveries still growing 0 0 2000 2001 2002 2003 2005 2006 2007 2008 2010 2011 2012 2013 Container deliveries (LHS) Dry bulk deliveries (RHS)

2000

2

30

Dry bulk fleet growth (RHS)

Source: Clarksons, CCBIS

Aging dry bulk fleet 17% of the dry bulk fleet is over 20 years old; for the container fleet the figure is 6%. Year-to-date, 3.4% of the dry bulk fleet was scrapped, compared with 0.2% of the container fleet. Container has a young fleet…

… less liable to be scrapped

100%

m DWT 3.5

90%

'000 TEU 60

3.0

80% 70%

50

2.5

40

60% 2.0

50%

30 1.5

40% Potential scrap is smaller for container

30%

20

1.0

20%

0% Bulk 20+

Source:Clarksons, CCBIS

19

10

0.5

10%

15-19

10-14

Container 5-9 0-4

0.0 1996

1997 1999 2001 2003 Bulk carrier scrap volume (LHS)

0 2004 2006 2008 2010 2011 Container vessel scrap volume (RHS)

Source: Shanghai Shipping Exchange, CCBIS

Transportation/Shipping

25 November 2011

Uncertain incremental demand for container Container demand is weak and uncertain, while dry bulk shipping demand is likely to see incremental improvements. In 2011, China accounted for approximately 30% of global seaborne bulk incremental demand while the US and Europe accounted for around 40% of container shipping incremental demand. Incremental demand for container comes from the US

Incremental dry bulk trade demand 100%

100% 80%

80%

60% 60% 40% 40%

20%

20%

0% (20)%

0%

(40)% (20)%

(60)%

(40)%

(80)% (100)%

(60)% 2001 2002 2003

Source: Clarksons, CCBIS

20

2004 2005 2006 2007 2008 Others China

2009 2010 2011F

2006 2007 2008 2009 Transpacific Asia-Europe North-South

Source: Shanghai Shipping Exchange, Clarksons, CCBIS

2010 2011F Non-mainlane East-West

Transportation/Shipping

25 November 2011

Dry bulk shipping outlook Freight rates to improve BDI is likely to improve in 2012 and 2013, underpinned by the improving supply-demand balance. Dry bulk vessel deliveries are declining and the rate of demand decline is slowing down. Taken together, these trends are sure to improve the industry balance as defined by demand growth minus supply growth. There is an overwhelming concern in the market that dry bulk shipping is in a state of oversupply. However, in our opinion, the freight rates are a reflection of the current industry balance, with the movement of freight rates determined by incremental relative changes in that balance. Oversupply in the market will not be remedied in the near future. Nevertheless, freight rates should see improvement as the supply surplus declines. BDI spot, annual averages and CCBI forecasts 12,000 10,000 8,000 6,000 4,000 2,000 0 Jan-00

Jul-01

Feb-03

Aug-04

Mar-06 BDI

Oct-07 Apr-09 Year average

Nov-10

Jun-12

Dec-13

Source: Bloomberg, CCBIS

We raise our 2011 full-year BDI forecasts, from 1,200 to 1,500, on the back of higher-than-expected 3Q11 freight rates. Year-to-date, the BDI average is 1,519. We forecast the BDI to be 1,700 in 2012, and 3,000 in 2013.

21

Transportation/Shipping

25 November 2011

Dry bulk shipping forecasts 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011F

2012F

2013F

447 169 381 260 52 30 765 2,104 4

450 171 402 269 55 31 776 2,154 2

485 171 391 269 55 30 861 2,262 5

522 174 427 265 60 29 904 2,381 5

596 179 471 273 65 31 971 2,586 9

664 182 495 273 69 31 1,009 2,723 5

722 180 527 290 75 30 1,081 2,905 7

783 198 556 302 89 31 1,141 3,100 7

847 204 572 323 94 31 1,131 3,202 3

901 191 587 317 72 20 1,020 3,108 (3)

995 239 662 341 84 23 1,131 3,475 12

1,056 235 687 344 94 27 1,190 3,633 5

1,084 240 718 349 97 28 1,233 3,749 3

1,192 264 790 355 100 30 1,245 3,977 6

275 3

287 4

295 3

302 2

322 7

345 7

368 7

392 7

418 7

459 10

536 17

606 13

676 11

729 8

1

(2)

2

3

2

(2)

(0)

0

(3)

(13)

(5)

(9)

(7)

(2)

1,607 51

1,214 (24)

1,146 (6)

2,645 131

4,505 70

3,371 (25)

3,194 (5)

7,092 122

6,341 (11)

2,602 (59)

2,753 6

1,500 (45)

1,700 13

3,000 76

Global seaborne trade Iron ore (m tonne) Coking coal (m tonne) Steam coal (m tonne) Grain (m tonne) Bauxite/aluminum (m tonne) Phosphorus rock (m tonne) Minor bulk (m tonne) Total dry bulk (m tonne) Growth (%) Year end fleet (m DWT) YoY (%) Trade balance (%) Freight rate Baltic Dry Index Growth Source: Clarksons, CCBIS

Dry bulk shipping demand China accounts for about 30% of global bulk shipping incremental demand. China’s seaborne bulk demand is primarily driven by property construction and infrastructure construction. We expect demand from China to continue to slow but at a much slower pace in 2012 than in 2011.

Steel production Global steel production was 125m tonnes in October 2011, up 1% MoM and 6% YoY. Global steel production is on a downward trend as we approach 2012. Eurofer forecasts a gloomy outlook for steel demand growth in Europe in 2012, adding that not only is steel production expected to slow but so too is activity in steel-intensive sectors. POSCO (005490 KS, Not Rated) is planning to cut capex in 2012 after its 3Q11 profit slides. China accounted for 44% of global steel production in October 2011. Because 50% of Chinese steel demand is generated from property and infrastructure construction, it is strongly correlated with M2. Should the Chinese government loosen monetary policy, steel production would likely also rise.

22

Transportation/Shipping

25 November 2011

China steel production vs. M2

World steel production

45%

m tonne 130

40%

120

30%

110 20%

100

40% 35% 30% 25%

30% 28% 26% 24%

20%

90

10%

80

0%

70

(10)%

15%

22%

10%

20%

5% 0% (5)%

60 (20)%

50

(10)% (15)%

40 (30)% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 World steel production (LHS) YoY (RHS)

Source: World Steel Association, CCBIS

18% 16% 14%

(20)% 12% 1998 1999 2000 2001 2003 2004 2005 2006 2008 2009 2010 2011 YoY China steel production (LHS) China M2 growth (RHS)

Source: National Bureau of Statistics, CCBIS

Iron ore imports China imported 49m tonnes of iron ore in October 2011, down 13% YoY and down 18% MoM. Together with declining imports, the domestic iron ore inventory increased 1.8m tonnes last week. China iron ore inventory

China iron ore imports 120%

m tonne 75

100%

70 65

80%

60

60%

55

40%

50

20%

45

0%

40

(20)%

35 30 Jun-05

Dec-05

May-06

Source:Mysteel, CCBIS

Oct-06

Apr-07

Sep-07

Mar-08

Aug-08

(40)% Jan-03 Jan-04 Jan-05 Dec-05 Dec-06 Dec-07 Nov-08 Nov-09 Nov-10 Oct-11

Source: Antaike Information Development, CCBIS

Domestic iron ore production is increasing gradually. China now imports 60% of its iron ore and produces 40% domestically. Domestic iron ore production costs US$70/tonne and unless the iron ore CIF price falls below US$70/tonne, we do not expect widespread closures of domestic iron ore mills.

23

Transportation/Shipping

25 November 2011

China iron ore price

Domestic iron ore production 125%

RMB/tonne 1,700

110 100

100%

1,500

90 80

75%

1,300

70 60

50%

1,100

50 40

25%

900

30 20

0%

700

m tonne 130 120

10 0 (25)% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 China iron ore production (LHS) YoY% (RHS)

Source: National Bureau of Statistics, CCBIS

500 Jun-06

Mar-07

Dec-07 Oct-08 Jul-09 Apr-10 Jan-11 China iron ore import price at Qingdao Port

Nov-11

Source: China Customs, CCBIS

Coal imports Coal imports began to rise early this year (2011). Strong thermal coal imports were driven by strong power consumption. China coal import

Power generating 50%

m tonne 7

45% 40%

6

35% 30%

5

25% 4

20% 15%

3

10% 5%

2

0% (5)%

1

(10)% 0 Jan-09

May-09

Sep-09 Jan-10 May-10 China coking coal import

Source: China Customs, CCBIS

24

Sep-10 Jan-11 May-11 China thermal coal import

Sep-11

(15)% Jan-07

Sep-07 May-08 Jan-09 YoY electricity generating

Sep-09 May-10 Jan-11 YoY electricity consumption

Source: National Bureau of Statistics, China Electricity Council, CCBIS

Sep-11

Transportation/Shipping

25 November 2011

Dry bulk shipping supply We expect deliveries to decelerate in 2012 and slow further in 2013. We expect fleet growth to be 11% in 2012 and 9% in 2013 compared with 13% in 2011. In addition, we anticipate 2012 slippage deliveries will be pushed to 2013. Dry bulk shipping supply 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011F

