Orient Overseas (316:HK)’s long-haul exposure rose, unit cost ex-fuel fell, stronger 2H17 outlook

Fair value: HK$80

Rating: Outperform

 

8 August 2017, Hong Kong – Orient Overseas International Ltd OOIL (316:HK) turned profitable in 1H17, in line with our expectations. The improved results were mainly driven by stronger long-haul shipping volume and the rebound in Asia-Europe and Intra-Asia/Australasia freight rates, lower unit cost ex-fuel and property & investment-related gains. OOIL’s share price has risen 66% and outperformed the Hang Seng Index by 50% since we initiated research coverage on the stock with an Outperform rating on 14 March 2017. As mentioned in our report on 10 July 2017, we expect most of OOIL’s public shareholders to accept COSCO SHIPPING (1919:HK) and Shanghai International Port Group (600018:CH)’s Voluntary General Offer of HK$78.67 cash per OOIL share. We remain positive on OOIL’s earnings outlook and expect 2H17 results to be much stronger than 1H as the benefits of the higher freight rates on Transpacific routes, which is OOIL’s largest revenue contributor, kick in. Here are our key takeaways on OOIL’s 1H17 results and read-through for the global container shipping sector:

Results in line with our expectations but below consensus – Orient Overseas International Limited OOIL (316:HK) reported a net profit of US$54m in 1H17, a marked improvement from its US$57m loss in 1H16. The results were boosted by US$27.7m fair value gain from the revaluation of Wall Street Plaza. Only 26% (US$31.4m) of OOIL Group EBIT was contributed by the Liner & Logistics business segment. The remaining 74% (US$87.8m) was contributed by Property & Investments. Liner & Logistics EBIT margin was only 1.1% in 1H17 but we expect to see stronger profits in 2H17. Liner profits would have been higher if not for the 64% y/y increase in bunker fuel costs. 

Revenue exposure to the Asia-Europe and Transpacific route regions rose while Intra-Asia/Australasia and Transatlantic contributions shrank – The Transpacific trade lane remains OOIL’s largest revenue contributor, rising 1ppt to 37% of OOIL’s total container shipping revenue in 1H17. This is followed by the Intra-Asia/Australasia trade although its share of contribution has fallen 4ppts y/y to 33% in 1H17. OOIL’s revenue exposure to the Asia-Europe trade increased significantly by 4ppts y/y to 20% in 1H17. Meanwhile, the Transatlantic trade only contributed 9% of OOIL’s revenue, down 3ppts y/y in 1H17.

Chart: Orient Overseas International Ltd – Container shipping revenue exposure by route region (1H17)

Chart: Orient Overseas International Ltd – Container shipping revenue exposure by route region (1H17)

Strong container shipping volume and a recovery in freight rates boosted total container shipping revenue by 15% y/y – OOIL’s overall container shipping volume rose 7% y/y, mainly driven by the 23% and 22% y/y surge in liftings on the long-haul Transpacific and Asia-Europe trade lanes. OOIL’s average revenue per TEU also rebounded by 8% y/y, mainly boosted by the 22% rebound in freight rates on the Asia-Europe trade.

Chart: Orient Overseas International Ltd (316:HK) Operating Statistics

Chart: Orient Overseas International Ltd (316:HK) Operating Statistics

The sharp rebound in OOIL’s Asia-Europe freight rates in 1H17 is a positive read-through for liners with large Asia-Europe trade exposure and is in line with our expectations. See our previous report on 9 March 2017 for more details:

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

Asian carriers with the largest exposure to the Asia-Europe trade are Yang Ming Marine 2609:TT (39% of total capacity), Nippon Yusen Kisha 9101:JP (34%), Evergreen Marine 2603:TT (32%).

Transpacific rates were still 2% lower y/y in 1H17 but are likely to strengthen in 2H17 as the new annual contract rates kick in which will be a positive earnings driver. Freight rates on the Transpacific trade lane have risen 14% y/y in July 2017. Asian carriers with the largest exposure to the Transpacific trade are Kawasaki Kisen Kaisha 9107:JP (54% of total capacity), Mitsui OSK 9104:JP (48%) and Hyundai Merchant Marine 011200:KS (34%).

Cost competitiveness improved further – OOIL’s unit cost excluding bunker fell 2% y/y to US$828 per TEU in 1H17 which is impressive. Liner profits would have been higher if not for the 64% y/y increase in bunker fuel costs.

Stake in Hui Xian REIT has fallen to 1.1% and we expect this stake to be sold off completely going forward. US$49.9m (Hui Xian Holding US$36.3m + Hui Xian REIT US$13.6m) remains on balance sheet at the end of June 2017.

Still has one of the strongest financial position in the global container shipping sector – OOIL’s net debt-equity remains low at 0.4x at the end of June 2017 and declared an interim DPS of 2.14 UScents (versus no DPS last year), implying a 25% dividend payout ratio which is in line with its historical dividend policy.

OOIL’s share price has risen 66% and outperformed the Hang Seng Index by 50% since we initiated research coverage on the stock with an Outperform rating on 14 March 2017. As mentioned in our previous report below on 10 July 2017, we expect most of OOIL’s public shareholders to accept COSCO SHIPPING (1919:HK) and Shanghai International Port Group (600018:CH)’s Voluntary General Offer of HK$78.67 cash per OOIL share. We remain positive on OOIL’s earnings outlook and expect 2H17 results to be much stronger than 1H as the benefits of the higher freight rates on Transpacific routes, which is OOIL’s largest revenue contributor, kick in.

Sweeter deal for acquirers COSCO (1919:HK) & SIPG than for target OOIL (316:HK)

Chart: Orient Overseas International Limited (316:HK) 1H17 Results at a Glance

Chart: Orient Overseas International Limited (316:HK) 1H17 Results at a Glance

Note: Stocks with upside of more than 10% based on our fair value are assigned an Outperform rating. Stocks with downside of more than 10% based on our fair value are assigned an Underperform rating. Stocks with upside or downside of less than 10% based on our fair value are assigned an In-line rating. These are Crucial Perspective’s proprietary rating classifications and by no means serve as investment recommendations.

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