Container Freight Rates and Asian Shipping Stocks Monitor – Week 10 of 2017

9th March, Asia - We launch our inaugural weekly report, monitoring the container shipping sector’s latest container freight rate and volume trends in the major trade lanes and assess their implications on the Asian container shipping stocks. Overall, the container freight rates and volume trends are looking more favourable y/y and are likely to drive the Asian container shipping stocks’ prices higher near term.

In summary, we expect the Asian container shipping stocks with larger exposure to the Asia-Europe trade lane to outperform in 1H17 while the container shipping stocks with larger exposure to the Transpacific trade lane are likely to outperform in 2H17.

Interestingly, there is a stronger positively correlation between the Asian container shipping stocks and the Asia-Europe trade volume and container freight rate trends than the Transpacific even though the Asian container shipping stocks tend to have a larger revenue exposure to the Transpacific trade which is rather counter-intuitive. We believe this could be due to investors’ broader concerns about the influx of mega vessels that are largely being delivered to the Asia-Europe trade which will eventually result in the cascading of vessel capacity into the other trade lanes over time.

The Asian container shipping stocks with larger exposure to the Intra-Asia Pacific trade lane continue to be defensive plays given the strong volume growth and rebounding container freight rates.

Listed Asian liners with the largest capacity exposure to the Asia-Europe trade are Yang Ming (34% of total capacity, 2.1x P/B), Evergreen (29%, 1.0x P/B), Hyundai Merchant Marine (29%, 1.0x P/B), COSCO Shipping (28%, 2.2x P/B).

Listed Asian carriers with the largest capacity exposure to the Transpacific trade are the 3 Japanese liners K-Line (51% of total capacity, 1.1x P/B), NYK (43%, 0.8x P/B), Mitsui OSK (37%, 0.8x P/B), Evergreen (34%, 1.0x P/B) and OOIL (30%, 0.8x P/B).

Listed Asian carriers with the largest capacity exposure to the Intra-Asia and Oceania related trade lanes are SITC (100%, 1.7x P/B), Wan Hai (49%, 1.1x P/B), COSCO Shipping (20%, 2.2x P/B), and OOIL (12%, 0.8x P/B). 

GLOBAL CONTAINER SHIPPING TRADE

+ Container freight rates trend: The overall container freight rates slipped w/w but are still an improvement y/y. The overall China Containerized Freight Index (CCFI) fell 2.5% w/w in the week ending 3rd March but was still 15% higher y/y. In the spot market, the overall Shanghai Containerized Freight Index (SCFI) fell 4.4% w/w but was 80% higher y/y.

+ Container freight volumes trend: The global container shipping volume rose 6% y/y in 4Q16, a marked acceleration from the 3% growth in the full year 2016.

TRANSPACIFIC TRADE LANE

+ Container freight rates trend: Container freight rates weakened w/w on both US West Coast and US East Coast lanes. The CCFI fell 5% and 2% w/w on the US West Coast and US East Coast trade and were still 14% and 2% lower y/y respectively, mainly reflecting the depressed rates at which the liners signed their annual contracts. Spot container freight rates (based on the SCFI) fell 9% and 3% w/w respectively but were 69% and 64% higher y/y at US$1,496/FEU and US$2,955/FEU respectively. If spot container freight rates can be maintained at these levels or higher, the liners will be well-positioned to sign higher container freight rates for their annual contracts that typically run from 1st May.

+ Container freight volumes trend: The Transpacific container shipping trade volume rose 4.5% y/y in January 2017 (versus the 4.3% growth for the full year 2016) but we will have to wait for February data to make a more reliable inference of the growth trend given the different timing of the Lunar New Year holidays this year versus last year.

+ Other key developments: The National Retail Federation and Hackett Associates expects US containerized imports to rise 4.6% y/y in 1H17. The container shipping companies are looking to sign their annual Asia-US West Coast contract rates at around US$1,250/FEU and US$1,550/FEU.

Implications on shipping stocks – liners with larger exposure to the Transpacific trade are likely to outperform in the stock market in 2H17

Historically, the Asian container shipping companies’ share price performance have a positive correlation with the Transpacific container shipping volume growth (decline) and Transpacific container freight rate growth (decline).

Buying (shorting) the Asian shipping stocks when container shipping volumes and container freight rates rose (fell) y/y yielded substantial returns for equity investors.

We expect Asian container shipping stocks with sizeable exposure to the Transpacific trade lane to outperform the sector in 2H17 as we expect their average container freight rates on this trade lane to improve when their new annual contracts with higher container freight rates are in place, as long as the trade demand growth momentum remains healthy in 2H17.

Listed Asian carriers with the largest capacity exposure to the Transpacific trade are K-Line (51% of total capacity, 1.1x P/B), NYK (43%, 0.8x P/B), Mitsui OSK (37%, 0.8x P/B), Evergreen (34%, 1.0x P/B) and OOIL (30%, 0.8x P/B).

Chart: Asian container shipping stocks index versus Transpacific container shipping volume growth (decline)

Container Freight Rates Monitor Chart 1

Chart: Asian container shipping stocks index versus Transpacific container freight rate growth (decline)

Container Freight Rates Monitor Chart 2

ASIA-EUROPE TRADE LANE

+ Container freight rates trend: Container freight rates weakened w/w on the Europe trade lane. The CCFI fell 3% w/w but was 53% higher than last year’s dismal levels. Spot container freight rates (based on the SCFI) are at US$876/TEU, nearly 4 times the level in the same period last year. If spot container freight rates can be maintained at these levels or higher, we expect to see a marked improvement in the Asian liners’ revenue contribution from the Asia-Europe trade in 1H17.