2012F

2013F

Beginning fleet (m DWT) Stated deliveries (m DWT) Actual deliveries to orderbook (%) Actual deliveries (m DWT) Scrap (m DWT) Others (m DWT)

266.8 13.3 100 13.3 4.6 (0.8)

274.8 19.6 105 20.7 8.2 (0.4)

286.9 14.0 102 14.3 6.0 (0.6)

294.6 12.0 97 11.6 4.1 (0.2)

301.9 17.7 111 19.7 0.4 1.1

322.3 21.3 110 23.4 1.0 0.0

344.8 24.3 107 26.0 1.7 (0.9)

368.2 24.8 99 24.7 0.6 (0.2)

392.1 29.5 83 24.4 5.5 6.9

417.9 67.8 64 43.1 10.4 8.6

459.1 109.8 72 79.0 5.7 3.6

536.0 120.3 79 95.0 28.0 3.0

606.0 115.3 70 81.0 20.0 3.0

670.0 47.2 142 67.0 10.0 0.0

End fleet (m DWT) YoY (%) Source: Clarksons, CCBIS

274.8 3

286.9 4

294.6 3

301.9 2

322.3 7

344.8 7

368.2 7

392.1 7

417.9 7

459.1 10

536.0 17

606.0 13

670.0 11

727.0 9

Fleet capacity

Scrap Dry bulk shipping scrap volume increased significantly in 2011 driven by the low freight rates and high scrap steel price. Scrap volume vs. BDI

Scrap steel price vs. scrap vessel price US$m 8.7 7.9

US$/tonne 620

11,000

m DWT 3.5

540

9,500

3.0

8,000

2.5

6,500

2.0

5,000

1.5

3,500

1.0

2,000

0.5

7.1 460

6.3 5.5

380

4.7

300

3.9 220

3.1 2.3 Jul-05

Apr-06 Jan-07 Nov-07 Aug-08 Panamax scrap price (LHS)

Source: Clarksons, Bloomberg, CCBIS

May-09 Mar-10 Dec-10 Scrap steel price (RHS)

140 Sep-11

500 Jan-00

Jun-01

Dec-02 May-04 Nov-05 May-07 Oct-08 Apr-10 BDI (LHS) Scrap volume (RHS)

0.0 Sep-11

Source: Clarksons, CCBIS

Currently, the youngest vessels are of the capesize class, so it is highly unlikely there will be large-scale capesize scrapping in 2012.

25

Transportation/Shipping

25 November 2011

Fleet age profile

Share of older fleet is declining

100%

30% 28%

80%

26% 24%

60% 22% 20%

40%

18% 20%

16%

Fleet age above 20 years

Source: Clarksons, CCBIS

26

Sep-11

Jan-11

May-11

Sep-10

Jan-10

May-10

Sep-09

Jan-09

May-09

Sep-08

Jan-08

May-08

Sep-07

Jan-07

May-07

Sep-06

Jan-06

May-06

Sep-05

Jan-05

May-05

14% 0% Handysize 20+ years

Source: Clarksons, CCBIS

Handymax Panamax 15-19 years 10-14 years 5-9 years

Capesize 0-4 years

Transportation/Shipping

25 November 2011

Container shipping outlook Freight rates Year-to-date, the average container shipping spot rate, CCFI, was 1,002. We expect the CCFI year average to be 990 in 2011 and 891 in 2012. CCFI declined 11% YTD, with transpacific down 10%, Asia-Europe down 35% and intra-Asia freight rates up 16%. CCFI

CCFI by route 1,950

1,260

820 780

1,750

1,160

740 1,550

700

1,060

660 1,350 620

960

1,150

580 540

860

950

760 1998 1999 2000 2001 2002 2003 2004 2006 2007 2008 2009 2010 2011

750 460 1998 1999 2000 2001 2002 2003 2004 2006 2007 2008 2009 2010 2011 Transpacific (LHS) Asia-Euro (LHS) Intra-Asia (RHS)

500

Source: Shanghai Shipping Exchange, CCBIS

Source: Shanghai Shipping Exchange, CCBIS

Recently, the rate of decline in container shipping freight rates has slowed, aided by resilient US sales and demand. However, we expect container shipping freight rates to decline further in 2012, with CCFI falling 10% on weak demand from Europe. Container shipping forecast Global GDP (%) Container Trade Transpacific (m TEU) Growth (%) Far east-Europe (m TEU) Growth (%) Transatlantic (m TEU) Growth (%) Non-mainland east-west (m TEU) Growth (%) North-South (m TEU) Growth (%) Other (m TEU) Growth (%) Total trade (m TEU) Growth (%) Fleet growth (%) Trade balance (%) Freight rates CCFI YoY (%) Source: Clarksons, CCBIS

27

2005 4.6

2006 5.2

2007 5.4

2008 2.9

2009 (0.5)

2010 5.0

2011F 2.5

2012F 2.5

2013F 3.5

18 0 12 0 6 0 10 0 18 0 42 0 106 11

20 10 15 19 6 3 11 9 19 6 47 12 117 11

21 4 17 17 7 7 12 14 20 6 54 14 130 11

21 (3) 17 (1) 6 (3) 14 18 22 14 56 5 137 5

18 (10) 15 (10) 5 (21) 14 1 21 (6) 50 (11) 124 (9)

20 10 17 13 6 12 16 11 24 14 57 12 140 12

21 3 18 3 6 3 18 15 25 6 59 5 148 6

21 0 17 (3) 6 1 20 8 26 3 62 5 152 3

22 4 18 5 6 7 22 10 28 7 67 7 163 7

11 (0)

14 (3)

12 (1)

11 (6)

5 (14)

8 4

13 (1)

9 (6)

9 (2)

1,141 1

1,023 (10)

1,073 5

1,122 5

881 (22)

1,131 28

990 (13)

891 (13)

1,120 30

Transportation/Shipping

25 November 2011

Container shipping demand We estimate container shipping demand growth will slow, from 6% in 2011 to 3% in 2012.

US shows resilient demand US sales show resilient growth. In addition, consumer sentiment is stronger than expected. Driven by this, the CCFI declined at a slower pace in the last month. US sales vs. container freight rates 60%

15%

50%

10%

40% 5%

30% 20%

0%

10%

(5)%

0%

(10)%

(10)% (15)% (20)% (20)%

(30)% (40)% 1999

2000

2002

2003 2005 2006 2008 CCFI YoY (LHS) US sales YoY (RHS)

2010

(25)% 2011

Source: US Census, CCBIS

On the other hand, the PMI is still falling, suggesting manufacturing is also falling. US PMI vs. CCFI 70% 63% 56% 49% 42% 35% 28% 21% 14% 7% 0% (7)% (14)% (21)% (28)% (35)% 1999

US consumer sentiment vs. CCFI 54% 45% 36% 27% 18% 9% 0% (9)% (18)% (27)%

2000

2001

2003

2004 CCFI YoY

2006 2007 2008 US PMI YoY

2010

2011

Source: Shanghai Shipping Exchange, Institute for Supply Management, CCBIS

(36)% 1999

2000

2001 2003 2004 2006 2007 2008 2010 CCFI YoY Michigan U Consumer Sentiment Index YoY

2011

Source: Shanghai Shipping Exchange, Michigan University, CCBIS

US sales include manufacturing, wholesale and retail sales. September 2011 growth was driven primarily by retail. Retail sales, historically resilient, accounted for 29% of total sales. Taken together, these three sub-sets drive container demand. It would be a mistake to assume that, based on the strength of any one of these, overall container demand will remain resilient.

28

Transportation/Shipping

25 November 2011

US sales growth

US sales breakdown

18%

Wholesaler 33%

9%

Manufacture 38%

0%

(9)%

(18)%

(27)% 1993 1994 1995 1997 1998 2000 2001 2003 2004 2005 2007 2008 2010 2011 Manufacture Retailer Wholesaler

Retailer 29%

Source: US Census, CCBIS

Source: US Census, CCBIS

The flip side of the US story is that both disposable income and savings are declining. It is questionable whether consumers will fork out savings further to 2007 levels to support even more consumption. If there is no improvement in disposable income it is not clear how sales growth can be sustainable. Earning less and saving less 10%

Will the savings continue to support sales? 8.5x

14%

8.4x

8% 7% 6%

6.5x

6.6x

4%

0%

2%

4.7x

4.6x (7)%

0% (2)%

2.8x

2.7x (14)%

(4)% (6)% 1999

0.9x 2000 2002 2003 2005 2006 2008 2010 2011 Disposable income growth (LHS) Savings to disposable income (RHS)

Source: Bureau of Economic Analysis, CCBIS

(21)% Jan-00

0.8x Sep-01 May-03 Jan-05 Sep-06 May-08 Jan-10 Sep-11 Sales YoY (LHS) Savings to disposable income (RHS)

Source: US Census, CCBIS

Europe not showing signs of recovery While US retail demonstrates resilient demand, the retail sector in Europe is weakening, declining 0.8% YoY in October 2011.

