2 May 2018, China – COSCO SHIPPING Holdings (1919:HK), currently the world’s 4th largest container shipping player with 9% market share, grew its shipping volume twice as fast as the global industry’s growth pace, especially on Intra-Asia routes and has increased its leverage to China’s Belt-and-Road initiatives.
However, it is still incurring negative free cash flows due to its large capex which have raised its net debt-equity ratio to 2.0x at the end of 1Q18. COSCO SHIPPING Holdings’ proposed issuance of non-public A shares is expected to raise up to Rmb12.9B which will significantly reduce its net debt-equity ratio to 0.9x on a pro-forma basis based on our estimates.
Even then, COSCO SHIPPING Holdings still has 25 newbuild vessels on order and a much larger proportion of chartered-in vessels compared to its global sector peers, owning only 28% of its total vessel fleet compared to 46% for the global industry average. Moreover, nearly 70% of the global newbuild vessel deliveries are front-loaded in 1H18 so competitive pressure will remain. Here are our 7 key takeaways from their post 1Q18 financial results management briefing:
#1 Gaining global market share – COSCO SHIPPING Holdings’ container liftings grew twice as fast as the global industry growth pace in 1Q18 and is highly leveraged to China’s Belt-and-Road initiatives
COSCO SHIPPING Holdings’ container shipping volume surged 12% y/y to 5.2 million TEUs in 1Q18, gaining global market share as its liftings grew twice as fast as the global container shipping sector’s volume growth rate of 6%. COSCO SHIPPING Holdings’ container shipping volume grew in all route regions in 1Q18 except on the Asia-Europe/ Mediterranean trade lane where the carrier transported 10% less volume compared to a year ago.
The Intra-Asia/Australia route region was the brightest spot, where COSCO SHIPPING Holdings’ volume grew significantly by 22% y/y in 1Q18. Domestic and Transpacific container shipping volume rose 10% and nearly 8% y/y respectively while volume surged 53% y/y for the Other International route region during the first quarter.
Around 65% of COSCO SHIPPING Holdings’ network is now exposed to trading ports that are linked to China’s Belt-and-Road initiatives and is therefore a key beneficiary.
Chart: COSCO SHIPPING Holdings container volume trends (1Q18)
#2 Freight rates rose in the Intra-Asia route region but weakened in all other domestic and international route regions
COSCO SHIPPING Holdings’ aggressive capacity growth prevented it from raising unit revenue in most markets, thus failing to effectively pass on the higher fuel prices to their customers. COSCO SHIPPING Holdings’ unit revenue per TEU fell 3% y/y in 1Q18 – domestic and international revenue per TEU weakened 12% and 2% y/y respectively. Its 2% y/y decline in international revenue per TEU was, however, smaller than our expectations, considering COSCO SHIPPING Holdings’ substantial fleet capacity increase of 12% y/y and the global container shipping rate index rose 1% y/y.
With the exception of Intra-Asia (including Australia) routes where unit revenue per TEU increased nearly 6% y/y, unit revenue per TEU declined in all other route regions in 1Q18. The Asia-Europe route region suffered the largest rate decline among the international routes. COSCO SHIPPING Holdings’ Asia-Europe (including Mediterranean) unit revenue per TEU fell 3% y/y in 1Q18. This was followed by the Transpacific route region where unit revenue per TEU fell 1% y/y. Rates slipped 0.2% y/y on the Other International routes in 1Q18.
