OOIL (316:HK) Rating: Outperform
OOIL (316:HK) Fair value: HK$80
13 March 2018, Global – We review Orient Overseas International Ltd (OOIL)’s FY2017 financial results and discuss the key implications for the global container shipping industry.
OOIL’S PROFITABILITY IMPROVED Y/Y AND H/H
Orient Overseas International Ltd OOIL (316:HK) reported a net profit of US$84m in 2H17, raising its full year net profit to US$138m, a turnaround from its net loss of HK$219m in 2016, boosted by the US$43.4m fair value gain from Wall Street Plaza and US$26.7m increased profit contribution from Hui Xian. Operating profit and net profit margins both improved 6ppts y/y to 2.7% and 2.3% respectively in 2017.
OOIL’s profitability would have been higher given the 11.4% improvement in average revenue per TEU and 3.6% y/y rise in container liftings if not for the 45% y/y rise in bunker fuel costs and higher fixed cost base with the delivery of newbuild mega-sized vessels. Bunker fuel costs, which accounted for 13% of OOIL’s total cost, was the main drag on earnings as the other costs items (cargo costs fell 1% y/y while vessel voyage and equipment & repositioning costs held steady y/y) remained well-managed.
HOWEVER, OOIL’S PROFITABILITY NO LONGER RANKS AHEAD OF SECTOR PEERS’
OOIL has historically ranked first or at least in the top 3 among the global container shipping companies in terms of profitability in the past 10 years. Based on the companies who have reported full year 2017 or year-to-date financial results so far, some investors would be disappointed that OOIL’s recent profitability ranks more in line with the global container shipping industry’s average net profit margin level in contrast with its profitability leadership in the past.
Chart: Global Container Shipping Companies Net Profit Margin Comparison (YTD 2017)
OOIL’S BALANCE SHEET STILL MUCH STRONGER THAN SECTOR PEERS BUT NO FINAL DIVIDEND DECLARED DUE TO COSCO SHIPPING AND SIPG’S TAKEOVER BID
Notwithstanding OOIL’S substantial capex of US$470m (+87% y/y) in 2017, OOIL generated positive free cash flow of US$9m in 2017. At the end of December 2017, OOIL’s balance sheet remains one of the strongest in the global container shipping industry with a net debt-equity of only 0.43x (only slightly higher than 0.42x in end 2016), well below the global industry average of 1.2x.
However, no final dividend was declared (versus its interim dividend of US$0.0214 per share). This is likely due to COSCO SHIPPING Holdings (1919:HK) and Shanghai International Port Group (600018:CH)’s impending takeover bid which would have taken into account OOIL’s level of cash balance when formulating the transaction structure and valuation.
Chart: Global Container Shipping Companies Net debt-equity Comparison (2017)
OOIL’S REVENUE EXPOSURE TO LONG-HAUL ROUTES INCREASED WHILE ITS INTRA-ASIA/AUSTRALASIA EXPOSURE SHRANK AND WAS DISAPPOINTING IN 4Q17
The Transpacific trade lane remains OOIL’s largest revenue contributor, rising 1ppt to 38% of OOIL’s total container shipping revenue in 2017. This is followed by the Intra-Asia/Australasia trade although its share of contribution has fallen 3ppts y/y to 33% in 2017. OOIL’s revenue exposure to the Asia-Europe trade increased significantly by 4ppts y/y to 20% in 2017 as it took delivery of more mega sized ships. Meanwhile, the Transatlantic trade only contributed 9% of OOIL’s revenue, down 2ppts y/y in 2017.
Chart: OOIL Revenue Contribution By Route Region (2017)
MANAGEMENT STILL CAUTIOUS ABOUT 2018 OUTLOOK BUT MORE OPTIMISTIC ABOUT 2019-2020 PROSPECTS – IN LINE WITH CRUCIAL PERSPECTIVE’S PROJECTION
Although the global container shipping industry fundamentals have improved, OOIL management remains cautious about the operating outlook in 2018 due to the influx of newbuild mega-sized containership deliveries. However, the lower capacity growth in 2019 and 2020 and industry consolidation should bring about greater stability, not seen in many years.
This is in line with our projection. We forecast the global container shipping net capacity to grow 5.9% y/y in 2018. Therefore, although we forecast global container shipping demand to be more robust, growing at 4.7% this year, demand will still fall below the industry’s capacity expansion.
More containerships will need to be scrapped and more newbuild deliveries deferred in order to increase the liners’ pricing power. In order to keep the global container shipping industry’s demand and supply growth balanced, at least one of the three bullish scenarios below needs to happen:
- Global trade demand growth accelerates to 6.0% or higher
- Vessel scrapping removes more than 3% of the global container shipping fleet capacity
- Some of the newbuild vessel deliveries are deferred to 2019
Chart: Global container shipping demand and supply growth and idle fleet ratio versus freight rate growth (2007 to 2020)
COMPLETION OF COSCO SHIPPING HOLDINGS AND SIPG’S TAKEOVER IS EXPECTED BY MID 2018
COSCO SHIPPING Holdings and Shanghai International Port Group (SIPG)’s voluntary general offer to acquire all of the issued OOIL’s shares held by qualifying OOIL shareholders at HK$78.67 per share has already secured pre-condition approvals from the U.S and European Commission anti-trust regulators and COSCO SHIPPING Holdings shareholders’ approval. It is still pending China’s MOFCOM and NDRC pre-condition approvals which should be achieved by the long stop date in June 2018. See our previous report on the implications of this transaction for more details:
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