29

Transportation/Shipping

25 November 2011

Europe PMI and CCFI

Europe sales and CCFI 7%

70%

55%

6%

60%

44%

5%

50%

4%

33%

3%

40% 30%

22%

2% 1%

20%

11%

10%

0%

0%

(1)% (2)%

0%

(11)%

(3)%

(22)%

(4)%

(10)% (20)% (30)%

(5)% (33)% Jan-96 Oct-97 Jul-99 Apr-01 Jan-03 Sep-04 Jun-06 Mar-08 Dec-09 Aug-11 Euro retail sales YoY (LHS) CCFI YoY (RHS)

Source: Eurostat, Shanghai Shipping Exchange, CCBIS

(40)% 1999

2000

2001

2003 2004 CCFI YoY

2006 2007 2008 Euro PMI YoY

2010

2011

Source: Shanghai Shipping Exchange, The Chartered Institute of Purchasing & Supply, CCBIS

Can the deterioration in Europe be offset by the US? The US accounts for 14% of global trade, compared with 12% from Europe. Transpacific and Asia-Europe are the two largest trade routes. We expect a 3% decline in demand from Europe with flat demand from the US in 2012. Struggling US consumers are unlikely to offset the fall in demand in Europe unless the US economy sees significant recovery. Trade route breakdown by volume Transpacific 14%

Asia-Europe 12% Other 41%

Transatlantic 4%

Non-mainland East-West 12% North-South 17%

Source: Clarksons, CCBIS

30

Transportation/Shipping

25 November 2011

Container shipping supply We estimate container fleet growth will be 9% in 2011F and 9% in 2012F. Vessel capacity of 1m TEU was delivered by October 2011. We expect container vessel capacity delivered in 2012 and 2013 to be 1.8m TEU and 1.8m TEU. Finally, we expect 20% delivery slippage in 2012. Container shipping supply growth 2005

2006

2007

2008

2009

2010

2011F

2012F

2013F

9.1 1.0 (0.0) 10.1 11

10.1 1.4 (0.0) 11.5 14

11.5 1.4 0.0 13.0 12

13.0 1.5 (0.1) 14.4 11

14.4 1.2 (0.5) 15.1 5

15.1 1.5 (0.2) 16.3 8

16.3 1.3 (0.1) 17.5 7

17.5 1.8 (0.1) 19.1 9

19.1 1.8 (0.1) 20.8 9

Supply Beg fleet (m TEU) Additions (m TEU) Scrap/removals (m TEU) End fleet (m TEU) YoY (%) Source: Clarksons, CCBIS

Adjustment factors to container shipping supply include scrapping and laying-up.

Scrapping Scrapping increased significantly from 2008 to 2009 thanks to low freight rates. We do not expect scrapping to change significantly in 2012. It did not increase significantly year-to-date, with 36,520 TEU vessels scrapped, representing 0.24% of the current fleet. The container fleet is not very old. Typically, a container vessel can operate on international sea routes for 20-25 years and on domestic coastal routes for more than 30 years in some countries. Only 2% of the current container vessel fleet is older than 30 years and liable to be scrapped within the next five years. Our forecast is for 0.1m TEU container vessels to be scraped in 2012, representing 1% of the container fleet at the beginning of 2012. Container vessel scrapping

Container fleet age profile 25+ years 3%

'000 TEU 55

20-24 years 3% 15-19 years 8%

44

33

22

0-4 years 45%

10-14 years 15%

11 5-9 years 26%

0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009 2010 2011

Source: Clarksons, CCBIS

31

Source: Clarksons, CCBIS

Transportation/Shipping

25 November 2011

Capacity lay-up In addition to scrapping vessels, another way to remove capacity and reduce operating costs is by laying-up vessels. Container vessel lay-ups represented about 10% of the total fleet in 2009 and early 2010. This declined to c.1% in 2H10 and then increased to 2.9% in 4Q11. We expect lay-ups to increase over the next six months as freight rates decline. Container freight rates and idle capacity m TEU 0.10

55% 44%

0.08

33% 22%

0.06

11% 0.04

0% (11)%

0.02

(22)% (33)% Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11

0.00

Laid- up container vessels (LHS)

Container freight rates YoY (RHS)

Source: Containerisation, CCBIS

Laying up capacity is an economic decision. Theoretically, if the incremental cash loss to run the vessel is higher than the lay-up expense, the container shipping company will idle the vessel. The table below shows the cash return of running a 5k TEU vessel from Hong Kong to Long Beach given different utilization and freight rates. We estimate the cost of laying-up a vessel with is engine shut off is around US$1m/year. The black line in the table is the theoretical threshold for shipowners to lay-up vessels. Above the line, the incremental cash loss to run the vessel is higher than the laying up expense. At that point, the shipowner would be better off laying up capacity. Cash return given different freight rates and utilization (US$) Freight rates (US$/TEU) Utilization (%)

900

1,000

1,100

1,200

1,300

40

(2,070,200)

(1,870,200)

(1,670,200)

(1,470,200)

(1,270,200)

50

(1,620,200)

(1,370,200)

(1,120,200)

(870,200)

(620,200)

60

(1,170,200)

(870,200)

(570,200)

(270,200)

29,800

70 (720,200) 80 (270,200) 90 179,800 100 629,800 * Utilization average of a round trip Source: CCBIS

(370,200) 129,800 629,800 1,129,800

(20,200) 529,800 1,079,800 1,629,800

329,800 929,800 1,529,800 2,129,800

679,800 1,329,800 1,979,800 2,629,800

The table above shows the economics involved in laying-up an owned container vessel. For chartered-in vessels, the breakeven utilization rate would be even higher.

32

Transportation/Shipping

25 November 2011

In practice, container shipping companies might run at a loss to maintain a route, client relationships and/or long-term market share, in the expectation that the market will rebound. Another consideration is that the cost of shutting down and reopening operations can be prohibitive. That said, laying-up vessels and scrapping can adjust capacity, with the determining factor being the freight market. Shipping capacity, on the other hand, is rigid, and faces volatile freight rate changes. Therefore, the effect of such adjustments is limited over the long-run. Operating capacity vs. freight rates 55% 44% 33% capacity movement is much more resilient

22% 11% 0% (11)% (22)% (33)% 2000

2001

2002

2003

2004 2005 2006 Operating capacity YoY

Source: Containerisation International, CCBIS

33

2007 2008 Freight rates YoY

2009

2010

2011

Transportation/Shipping

25 November 2011

China COSCO Holdings (1919 HK) Company Rating: Outperform

On the recovery track

(upgraded from Underperform)

We revise up our 2012 earnings forecasts for China COSCO (CCH) on the back of our higher 2012 BDI forecast. We also upgrade our rating on the company, from Underperform to Outperform, and raise our target price, from HK$3.60 to HK$4.90.











Earnings recovery. We expect CCH to reduce its loss from RMB7b in 2011 to RMB6b in 2012 and record net profit of RMB5b in 2013. Although 2012 will still be a loss-making year, the company will see gradual improvement on a quarterly basis. We expect BDI to improve in 2012 and 2013. CCH’s dry-bulk revenue spot exposure is 45%, the highest in our China shipping universe. Also, as 50% of its fleet are capsize class, CCH is leveraged to capesize freight improvements in 2012 and 2013 Incentivized to avoid “special treatment”. If an A-share listed company makes a loss for two consecutive years, its stock will receive “special treatment” (ST). An ST stock is considered financially problematic. If the company makes a loss for three straight years, its stock is delisted. We believe management will pull out all the stops to improve the company’s earnings over the next two years to maintain its A-share financing channel. Valuation. Our price target is based on 1.2x 2012 PBR. In our view, CCH offers the best leverage to a freight rate recovery and will demonstrate better earnings improvement than its peers, which in turn may boost its share price. Risks. CCH has 40% profit generated from container shipping, which is now facing unstable demand. Should container shipping demand weaken more than expected, CCH’s net profit will fall below our forecasts.

Price:

HK$3.29

Target:

HK$4.90 (up from HK$3.60)

Trading data 52-week range Market capitalization (US$m) H-shares outstanding (m) H-shares free float (%) Total free float (%) 3M average daily T/O (m shares) 3M average daily T/O (US$m) Expected return (%) – 1 year Closing price on 24 November 2011

Stock price and HSI (rebased) HK$ 12.5

10.5

8.5

6.5

4.5

2.5 Jan-09

May-09

Sep-09

Feb-10 Jun-10 Oct-10 Mar-11 CCH HSI (rebased)

Source: Bloomberg

Financial forecast Year to 31 Dec

2009

Revenue (RMB m) 68,463 Growth (%) (48) Operating profit (RMB m) (6,408) Net profit (RMB m) (7,468) Growth (%) N/A EPS (RMB) (0.73) PER (x) 2.5 PBR (x) 0.5 ROE (%) 19 ROA (%) 10 Source: Company data, CCBIS estimates

34

2010F

2011F

2012F

2013F

96,439 41 7,713 6,858 N/A 0.67 4.2 0.6 12 5

70,337 (27) (7,436) (7,097) N/A (0.69) N/A 0.7 (12) (5)

76,512 9 (5,871) (5,952) 19 (0.58) N/A 0.8 (12) (4)

93,725 22 4,919 5,139 N/A 0.50 5.0 0.7 10 3

HK$2.8 – 9.5 8,518 2,581 100 44 21 10 49

Winnie Guo (8610) 6652 3729 [email protected]

