Tuesday, December 22, 2009

>Asia Pacific: Transportation: Shipping (GOLDMAN SACHS)

Reiterate attractive sector stance
The containership sector has rallied 45% ytd despite persistent concerns of oversupply, while
MSCI Asia has increased 28% over the same period. The sector is still trading below mid-cycle
multiples, implying 34% upside on avg to our target prices. Hanjin Shipping, OOIL and Wan Hai
have the highest upside to TP. We upgrade NOL to Buy from Neutral following the recent retracement in the share price. Also, we downgrade RCL and Yang Ming to Neutral from Buy after reducing our 2010E estimated returns.

Three favorable factors for freight
Carriers are still suffering deep losses despite a 29% increase in spot rates from trough levels. We assume 15%-20% rate hikes for 2010E, compared with 5%-10% previously. There are three
favorable factors for freight rates underpinning our optimism:

  1. large net losses to drive a cost recovery;
  2. supply growth is slowing; and
  3. demand will likely accelerate.

Higher opex than we initially assumed
Previously, we assumed greater cost-cutting than what many carriers have achieved ytd. Some have been better than others at rationalizing their businesses, like OOIL, Wan Hai and NOL, which is evident in operating margins. Others like Hanjin, CSCL and RCL have been much less successful. Overall, we increase our estimated net losses for 2009E by 22% on avg. We cut our EPS estimates by 19% on avg for 2010E to reflect higher bunker fuel prices, and revise 2011E by -2%. Furthermore, we no longer assume terminal handling charges will decline next year and model in flat THCs. However, we still expect the industry to return to profitability in 2010 and achieve mid-cycle returns by 2011. We reduce our target prices by 8% on avg on lower future returns on fleet for 2010E-11E.

Risks to our sanguine view
Capacity and pricing discipline pose the greatest risks to our positive view of the containership
sector. Macro risks remain, too, such as a double dip recession in the US and/or EU, which could
derail our thesis.

To read the full report: SHIPPING SECTOR