Chart: COSCO SHIPPING Holdings unit revenue per TEU trends (1Q18)
#3 Revenue exposure to Asia-Europe and domestic trade has diminished while Intra-Asia and Other international routes’ revenue contribution has become more important
The Transpacific trade lane remains the largest revenue contributor for COSCO SHIPPING, accounting for 28% of its total container shipping revenue and will be negatively impacted by trade tensions between China and the United States. This year’s Transpacific contracting season has also become more challenging as more customers are adopting a wait-and-see attitude given the uncertainty arising from the China-US trade tensions as well as accelerating capacity growth implied by scheduled newbuild vessel deliveries expected in 2018. See our previous reports for more details:
COSCO SHIPPING Holdings is currently the 3rd largest carrier on the Transpacific trade lane and will become the largest operator if its acquisition of Orient Overseas International (316:HK) is successfully completed. See our previous report for more details:
COSCO SHIPPING Holdings’ revenue exposure to the Asia-Europe trade has decreased substantially by 5ppts y/y to 22% in 1Q18 from 27% a year ago. Revenue contribution from the domestic market has also fallen, driving only 15% of its revenue in 1Q18 compared to 17% a year ago.
The Intra-Asia (Australia) route region’s revenue contribution increased 3ppts y/y to 22% during 1Q18 while Other International routes’ revenue contribution increased 4ppts y/y to 13%.
Chart: COSCO SHIPPING Holdings revenue breakdown by route region (1Q18)
#4 Profitability improved, helped by strong container shipping volume, improved cost efficiency and higher terminal liftings
COSCO SHIPPING Holdings reported a net profit of Rmb181 million in 1Q18. Excluding non-recurring items, its net profit grew 65% y/y to Rmb150 million. Gross profit margin improved slightly by 0.2ppts y/y to 7.9% in 1Q18. COSCO SHIPPING Holdings’ cost per TEU fell 2.4% y/y in 1Q18, helped by its vessel-upsizing and greater economies of scale. The key headwind was the 18% y/y increase in average bunker fuel price which was challenging to pass on to customers completely given COSCO SHIPPING Holdings’ aggressive capacity expansion.
#5 Non-public A share placement will significantly lower COSCO SHIPPING Holdings’ high financial leverage due to its large capex
COSCO SHIPPING Holdings’ incurred negative free cash flow of Rmb3.1B during 1Q18 versus its negative free cash flow of Rmb2.2B in 1Q17, mainly due to its increased capex. Net debt-equity rose to 2.0x at the end of 1Q18 from 1.8x at the end of 2017. COSCO SHIPPING Holdings’ proposed issuance of non-public A shares is expected to raise up to Rmb12.9B which will significantly reduce its net debt-equity ratio to 0.9x on a pro-forma basis based on our estimates.
Even then, COSCO SHIPPING Holdings still has 25 vessels on order and a much larger proportion of chartered-in vessels compared to its global sector peers. The carrier owns only 28% of its total vessel fleet compared to 46% for the global industry average.
#6 Nearly 70% of the global newbuild vessel deliveries are frontloaded in 1H18 which could prove challenging to fill as we expect the global container shipping capacity expansion to outpace demand growth this year; sector outlook to improve from 2019 as deliveries moderate
Based on our estimates, the global container shipping net capacity will grow 5.1% y/y in 2018 after taking into account vessel scrapping and delivery slippage. Nearly 70% of the global newbuild vessel deliveries are front-loaded in 1H18. This is likely to outpace our global container shipping demand growth forecast of 4.2% in 2018, moderating from 5.2% demand growth in 2017 so competitive pressure will remain. We expect the global container shipping sector’s operating outlook to improve from 2019 as capacity growth moderates based on the current vessel orderbook and delivery schedules.
Chart: Global container shipping demand and supply growth and idle fleet ratio versus freight rate growth (2007 to 2020)
#7 COSCO SHIPPING Ports’ container throughput grew substantially in 1Q18
COSCO SHIPPING Ports’ (1199:HK) combined terminal throughput surged 38% y/y to 27.2 million TEUs in 1Q18. Notably, the Bohai Rim region’s throughput grew 150% and accounted for one-third of COSCO SHIPPING Ports’ total volume. The Pearl River Delta region’s throughput grew 6% y/y and contributed 23% of total volume. Overseas ports’ throughput surged 36% y/y and contributed 22% of COSCO SHIPPING Ports’ total volume in 1Q18.
Chart: COSCO SHIPPING ports’ container throughput trends (1Q18)
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