Chou Xiao (86755) 8826 6505 [email protected]

Tim Bacchus, CFA (852) 2532 2549 [email protected]

Jul-11

Nov-11

Transportation/Shipping

25 November 2011

China COSCO – financial statements Income statement FYE 31 Dec (RMB m) Revenue – Container shipping – Bulk shipping – Logistics – Terminal & others – Eliminations Cost of service Gross profit Other income SG&A EBITDA Depreciation EBIT Finance income Finance cost Profit/loss in JCE & associates Profit before tax Tax expense Net profit Minority interests Shares outstanding (m) EPS (RMB) DPS (RMB) EPS (HK$) DPS (HK$)

Balance sheet 2010

2011F

2012F

2013F

FYE 31 Dec (RMB m)

2010

2011F

2012F

96,439

70,337

76,512

93,725

Inventory

2,117

1,870

1,981

2,150

46,342 32,777 15,288 3,048 (1,061) (84,052) 12,386 271 (4,944) 11,225 3,512 7,713 1,163 (1,321) 1,719 9,274 (1,189) 6,858 (1,226)

35,517 16,302 16,052 3,623 (1,157) (74,819) (4,482) 703 (3,658) (3,252) 4,184 (7,436) 1,397 (1,648) 1,776 (5,912) (296) (7,097) (890)

35,822 21,002 16,855 4,067 (1,234) (79,246) (2,734) 765 (3,902) (1,299) 4,573 (5,871) 1,141 (1,648) 1,612 (4,766) (238) (5,952) (947)

44,461 28,305 17,698 4,586 (1,325) (85,994) 7,730 937 (3,749) 9,644 4,726 4,919 1,235 (1,648) 2,001 6,507 (325) 5,139 (1,042)

10,216

10,216

10,216

10,216

10,987 850 46,551 60,505 68,681 15,370 4,986 89,037 149,542 21,254 5,870 1,325 28,449 54,927 5,190 60,117 88,566 10,216 35,373 14,467 60,056 149,542

11,957 850 38,033 52,710 75,107 17,146 4,986 97,239 149,949 19,658 15,000 1,325 35,983 54,927 5,190 60,117 96,100 10,216 28,276 15,357 53,849 149,949

10,712 850 41,165 54,707 77,600 18,758 4,986 101,344 156,052 20,764 25,000 1,325 47,090 54,927 5,190 60,117 107,207 10,216 22,324 16,304 48,845 156,052

13,121 850 41,951 58,072 82,944 20,759 4,986 108,689 166,761 22,451 30,000 1,325 53,777 54,927 5,190 60,117 113,894 10,216 25,305 17,346 52,867 166,761

0.67 0.09 0.77 0.10

(0.69) 0.00 (0.87) 0.00

(0.58) 0.00 (0.76) 0.00

0.50 0.10 0.65 0.13

4.55 5.22

3.77 4.73

3.19 4.13

3.48 4.51

Financial ratios FYE 31 Dec (%) Revenue growth EBITDA growth EBIT growth Gross profit margin EBITDA margin EBIT margin Net profit margin Balance sheet ratios ROE ROA Debt/equity

BVPS (RMB) BVPS (HK$)

Cash flow 2010

2011F

2012F

2013F

41 N/A N/A 13 12 8 7

(27) N/A N/A (6) (5) (11) (10)

9 143 27 (4) (2) (8) (8)

22 N/A N/A 8 10 5 5

12 5 24

(12) (5) 59

(12) (4) 79

10 3 81

Source: Historical data from the Company, CCBIS estimates

35

Receivables Others Cash Current assets PP&E JCE & associate Others Non-current assets Total assets Payable Short-term debt Others Current liabilities Long-term debt Others Non-current liabilities Total liabilities Share capital Reserves Minority interests Total equity Total liabilities & equity

2013F

FYE 31 Dec (RMB m) EBITDA Change in working capital Tax paid Other Operating cashflow Interest received Capex Investments Dividends Investing cashflow Interest paid Other Financing cashflow Net exchange effect Net change in cash

2010

2011F

2012F

2013F

11,225 (1,700) (284) 1,766 11,008 665 (8,497) (3,021) 881 (10,880) (1,301) 4,101 2,800 (475) 2,928

(3,252) 6,811 (296) 1,333 4,596 599 (10,547) (400) 906 (10,547) (1,648) (445) (2,092) (475) (8,043)

(1,299) 12,242 (238) 1,075 11,779 539 (7,000) (400) 913 (7,000) (1,648) 475 (1,173) (475) 3,607

9,644 4,109 (325) 1,165 14,593 485 (10,000) (400) 1,134 (10,000) (1,648) (1,684) (3,331) (475) 1,261

Transportation/Shipping

25 November 2011

China Shipping Development (1138 HK) Company Rating: Neutral

Not defensive

(upgraded from Underperform)

We upgrade our rating on China Shipping Development (CSD), from Underperform to Neutral, and the target price, from HK$4.17 to HK$4.21, as we roll over to 2012 valuations.














Not as defensive as once thought. CSD has been considered as a defensive shipping stock as 45% of its revenue is locked in long-term contracts. In our view, CSD’s long-term contracts with steel mills, which account for 15% of revenue and which were signed when BDI was at 4,000, are likely to be re-negotiated given the low profitability of steel mills and low freight rates. Earnings improvement unlikely. We expect CSD’s earnings to be flat in 2012 as 45% of the company’s freight rates are locked in contracts. In addition, the benchmark for coastal freight rate annual negotiations is based on the previous year’s BDI. It will be hard for CSD to benefit from improving freight rates in 2012. We expect the company’s margins to be squeezed in 2012 on higher financing expense and bunker costs. Convertible bonds cap upside of equity holders. CSD currently has RMB4b in A-share convertible bonds. We estimate the dilution effect to earnings will be 12% once the bonds are converted. Valuation. Our price target is based on 0.5x 2012F PBR, implying 0.8x price-to-NAV. We apply a lower valuation multiple to CSD than CCH as its book value is overstated. Risks. Should bulk shipping freight rates be better than we expect, CSD’s earnings would also be higher than we expect.

Price:

HK$4.44

Target:

HK$4.21 (up from HK$4.17)

Trading data 52-week range Market capitalization (US$m) H-shares outstanding (m) H-shares free float (%) Free float (%) 3M average daily T/O (m shares) 3M average daily T/O (US$m) Expected return (%) – 1 year Closing price on 24 November 2011

Stock price and HSI (rebased) HK$ 15.5 13.5 11.5 9.5 7.5 5.5 3.5 Jan-09

May-09

Sep-09

Feb-10 Jun-10 Oct-10 Mar-11 CSD HSI (rebased)

Source: Bloomberg

Financial forecast Year to 31 Dec

2009

Revenue (RMB m) 8,730 Growth (%) (49) Operating profit (RMB m) 1,099 Net profit (RMB m) 1,065 EPS (HK$) 0.35 DPS (HK$) 0.11 EPS growth (%) (80) PER (x) 8.1 PBR (x) 1.4 ROE (%) 5 ROA (%) 3 Source: Company data, CCBIS estimates

36

2010

2011F

2012F

2013F

11,284 29 1,958 1,717 0.58 0.20 61 16.9 1.4 8 5

12,071 7 1,324 1,166 0.41 0.12 (32) 10.8 0.5 5 3

14,097 17 1,509 1,119 0.39 0.12 (4) 11.3 0.5 5 2

15,040 7 2,087 1,415 0.50 0.15 26 8.9 0.5 6 3

HK$4.2 – 11.54 3,028 1,296 100 54 11 8 5

Winnie Guo (8610) 6652 3729 [email protected]

Chou Xiao (86755) 8826 6505 [email protected]

Tim Bacchus, CFA (852) 2532 2549 [email protected]

Jul-11

Nov-11

Transportation/Shipping

25 November 2011

China Shipping Development – financial statements Income statement FYE 31 Dec (RMB m)

Balance sheet 2010

2011F

2012F

2013F

FYE 31 Dec (RMB m)

Revenue

11,284

12,071

14,097

15,040

Inventory

Cost of service Gross profit SG&A EBITDA Depreciation EBIT Gain/loss on disposals Finance income Finance cost Profit before tax Tax expense Net profit Minority interests

(8,931) 2,353 (395) 3,323 1,364 1,958 179 15 (205) 225 2,171 (449) 1,717 (5)

(10,361) 1,711 (386) 3,271 1,946 1,324 186 16 (225) 181 1,482 (311) 1,166 (5)

(12,109) 1,988 (479) 4,020 2,511 1,509 193 22 (494) 211 1,441 (317) 1,119 (5)

(12,442) 2,598 (511) 4,612 2,526 2,087 201 23 (715) 226 1,821 (401) 1,415 (5)

3,405

3,405

3,405

3,405

0.50 0.58 0.17

0.34 0.41 0.10

0.33 0.39 0.10

0.42 0.50 0.12

Shares outstanding (m) EPS (RMB) EPS (HK$) DPS (RMB) DPS (HK$)

Receivables Cash Other Current assets PP&E JCE Other Non-current assets Total assets Payable Short-term debt Other Current liabilities Long-term debt Other Non-current liabilities Total liabilities Share capital Reserves Other Total shareholders’ equity Total liabilities & shareholders’ funds BVPS (RMB) BVPS (HK$)