+ Container freight volumes trend: The Asia-Europe container shipping trade volume was still rather anaemic, remaining flat y/y in 4Q16.

+ Other key developments: There is a rising shortage of capacity on the back-haul Europe-Asia routes, mainly driven by blank head-haul sailings due to the carriers’ network adjustments. This has resulted in a sharp spike in North Europe-Asia spot container freight rates, exceeding head-haul spot rates. Apart from boosting the Asian container shipping companies’ revenue, this could potentially drive some time-sensitive higher-value cargo into air freight transport near term.

Implications on stocks - – liners with larger exposure to the Asia-Europe trade are likely to outperform in the stock market in 1H17

Historically, the Asian container shipping companies’ share price performance have a positive correlation with the Asia-Europe container shipping volume growth (decline) and Asia-Europe container freight rate growth (decline).

Buying (shorting) the Asian shipping stocks when container shipping volume and container freight rates rose (fell) y/y yielded substantial returns for equity investors. This correlation coefficient is higher for the Asia-Europe trade than for the Transpacific trade.

We expect Asian container shipping stocks with sizeable exposure to the Asia-Europe trade lane to outperform the sector in 1H17 as we expect their improving average container freight rates on this trade lane to lift their Asia-Europe revenue, helping to offset the y/y decline in their Transpacific revenue, as long as the trade volume does not deteriorate further.

Chart: Asian container shipping stocks index versus Asia-Europe container shipping volume growth (decline)

Container Freight Rates Monitor Chart 3

Chart: Asian container shipping stocks index versus Asia-Europe container freight rate growth (decline)

Container Freight Rates Monitor Chart 4

Listed Asian liners with the largest capacity exposure to the Asia-Europe trade are Yang Ming (34% of total capacity, 2.1x P/B), Evergreen (29%, 1.0x P/B), Hyundai Merchant Marine (29%, 1.0x P/B), COSCO Shipping (28%, 2.2x P/B).

Listed Asian airlines with the largest revenue exposure to cargo are China Airlines Taiwan (whose cargo revenue contributes 28% of its total revenue, 0.8x P/B), Cathay Pacific (22%, 0.9x P/B) and Korean Air (21%, 1.0x P/B).

INTRA-ASIA PACIFIC TRADE LANE

+ Container freight rates trend: Container freight rates slipped w/w on all the major Intra-Asia Pacific trade lanes. The CCFI fell 1%-3% w/w on average. On a y/y basis, the CCFI was lower y/y on the Korea and Hong Kong trade lanes but higher in the Japan, Southeast Asia and Australia/New Zealand routes respectively. Spot container freight rates (based on the SCFI) fell 8% and 1% w/w on the Australia/NZ and Korea trade lanes respectively but rose w/w on the Japan and Southeast Asia trade lanes. On a y/y basis, spot container freight rates rebounded strongly on the Japan, Southeast Asia and Aus/NZ trade lanes but weakened further on the Korea and Hong Kong routes.

Chart: Container freight rates (Week of 3 March 2017)

Container Freight Rates Monitor Table

+ Container freight volume: The Intra-Asia container shipping trade volume rose 7.6% y/y in November and December 2016.

+ Other key developments: Due to the THAAD anti-missile issue, Chinese state media is encouraging the boycott of South Korean products and companies.  Unidentified sources within China are even calling for a severing of diplomatic ties. (Source: New York Times, 6th March 2017).  This may dampen container shipping volume between China and Korea near term, putting further pressure on the container freight rates on this trade lane in the spot market.

Implications on stocks:

Listed Asian carriers with the largest capacity exposure to the Intra-Asia and Oceania related trade lanes are SITC (100%, 1.7x P/B), Wan Hai (49%, 1.1x P/B), COSCO Shipping (20%, 2.2x P/B), and OOIL (12%, 0.8x P/B).

VESSEL CHARTERING MARKET

Vessel chartering demand has picked up, lifting the containership timecharter index slightly. Historically, there has been a positive correlation between the Asian container shipping stocks and the containership timecharter rate as the rising timecharter rate likely signal a pick-up in shipping volume and the liners’ optimism in carrying more freight.

Chart: Asian container shipping stocks index versus Containership timecharter index

Container Freight Rates Monitor Chart 5

BUNKER FUEL PRICE TREND

Bunker fuel price held steady w/w at US$357/ton but are 65% higher y/y ytd. Interestingly, the Asian container shipping stocks tend to have a positive correlation with the bunker fuel price which seems counter-intuitive since they have not been able to pass on the higher bunker fuel costs effectively to their customers due to their lack of pricing power resulting from the industry overcapacity.

Chart: Asian container shipping stocks index versus Bunker fuel price

Container Freight Rates Monitor Chart 6

Note: All the P/B valuations stated above are based on current share prices and the average consensus estimates in calendar year 2017.

Source: Crucial Perspective estimates, Alphaliner, Bloomberg, Clarksons, Container Trades Statistics, Journal of Commerce, Loadstar, Shanghai Shipping Exchange.

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