Asian Equities Analyst, Logistics & Transport, Tracking Traffic

Daniel Hellberg

Asian Equities Analyst, Logistics & Transport

Equity Bottom-Up

A brief congratulatory phone call from ROC President Tsai Ing-wen to US President-elect Trump last Friday has angered Chinese officials, who view the call (initiated by Tsai) as a departure from the United States' long-standing 'One-China' policy. The call from President Tsai, whose Democratic Progressive Party (DPP) openly seeks greater independence from China, will undoubtedly further damage already shaky relations between Taiwan and the Mainland in the near-term.We believe China will retaliate for this affront not against Trump or the US, but against Taiwanese interests, including Taiwanese airlines. A likely response from China would be to further slow the issuance of tourist visas to Chinese nationals hoping to visit Taiwan; Beijing could also delay the expansion of flights between Taiwan and China, which have grown dramatically in recent years. We believe either of these responses could have a material negative impact on <a href="https://www.smartkarma.com/entities/20645" target="_blank" data-smartkarma-citation="entities:20645:1">Eva Airways Corp (2618 TT)</a>'s passenger revenues in 2017. EVA has become increasingly reliant on passenger volume growth as its once-burgeoning cargo business has dramatically dwindled over the past decade.EVA may also come under pressure, indirectly, from poor profitability at parent <a href="https://www.smartkarma.com/entities/15428" target="_blank" data-smartkarma-citation="entities:15428:1">Evergreen Marine Corp Ltd (2603 TT)</a>, which retains a 16.3% stake in the airline. Due to weak demand and chronic industry over-capacity, Evergreen lost money in three of the last four years, and will likely lose money again in 2016. We believe Evergreen may be willing to sell down part of its remaining stake in EVA in order to offset losses in its core shipping business. In our view, the January 2016 death of Evergreen Group founder Chang Yung-fa and subsequent family squabbles over succession issues make the sale of Evergreen's EVA stake more likely. Trading at 1.16x NTA, and facing pressure from likely Chinese retaliation over 'The Trump Call', we recommend investors establish Short positions in EVA and use the proceeds to fund Long positions in Evergreen.Despite its heavy operating losses, we believe Evergreen Marine is becoming an attractive target in the rapidly consolidating container shipping sector. Long a global Top-3 container carrier by capacity, Evergreen now sits at number five behind the three large European carriers and <a href="https://www.smartkarma.com/entities/286" target="_blank" data-smartkarma-citation="entities:286:1">China COSCO Holdings (H) (1919 HK)</a> (Source: Alphaliner, December 2016). Soon, however, recently announced mergers and acquisitions within the container shipping space will push Evergreen down to a distant seventh in the tables. We believe Evergreen's large scale (among remaining independent carriers) and depressed valuation make it an logical merger or acquisition target; the early 2016 passing of its founder (and subsequent family squabbles) could potentially ease a sale of the business. And although core earnings remain under pressure, we believe Evergreen can and will resort to asset disposals in the near- to medium-term to help offset losses. Finally, compared to its Evergreen Group associate EVA, we believe Evergreen is much less vulnerable to retaliatory measures from China, as its business is less closely tied to Taiwan than EVA's.

A brief congratulatory phone call from ROC President Tsai Ing-wen to US President-elect Trump last Friday has angered Chinese officials, who view the call (initiated by Tsai) as a departure from the United States' long-standing 'One-China' policy. The call from President Tsai, whose Democratic Progressive Party (DPP) openly seeks greater independence from China, will undoubtedly further damage already shaky relations between Taiwan and the Mainland in the near-term.We believe China will retaliate for this affront not against Trump or the US, but against Taiwanese interests, including Taiwanese airlines. A likely response from China would be to further slow the issuance of tourist visas to Chinese nationals hoping to visit Taiwan; Beijing could also delay the expansion of flights between Taiwan and China, which have grown dramatically in recent years. We believe either of these responses could have a material negative impact on Eva Airways Corp (2618 TT)'s passenger revenues in 2017. EVA has become increasingly reliant on passenger volume growth as its once-burgeoning cargo business has dramatically dwindled over the past decade.EVA may also come under pressure, indirectly, from poor profitability at parent Evergreen Marine Corp Ltd (2603 TT), which retains a 16.3% stake in the airline. Due to weak demand and chronic industry over-capacity, Evergreen lost money in three of the last four years, and will likely lose money again in 2016. We believe Evergreen may be willing to sell down part of its remaining stake in EVA in order to offset losses in its core shipping business. In our view, the January 2016 death of Evergreen Group founder Chang Yung-fa and subsequent family squabbles over succession issues make the sale of Evergreen's EVA stake more likely. Trading at 1.16x NTA, and facing pressure from likely Chinese retaliation over 'The Trump Call', we recommend investors establish Short positions in EVA and use the proceeds to fund Long positions in Evergreen.Despite its heavy operating losses, we believe Evergreen Marine is becoming an attractive target in the rapidly consolidating container shipping sector. Long a global Top-3 container carrier by capacity, Evergreen now sits at number five behind the three large European carriers and China COSCO Holdings (H) (1919 HK) (Source: Alphaliner, December 2016). Soon, however, recently announced mergers and acquisitions within the container shipping space will push Evergreen down to a distant seventh in the tables. We believe Evergreen's large scale (among remaining independent carriers) and depressed valuation make it an logical merger or acquisition target; the early 2016 passing of its founder (and subsequent family squabbles) could potentially ease a sale of the business. And although core earnings remain under pressure, we believe Evergreen can and will resort to asset disposals in the near- to medium-term to help offset losses. Finally, compared to its Evergreen Group associate EVA, we believe Evergreen is much less vulnerable to retaliatory measures from China, as its business is less closely tied to Taiwan than EVA's. 

'The Trump Call' May See Taiwan Airlines Hurt; Short EVA Against Long Position in Evergreen Marine

Taiwan

Evergreen International Storage & Transport Corporation provides motor freight transportation and warehousing, cargo handling operation, as well as automobile repairing services.

Evergreen Int'L Storage & Transport (2607 TT)

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'The Trump Call' May See Taiwan Airlines Hurt; Short EVA Against Long Position in Evergreen Marine

A brief congratulatory phone call from ROC President Tsai Ing-wen to US President-elect Trump last Friday has angered Chinese officials, who view...

Daniel Hellberg