Financial ratios FYE 31 Dec (%)

2011F

2012F

449

736

841

2013F 918

1,235 1,062 0 2,746 35,386 2,574 4 37,964 40,710 2,060 2,424 79 4,562 12,552 504 13,056 17,619 3,405 18,595 1,092 23,091 40,710

1,328 940 0 3,004 45,662 2,574 4 48,241 51,245 2,383 5,700 12 8,095 19,000 466 19,466 27,562 3,405 19,411 868 23,684 51,245

1,551 905 0 3,297 50,511 2,574 4 53,089 56,386 2,785 6,600 13 9,398 22,000 536 22,536 31,934 3,405 20,190 858 24,452 56,386

1,654 866 0 3,438 49,009 2,574 4 51,587 55,026 2,862 6,000 16 8,878 20,000 617 20,617 29,494 3,405 21,175 952 25,531 55,026

6.63 7.61

6.80 8.17

7.03 8.43

7.34 8.81

2010

Cash flow 2010

2011F

2012F

2013F

Revenue growth EBITDA growth EBIT growth Gross profit margin EBITDA margin EBIT margin Net profit margin

29 53 78 21 29 17 15

7 (2) (32) 14 27 11 10

17 23 14 14 29 11 8

7 15 38 17 31 14 9

Balance sheet ratios ROE ROA Debt/equity

8 5 76

5 3 119

5 2 133

6 3 118

Source: Historical data from the company, CCBIS estimates

37

2010

FYE 31 Dec (RMB m)

2011F

2012F

2013F

EBITDA Change in working capital Other Operating cashflow Interest received Capex Disposal of fixed assets Investing cashflow Interest paid Dividend paid Net new borrowings Financing cashflow

3,323 3,271 (50) 123 (449) (311) 2,754 3,264 15 16 (8,072) (12,223) 353 186 (8,446) (12,021) (364) (225) (340) (350) 5,141 9,724 4,554 9,150

4,020 (75) (317) 3,842 14 (7,360) 193 (7,153) (494) (334) 3,900 3,072

4,612 100 (401) 4,540 14 (1,024) 201 (809) (715) (422) (2,600) (3,737)

Net exchange effect Net change in cash

(23) (1,137)

0 (239)

0 (7)

0 392

Transportation/Shipping

25 November 2011

Sinotrans Shipping (368 HK) Company Rating: Neutral

Limited catalysts

(maintained)

We maintain our Neutral rating and price target of HK$2.10 for Sinotrans Shipping (SSL). As low freight rates realized this year may reduce the company’s profitability next year, we lower our 2012F net profit forecast by 25%.














Lagging profitability. SSL charters its vessels to other shipping companies for one-to-three years. As the charter contracts are staggered as they are rolled over, the company’s earnings lag market spot rates. More than 50% of SSL’s capacity is renewed at 2011’s lower rates. Minority shareholder interests may be sacrificed. SSL lent US$43m to its sister company, another subsidiary of Sinotrans & CSC Group, in October 2011. Although the amount was small considering the company has US$790m in net cash, the move revealed that SS puts its parent company’s interests above its shareholders. Default risk remains. SSL is a charter operator. With shipping companies in distressed cash positions and with charter contract disputes becoming more frequent, we believe the company’s clients will begin re-negotiating their contracts if they haven’t already done so. This process could last six months or more. Valuation. Our price target is based on 0.5x 2012F PBR. We believe SSL’ valuation is undemanding. The company’s net cash is HK$1.54/share and its fleet value is HK$2.20. However, net cash will only support the share price of the company – it will not act as a positive catalyst.

Price:

HK$1.93

Target:

HK$2.10 (maintained)

Trading data 52-week range Market capitalization (US$m) Shares outstanding (m) Free float (%) 3M average daily T/O (m shares) 3M average daily T/O (US$m) Expected return (%) – 1 year Closing price on 24 November 2011

Stock price and HSI (rebased) HK$ 4.5 4.0 3.5 3.0 2.5 2.0 1.5 Jan-09

May-09

Sep-09

Feb-10 Jun-10 Oct-10 Mar-11 SSL HSI (rebased)

Source: Bloomberg

Risks. (1) Default risk from its customers; and (2) further BDI declines.

Financial forecast Year to 31 Dec

2009

Revenue (US$m) 229 Growth (%) (50) Operating profit (US$m) 87 Net profit (US$m) 106 Growth (%) (69) EPS (US$) 0.03 PER(x) 6.2 PBR(x) 0.7 ROE (%) 5 ROA (%) 5 Source: Company data, CCBIS estimates

38

2010

2011F

2012F

2013F

278 22 116 128 20 0.03 7.9 0.5 6 6

248 (11) 74 92 (28) 0.02 10.7 0.5 4 4

264 6 50 67 (28) 0.02 14.8 0.4 3 3

344 30 98 117 76 0.03 8.4 0.4 5 5

HK$1.53 – 3.10 988 3,992 32 2 1 9

Winnie Guo (8610) 6652 3729 [email protected]

Chou Xiao (86755) 8826 6505 [email protected]

Tim Bacchus, CFA (852) 2532 2549 [email protected]

Jul-11

Nov-11

Transportation/Shipping

25 November 2011

Sinotrans Shipping – financial statements Income statement FYE 31 Dec (US$m)

Balance sheet 2010

2011F

2012F

2013F

278

248

264

344

– Container – Dry bulk –Tanker – Others COGS Gross profit Other income SG&A EBITDA Depreciation EBIT Finance income Finance cost Profit/loss in JCE Profit before tax Income tax Net profit

20 258 13 (12.8) (164) 115 17 (16) 160 (43) 116 13 0.0 (1) 128 (0.8) 128

22 226 12 (12.0) (162) 86 2 (15) 128 (55) 74 15 0.0 4 92 (0.2) 92

19 244 14 (12.9) (198) 65 3 (18) 109 (60) 50 16 (1.0) 2 67 (0.1) 67

19 328 14 (17.1) (228) 116 3 (21) 162 (63) 98 15 (1.0) 5 117 (0.2) 117

Shares outstanding (m)

3,992

3,992

3,992

3,992

0.03 0.25 0.08

0.02 0.18 0.05

0.02 0.13 0.04

0.03 0.23 0.07

Revenue

EPS (US$) EPS (HK$) DPS (HK$)

Financial ratios FYE 31 Dec (%) Revenue growth EBITDA growth EBIT growth Gross profit margin EBITDA margin EBIT margin Net profit margin Balance sheet ratios ROE ROA Debt/equity

FYE 31 Dec (US$m)

2010

2011F

2012F

2013F

Cash

1,008

1,038

1,021

1,164

Inventory Receivables Other Current assets PP&E JCE & associate Non-current assets Total assets Payables Short-term debt Other Current liabilities Long-term debt Non-current liabilities Total liabilities Share capital Reserve Total equity Total liabilities & shareholders’ funds

– 37 5 1,050 1,029 85 1,114 2,163 37 – 0.7 38 – – 38 51 2,074 2,126 2,163

2 27 5 1,072 1,124 85 1,209 2,281 41 – 0.7 41 50 50 91 51 2,139 2,190 2,281

2 29 5 1,057 1,195 85 1,280 2,337 50 – 0.7 50 50 50 100 51 2,185 2,237 2,337

3 38 5 1,210 1,132 85 1,216 2,426 57 – 0.7 58 50 50 108 51 2,267 2,319 2,426

0.53 4.15

0.55 4.28

0.56 4.37

0.58 4.53

FYE 31 Dec (US$m)

2010

2011F

2012F

2013F

EBITDA Changes in working capital Interest received Income tax paid Other Operating cashflow Capex Investments Other Investing cashflow Long-term debt Dividends paid Financing cashflow

160 (11) 11 (0) (17) 142 (335) (11) 148 (198) 0 (36) (36)

128 11 15 (0) 0 154 (150) (11) 4 (158) 50 (28) 34

109 7 16 (0) (1) 131 (130) (12) 2 (139) 0 (20) (8)

162 (2) 15 (0) (1) 174 0 (12) 5 (7) 0 (35) (24)

(93)

30

(17)

144

BVPS (US$) BVPS (HK$)

Cash flow 2010

2011F

2012F

2013F

22 35 34 41 57 42 46

(11) (20) (37) 35 52 30 37

6 (15) (32) 25 41 19 25

30 48 97 34 47 29 34

6 6 2

4 4 4

3 3 4

5 5 5

Net change in cash Source: Historical data from the company, CCBIS estimates

39

Transportation/Shipping

25 November 2011

Pacific Basin Shipping (2343 HK) Company Rating: Neutral

Improving earnings outlook

(upgraded from Underperform)

We revise up Pacific Basin’s (PB) 2012 earnings estimates by 32% on our higher BDI forecast for 2012. We also upgrade our target price, from HK$3.00 to HK$3.10 and change our rating on the stock, from Underperform to Neutral.











BDI a positive catalyst. We expect the BDI to reach 1,700 in 2011 and 3000 in 2012. Although P/B is a handysize/handymax operator, it is widely seen as a dry-bulk shipping spot player and we believe its share price will benefit from the improving bulk shipping momentum. Given the company’s active fleet management, we believe the company is becoming more interesting to investors looking to invest in shipping’s underlying asset market. Earnings to improve. Due to the one-off asset impairment in 1H11, we expect 2012F earnings to see a 181% increase. Excluding the non-recurring item, we expect the company’s organic earnings growth next year to be 32%. Non-bulk operation remains a risk. We do not expect the non-bulk operation to see significant improvement in 2012, which could drag down core business profit. Valuation. Our price target of HK$3.10 (up from HK$3.00) is based on 0.5x 2012F PBR. PB’s share price fell 35% YTD and a 0.5x PBR has already been factored in the over-supply risk of the industry and PB’s lower profit.

Price:

HK$3.31

Target:

HK$3.10 (up from HK$3.00)

Trading data 52-week range Market capitalization (US$ m) Shares outstanding (m) Free float (%) 3M average daily T/O (m shares) 3M average daily T/O (US$ m) Expected return (%) – 1 year Closing price on 24 November 2011

Stock price and HSI (rebased) HK$ 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 Jan-09

May-09

Sep-09

Feb-10 PB

Source: Bloomberg


Risks. (1) The non-bulk business might be a drag on the company’s 2011 earnings and outlook; and (2) further asset impairments could reduce earnings forecasts.

Forecast and valuation 2009

2010

2011F

2012F

2013F

Revenue (US$m) 950 Growth (%) (43) Operating profit (US$ m) 144 Net profit (US$ m) 110 EPS growth (%) (76) EPS (HK$) 0.42 PER (x) 5.4 PBR (x) 0.9 ROE (%) 8 ROA (%) 5 Source: Company data, CCBIS estimates

Year to 31 Dec

1,269 33 153 104 (9) 0.14 9.8 0.7 7 4

1,171 (8) 83 35 (66) 0.39 23.4 0.6 2 1

1,266 8 148 99 183 0.50 8.4 0.5 6 4

1,400 11 175 127 27 0.00 6.6 0.5 8 5

40

HK$2.77 – 5.74 822 1,937 90 5 2 (14)

Winnie Guo (8610) 6652 3729 [email protected]

Tim Bacchus, CFA (852) 2532 2549 [email protected]

Chou Xiao (86755) 8826 6505 [email protected]

Jun-10 Oct-10 Mar-11 HSI (rebased)

Jul-11

Nov-11

Transportation/Shipping

25 November 2011

Pacific Basin – financial statements Income statement

Balance sheet

FYE 31 Dec (US$m)

2010

2011F

2012F

2013F

FYE 31 Dec (US$m)

Revenue

1,269

1,171

1,266

1,400

Cash

COGS Gross profit Depreciation EBITDA Other income/expenses SG&A EBIT Finance cost Profit/loss in JCE Profit before tax Income tax Net profit

(1,109) 159 58 212 (59) (13) 153 (50) 2 105 (0) 104

(1,029) 141 72 154 (100) (13) 83 (49) 2 36 (1) 35

(1,109) 157 81 229 (50) (14) 148 (49) 2 101 (2) 99

(1,211) 189 103 279 (50) (15) 175 (49) 2 129 (2) 127

Shares outstanding (m)

1,929

1,949

1,968

1,988

0.05 0.42 0.03 0.21

0.02 0.14 0.01 0.10

0.05 0.39 0.03 0.20

0.06 0.50 0.03 0.25

EPS (US$) EPS (HK$) DPS (US$) DPS (HK$)

2010

2011F

2012F

2013F

693

672

515

476

40 7 111 852 1,519 56 7 122 1,704 2,555 4 130 166 302 694 15 708 1,010 193 721 631 1,545 2,555

54 7 106 840 1,567 59 11 50 1,687 2,526 4 140 166 309 694 15 708 1,018 194 684 631 1,509 2,526

57 7 116 695 1,766 62 12 50 1,889 2,584 4 147 166 317 694 15 708 1,026 194 733 631 1,558 2,584

66 7 129 678 1,862 65 13 50 1,990 2,668 4 168 166 338 694 15 708 1,046 195 797 631 1,622 2,668

0.80 6.22

0.77 6.01

0.79 6.15

0.82 6.34

FYE 31 Dec (US$m)

2010

2011F

2012F

2013F

EBITDA Changes in working capital Income tax paid Other Operating cashflow Capex Interest received Other Investing cashflow Net change in bank loans Interest paid Dividends paid Financing cashflow Net change in cash

212 (17) (2) 6 199 (541) 19 60 (462) (10) (37) (50) (97) (360)

154 0 (1) (15) 139 (200) 15 146 (40) 0 (49) (24) (120) (21)

229 (2) (2) (15) 210 (200) 14 (84) (269) 0 (49) (50) (98) (157)

279 (3) (2) (8) 266 (200) 11 (4) (193) 0 (49) (64) (112) (39)

Inventory Derivatives Receivables Current assets PP&E JCE & associate Receivables Other Non-current assets Total assets Derivatives Payables Short-term debt Current liabilities Long-term debt Other Non-current liabilities Total liabilities Share capital Reserve Other reserves Total shareholders’ equity Total liabilities & shareholders’ funds BVPS (US$) BVPS (HK$)

Financial ratios FYE 31 Dec (%) Revenue growth EBITDA growth EBIT growth Gross profit margin EBITDA margin EBIT margin Net profit margin

Cash flow 2010

2011F

2012F

2013F

33 (6) 4 13 17 12 8

(8) (27) (11) 12 13 7 3

8 48 11 12 18 12 8

11 22 20 13 20 13 9

6 4 55 304 0.01 0.04

8 5 53 361 0.03 0.26

Balance sheet ratios ROE 7 2 ROA 4 1 Debt/equity 56 57 Interest cover 305 170 FCF/share (US$) (0.18) (0.03) FCF/share (HK$) (1.38) (0.24) Source: Historical data from the company, CCBIS estimates

41

Transportation/Shipping

25 November 2011

Orient Overseas (International) (316 HK) Company Rating: Underperform

A rare loss

(maintained)

We revise down our 2011 net profit forecast for Orient Overseas (International) (OOIL) by 7% and expect 2012 to be loss making due to weaker-than-expected 3Q11 industry-wide freight rates. We maintain our Underperform rating and target price of HK$25.00.








Loss-making in 2012. We expect OOIL to make a loss in 2H11 given lower freight rates and higher costs. 2012 will be a hard year for container shipping business. Earnings downgrade. Most shipping companies announced surprisingly low 3Q11 profit. In our view, consensus forecast for OOIL’s 3Q11 earnings is still too high. It made a profit of US$175m in 1H11 and we expect it to breakeven in 3Q11 and post a loss in 4Q11. We estimate OOIL will record US$98m in net profit in 2011 and a loss of US$139m in 2012. Container demand still uncertain. Despite resilient US sales, we are still uncertain of when demand will pick up. Meanwhile, weak demand in Europe remains an overhang to the overall recovery of the industry. Look for container vessel deliveries to increase in 2012 and 2013, making any improvement in freight rates unlikely, at least in the next 12-months.

Price:

HK$33.75

Target:

HK$25.00 (maintained)

Trading data 52-week range Market capitalization (US$m) Shares outstanding (m) Free float (%) 3M average daily T/O (m share) 3M average daily T/O (US$m) Expected return (%) – 1 year Closing price on 24 November 2011

HK$28.50 – 69.73 2,709 626 31 1 5 (26)

Stock price and HSI (rebased) HK$ 90 80 70 60 50 40 30




Valuation. Our price target is based on 0.54x 2012F PBR. In our view, container shipping companies will see another loss-making year in 2012. A pricing war may be unavoidable.

20 10 Jan-09

May-09

Sep-09

Feb-10 Jun-10 Oct-10 Mar-11 OOIL HSI (rebased)

Source: Bloomberg


Risks. If the recovery in US demand offsets demand weakness in Europe, freight rates will be higher than we expect.

Financial forecast Year to 31 Dec

2009

Revenue (US$m) 4,350 Growth (%) (33) Operating profit (US$m) (332) Net profit (US$m) (402) Growth (%) (2) EPS (HK$) N/A PER (x) N/A PBR (x) 0.7 ROE (%) (5) ROA (%) 4,350 Source: Company data, CCBIS estimates

42

2010

2011F

2012F

2013F

6,033 39 919 870 (6) 7.04 7.0 1.1 11 6,033

5,973 (1) 189 99 (1) 31.41 27.8 0.6 1 5,973

6,298 5 (54) (140) (2) (22.13) N/A 0.7 (2) 6,298

7,554 20 255 160 (2) 19.35 17.1 0.6 2 7,554

Winnie Guo (8610) 6652 3729 [email protected]

Tim Bacchus, CFA (852) 2532 2549 [email protected]

Chou Xiao (86755) 8826 6505 [email protected]

Jul-11

Nov-11

Transportation/Shipping

25 November 2011

Orient Overseas (International) – financial statements Income statement

Balance sheet

FYE 31 Dec (US$m)

2010

2011F

2012F

2013F

FYE 31 Dec (US$m)

Revenue

6,033

5,973

6,298

7,554

Inventory

(4,671) 1,362 45 (488) 1,174 (255) 919

(5,296) 677 42 (530) 459 (270) 189

(5,868) 430 44 (528) 231 (285) (54)

(6,745) 809 53 (607) 555 (300) 255

(29) 9 899 (29) 870 (8)

(97) 10 102 (3) 99 (1)

(100) 10 (144) 4 (140) 1

(100) 10 165 (5) 160 (2)

625,793

625,793

625,793

625,793

2.98 2.84 23.22 22.09

0.16 0.04 1.21 0.30

(0.22) (0.06) (1.72) (0.43)

0.25 0.06 1.97 0.49

Cost of service Gross profit Other income SG&A EBITDA Depreciation EBIT Finance income Finance cost Profit/loss in JCE & associates Profit before tax Tax expense Net profit Minority interests Shares outstanding (m) EPS (US$) DPS (US$) EPS (HK$) DPS (HK$)

Financial ratios FYE 31 Dec (%)

2011F

2012F

2013F

39 (1,039) (377) 23 19 15 31

(1) (61) (79) 11 8 3 2

5 (50) (129) 7 4 (1) (2)

20 141 (568) 11 7 3 2

39 11 48

2 1 65

(3) (2) 67

4 2 65

Interest cover 31.58 1.95 FCF/share (US$) 0.00 (0.00) FCF/share (HK$) 0.01 (0.00) Source: Historical data from the company, CCBIS estimates

(0.54) (0.00) (0.00)

2.55 (0.00) (0.00)

Balance sheet ratios ROE ROA Debt/equity

43

2011F

2012F

2013F

96

108

113

136

Receivables Other Cash Current assets PP&E JCE & associate Other Non-current assets Total assets Payable Short-term debt Other Current liabilities Long-term debt Other Non-current liabilities Total liabilities Share capital Reserves Minority interests Total equity Total liabilities & shareholders’ funds

455 2,791 1,213 4,556 3,860 69 587 4,516 9,072 758 248 18 1,024 2,416 53 2,469 3,493 63 5,510 7 5,580 9,072

478 1,370 1,136 3,092 4,070 79 587 4,736 7,828 776 248 18 1,042 2,500 53 2,553 3,595 63 4,162 8 4,233 7,828

504 1,370 816 2,804 4,285 89 587 4,961 7,764 819 248 18 1,084 2,500 53 2,553 3,637 63 4,058 6 4,127 7,764

604 1,370 766 2,877 4,485 99 587 5,171 8,048 982 248 18 1,248 2,500 53 2,553 3,800 63 4,177 8 4,248 8,048

BVPS (US$) BVPS (HK$)

8.92 69.39

6.76 52.64

6.60 51.33

6.79 52.83

FYE 31 Dec (US$m)

2010

2011F

2012F

2013F

EBITDA Change in working capital Interest received Tax paid Other Operating cashflow Capex Investments Dividends Investing cashflow Long-term borrowings Interest paid Other Financing cashflow Net exchange effect Net change in cash

1,174 73 (27) (8) (37) 1,175 (214) (483)

459 (16) (42) (3) (97) 302 (480) 42

231 10 (44) 4 (100) 101 (500) 44

555 40 (53) (5) (100) 437 (500) 53

(698) 22

(438) 84

(456) –

(447) –

(375) (353) 1 124

(24) 59 – (77)

35 35 – (320)

(40) (40) – (50)

Cash flow 2010

Revenue growth EBITDA growth EBIT growth Gross profit margin EBITDA margin EBIT margin Net profit margin

2010

Transportation/Shipping

25 November 2011

SITC International Holdings (1308 HK) Company Rating: Outperform

Solid valuation

(maintained)

We lower our 2012 earnings estimates for SITC International Holdings by 49% on weaker container shipping volume amid intensifying competition in intra-Asia trade. Given the circumstances, we maintain our Outperform rating and price target of HK$2.50.














De-rating overdone. We expect SITC to turn a better-than-peer profit in 2011 and we estimate its 2011 ROE at 13%. Our estimates are conservative and are among the lowest in the market. With its higher-than-peer average ROE and earnings visibility, we believe SITC deserves a premium to its peers. Near liquidation value. SITC has net cash of HK$1.05/share, representing 54% of its share price. Fleet value is HK$0.59, representing 30% of its share price. Even using the scrap value of its fleet, SITC comes out with a liquidation value of HK$1.78. Thus potential downside is limited. Intra-Asia exposure. SITC is a pure play on the intra-Asia route. We do expect the cascading effect of larger players relocating their capacity into this route. However, we expect solid growth from intra-Asia demand and as a long-time market participant, SITC should benefit. We expect to see potential short-term share price weakness due to falling container freight rates. We believe this will provide investors with an entry point to buy the stock. Recommendation. We maintain our Outperform rating on SITC and target price of HK$2.50 based on 1.1x 2012F PBR.

Price:

HK$1.66

Target:

HK$2.50 (maintained)

Trading data 52-week range Market capitalization (US$m) Shares outstanding (m) Free float (%) 3M average daily T/O (m shares) 3M average daily T/O (US$m) Expected return (%) – 1 year Closing price on 24 November 2011

Stock price and HSI (rebased) HK$ 5.7 5.0 4.3 3.6 2.9 2.2 1.5 Oct-10

Nov-10

Jan-11

Feb-11

Apr-11 May-11 Jul-11 SITC HSI (rebased)

Source: Bloomberg

Risks. Much lower-than-expected freight rates on the long-haul routes could lead to weaker-than-expected intra-Asia freight rates.

Financial forecast Year to 31 Dec

2009

Revenue (US$m) 694 Growth (%) (10) Operating profit (US$m) 37 Net profit (US$m) 32 Growth (%) (8) EPS(HK$) 0.01 PER (x) N/A PBR (x) N/A ROE (%) 33 ROA (%) 10 Source: Company data, CCBIS estimates

44

2010

2011F

2012F

2013F

892 28 117 112 246 0.33 13.8 2.6 32 20

977 10 92 86 (23) 0.25 6.5 0.8 13 10

1,179 21 89 83 (4) 0.24 6.8 0.7 11 8

1,627 38 211 199 141 0.59 2.8 0.6 23 17

HK$1.48 – 5.64 554 2,600 44 1 4 51

Winnie Guo (8610) 6652 3729 [email protected]

Chou Xiao (86755) 8826 6505 [email protected]

Tim Bacchus, CFA (852) 2532 2549 [email protected]

Aug-11

Oct-11

Nov-11

Transportation/Shipping

25 November 2011

SITC International Holdings – financial statements Income statement FYE 31 Dec (US$m)

Balance sheet 2010

2011F

2012F

2013F

FYE 31 Dec (US$m)

892

977

1,179

1,627

Inventory

Cost of service Gross profit Other income SG&A EBITDA Depreciation EBIT Finance income Finance cost Profit/loss in JCE & associates Profit before tax Tax expense Net profit Minority interests

(720) 172 2 (52) 127 (11) 117 1 (2) (6) 115 (3) 112 0

(849) 127 14 (54) 102 (10) 92 10 (1) (6) 91 (5) 86 1

(1,043) 137 14 (65) 108 (19) 89 9 (2) (6) 87 (4) 83 1

(1,342) 285 14 (90) 239 (28) 211 7 (2) (6) 209 (10) 199 2

Shares outstanding (m)

2,600

2,600

2,600

2,600

0.04 0.02 0.33 0.12

0.03 0.01 0.25 0.09

0.03 0.01 0.24 0.09

0.08 0.03 0.59 0.21

Revenue

EPS (RMB) DPS (RMB) EPS (HK$) DPS (HK$)

Financial ratios FYE 31 Dec (%)

2011F

2012F

2013F

28 177 215 19 14 13 13

10 (20) (21) 13 10 9 9

21 6 (4) 12 9 8 7

38 122 138 18 15 13 12

32 20 13

13 10 11

11 8 10

23 17 8

Interest cover 70 64 FCF/share (US$) 0.04 (0.03) FCF/share (HK$) 0.28 (0.24) Source: Historical data from the company, CCBIS estimates

55 (0.03) (0.22)

115 0.02 0.16

Balance sheet ratios ROE ROA Debt/equity

45

2011F

2012F

–

–

–

2013F –

Receivables Other Cash Current assets PP&E JCE & associate Other Non-current assets Total assets Payable Short-term debt Other Current liabilities Long-term debt Other Non-current liabilities Total liabilities Share capital Reserves Minority interests Total shareholders’ equity Total liabilities & shareholders’ funds

56 29 515 601 195 2 2 200 800 93 13 32 138 66 1 66 204 34 560 2 596 800

59 33 437 528 378 2 2 383 911 110 13 39 162 66 1 66 229 34 646 3 682 911

71 35 365 471 551 2 2 556 1,027 136 13 47 195 66 1 66 261 34 729 3 765 1,027

98 42 420 560 715 2 2 719 1,279 174 13 61 248 66 1 66 314 34 928 4 965 1,279

BVPS (US$) BVPS (HK$)

0.23 1.78

0.26 2.04

0.29 2.29

0.37 2.89

2010

2011F

2012F

2013F

127 26 1 (2) (22) 132 (39) 1 0 (38) (18) 345 327 4 420 127

102 18 10 (4) (12) 114 (193) (0) – (193) – 0 0 – (79) 102

108 18 9 (4) (10) 120 (192) 0 – (192) – 0 0 – (72) 108

239 18 7 (9) (9) 246 (191) – – (191) – 1 1 – 56 239

Cash flow 2010

Revenue growth EBITDA growth EBIT growth Gross profit margin EBITDA margin EBIT margin Net profit margin

2010

FYE 31 Dec (US$m) EBITDA Change in working capital Interest received Tax paid Other Operating cashflow Capex Investments Dividends Investing cashflow Long-term borrowings Other Financing cashflow Net exchange effect Net change in cash EBITDA

Transportation/Shipping

25 November 2011

Neptune Orient Lines (NOL SP) Company Rating: Underperform

Troubled seas ahead

(maintained)

We increase our 2012 loss estimate for Neptune Orient Lines (NOL) by 32% on lower container shipping freight rate expectations. In addition, we maintain our target price of S$0.77.

Price:

S$1.03

Target:

S$0.77 (maintained)
















Relocating to intra Asia. NOL reported shipping volume of 241k FEU in October, up 13% YoY and 5% MoM, as more capacity was relocated to the intra-Asia route. Unlikely that TSA will raise freight rates. The TSA stated that it intended to impose a levy of at least US$400/FEU as a temporary measure before the start of annual contract negotiations. Given that the peak season surcharge failed to materialize in 3Q11, and given current weak demand, we believe the surcharge is unlikely to be implemented in January 2012. Uncertain outlook. We expect most container shipping companies to see another loss-making year in 2012. Despite resilient US sales and consumer sentiment, European demand continues to weaken. With more container shipping vessels to be delivered in 2012, we expect freight rates to fall sharply in 2012. Valuation. Our target price is based on 0.6x 2012F PBR. We expect poor TSA freight rate negotiation results and declining freight rates to be the negative catalysts for NOL’s share price. Risks. If the recovery in US demand can offset demand weakness in Europe, freight rates will be higher than we anticipate.

Trading data 52-week range Market capitalization (US$m) Shares outstanding (m) Free float (%) 3M average daily T/O (m share) 3M average daily T/O (US$m) Expected return (%) – 1 year Closing price on 24 November 2011

Stock price and FSSTI (rebased) S$ 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 Oct-10

Nov-10

Jan-11

Feb-11 Apr-11 May-11 Jul-11 NOL FSSTI (rebased)

Source: Bloomberg

Forecast and valuation Year to 31 Dec

2009

2010

2011F

2012F

2013F

Revenue (US$m) Growth (%) Operating profit (US$m) Net profit (US$m) Growth (%) EPS (S$) PER (x) PBR (x) ROE (%) ROA (%) Source: CCBIS estimates

6,516 (30) (651) (741) N/A 0.24 N/A 0.7 (28) (14)

9,422 45 590 461 N/A (0.13) 4.2 0.6 15 8

8,484 (10) (176) (277) N/A (0.15) N/A 0.7 (9) (4)

8,409 (1) (170) (307) N/A 0.09 N/A 0.8 (11) (5)

9,937 18 267 179 (158) 0.00 11.9 0.7 6 3

46

HK$0.98 – 2.4 2,028 2,583 32 11 10 (25)

Winnie Guo (8610) 6652 3729 [email protected]

Chou Xiao (86755) 8826 6505 [email protected]

Tim Bacchus, CFA (852) 2532 2549 [email protected]

Aug-11

Oct-11

Nov-11

Transportation/Shipping

25 November 2011

Neptune Orient Lines – financial statements Income statement

Balance sheet

FYE 31 Dec (US$m)

2010

2011F

2012F

2013F

FYE 31 Dec (US$m)

Revenue

9,422

8,484

8,409

9,937

Inventory

Cost of service Gross profit Other income SG&A EBITDA Depreciation EBIT Finance income Finance cost P/L in JCE & associates Profit before tax Tax expense Minority interests Net profit

(8,153) 1,269 15 (704) 875 (285) 590 4 (60) 5 530 (66) (3) 461

(7,977) 507 8 (705) 120 (295) (176) 10 (73) 4 (249) (30) 2 (277)

(7,900) 509 17 (707) 150 (320) (170) 8 (107) 4 (276) (33) 2 (307)

(8,989) 948 20 (710) 609 (342) 267 5 (107) 4 161 19 (1) 179

Shares outstanding (m)

2,583

2,583

2,583

2,583

0.18 0.00 0.24 0.00

(0.11) 0.00 (0.13) 0.00

(0.12) (0.02) (0.15) (0.03)

0.07 0.01 0.09 0.02

EPS (US$) DPS (US$) EPS (S$) DPS (S$)

2010

2011F

2012F

244

239

237

270

1,082 100 977 2,402 3,691 77 280 4,049 6,451 1,174 21 421 1,616 1,338 231 1,569 3,185 1,815 1,408 43 3,266 6,451

933 100 766 2,038 3,996 77 280 4,353 6,391 1,117 32 421 1,570 1,600 231 1,831 3,401 1,815 1,131 45 2,991 6,391

925 100 545 1,806 4,275 77 280 4,633 6,439 1,106 38 421 1,565 1,900 231 2,131 3,696 1,815 885 43 2,743 6,439

1,093 100 385 1,847 4,531 77 280 4,889 6,735 1,258 38 421 1,717 1,900 231 2,131 3,848 1,815 1,028 44 2,887 6,735

1.25 1.70

1.14 1.43

1.05 1.31

1.10 1.38

FYE 31 Dec (US$m)

2010

2011F

2012F

2013F

EBITDA Change in working capital Net interest received Tax paid Other Operating cashflow Capex Investments Investing cashflow Long-term borrowings Other Financing cashflow

875 (130) (29) (32) 8 693 (471) 21 (450) 402 (1) 401

120 96 (63) (30) (14) 108 (600) 4 (596) 273 4 277

150 (0) (99) (33) (12) 6 (599) (58) (657) 306 124 430

609 (48) (101) 19 (9) 470 (598) 40 (558) – (72) (72)

644

(211)

(221)

(160)

Receivables Other Cash Current assets PP&E JCE & associate Other Non-current assets Total assets Payable Short-term debt Other Current liabilities Long-term debt Other Non-current liabilities Total liabilities Share capital Reserves Minority interests Total shareholders’ equity Total liabilities & shareholders’ funds BVPS (US$) BVPS (S$)

Financial ratios FYE 31 Dec (%)

Cash flow 2010

2011F

2012F

2013F

45 N/A N/A 13 9 6 5

(10) (86) N/A 6 1 (2) (3)

(1) 25 N/A 6 2 (2) (4)

18 307 (257) 10 6 3 2

15 8 42

(9) (4) 55

(11) (5) 71

6 3 67

Interest cover 9.80 (2.40) FCF/share (US$) 0.09 (0.19) FCF/share (S$) 0.12 (0.24) Source: Historical data from the company, CCBIS estimates

(1.59) (0.23) (0.29)

2.51 (0.05) (0.06)

Revenue growth EBITDA growth EBIT growth Gross profit margin EBITDA margin EBIT margin Net profit margin Balance sheet ratios ROE ROA Debt/equity

47

2013F

Net change in cash

Transportation/Shipping

25 November 2011

Rating definitions Outperform (O) – expected return > 10% over the next twelve months Neutral (N) – expected return between -10% to 10% over the next twelve months Underperform (U) – expected return < -10% over the next twelve months

Analyst Certification: The authors of this report, hereby declare that: (i) all of the views expressed in this report accurately reflect their personal views about any and all of the subject securities or issuers; and (ii) no part of any of their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this report; and (iii) they receive no insider information/non-public price-sensitive information in relation to the subject securities or issuers which may influence the recommendations made by them. The authors of this report further confirm that (i) neither they nor their respective associate(s) (as defined in the Code of Conduct issued by the Hong Kong Securities and Futures Commission) has dealt in or traded in the securities covered in this research report within 30 calendar days prior to the date of issue of the report; (ii) neither they nor their respective associate(s) serves as an officer of any of the Hong Kong listed companies covered in this report; and (iii) neither they nor their respective associate(s) has any financial interests in the securities covered in this report.

Disclaimers: This report is prepared by CCB International Securities Limited. CCB International Securities Limited is a wholly owned subsidiary of CCB International (Holdings) Limited (“CCBIH”) and China Construction Bank Corporation (“CCB”). Information herein has been obtained from sources believed to be reliable but CCB International Securities Limited, its affiliates and/or subsidiaries (collectively “CCBIS”) do not warrant its completeness or accuracy or appropriateness for any purpose or any person whatsoever. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Investment involves risk and past performance is not indicative of future results. Information in this report is not intended to constitute or be construed as legal, financial, business, tax or any professional advice for any prospective investors and should not be relied upon in that regard. This report is for informational purposes only and should not be treated as an offer or solicitation for the purchase or sale of any products, investments, securities, trading strategies or financial instruments of any kind. Neither CCBIS nor any other persons accept any liability whatsoever for any loss arising from any use of this report or its contents or otherwise arising in connection therewith. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. The opinions and recommendations herein do not take into account prospective investors circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to any prospective investors. The recipients of this report shall be solely responsible for making their own independent investigation of the business, financial condition and prospects of companies referred to in this report. 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