Asian Equities Analyst, Logistics & Transport, Tracking Traffic

Daniel Hellberg

Asian Equities Analyst, Logistics & Transport

Tracking Traffic

Focusing on Asian logistics, transportation, and travel companies

Equity Capital Markets

ZIM Integrated Shipping Services / Equity Capital Markets

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<p>Israel's ZIM Integrated Shipping Services (proposed ticker ZIM US) has filed documents to launch an IPO in the US. Media reports have speculated the container shipping company hopes to raise at least US$100 mn in the deal; some reports say ZIM could try to raise US$300 mn or more.</p>
<p>The objective of this note is to provide some context for the company and the global container shipping industry. After all, it has been over two decades since a global container ship operator has traded in the US (<a href="https://www.smartkarma.com/entities/matson-inc" target="_blank" data-smartkarma-citation="entities:6335:1" rel="noopener">Matson Inc (MATX US)</a> focuses on niche domestic US markets, generally).</p>
<p>ZIM is a small player in global container shipping, and contrary to its claims the company mainly operates in highly competitive segments. Its "asset-light" model is unusual, but it represents a double-edged sword: chartering in the majority of its capacity offers flexibility, but it also means operating costs may rise in tandem with freight rates over the cycle, limiting margin expansion. </p>
<p>Fortunately, Europe and Asia offer several direct comps for ZIM, including <a href="https://www.smartkarma.com/entities/ap-moeller-maersk-a-s" target="_blank" data-smartkarma-citation="entities:22428:1" rel="noopener">AP Moeller - Maersk A/S (MAERSKB DC)</a> of Denmark and <a href="https://www.smartkarma.com/entities/evergreen-marine-corp-ltd" target="_blank" data-smartkarma-citation="entities:15428:1" rel="noopener">Evergreen Marine Corp (2603 TT)</a> of Taiwan. These two companies -- both of them far larger than ZIM, and more profitable over the cycle -- will serve as useful benchmarks once ZIM and its bankers announce details regarding deal size and pricing. </p>




Israel's ZIM Integrated Shipping Services (proposed ticker ZIM US) has filed documents to launch an IPO in the US. Media reports have speculated the container shipping company hopes to raise at least US$100 mn in the deal; some reports say ZIM could try to raise US$300 mn or more.
The objective of this note is to provide some context for the company and the global container shipping industry. After all, it has been over two decades since a global container ship operator has traded in the US (Matson Inc (MATX US) focuses on niche domestic US markets, generally).
ZIM is a small player in global container shipping, and contrary to its claims the company mainly operates in highly competitive segments. Its "asset-light" model is unusual, but it represents a double-edged sword: chartering in the majority of its capacity offers flexibility, but it also means operating costs may rise in tandem with freight rates over the cycle, limiting margin expansion. 
Fortunately, Europe and Asia offer several direct comps for ZIM, including AP Moeller - Maersk A/S (MAERSKB DC) of Denmark and Evergreen Marine Corp (2603 TT) of Taiwan. These two companies -- both of them far larger than ZIM, and more profitable over the cycle -- will serve as useful benchmarks once ZIM and its bankers announce details regarding deal size and pricing. 

Planned ZIM IPO: Opportunistic Listing Near Cycle Peak for Minor Industry Player

Equity Bottom-Up

<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/180/980/original/BANNER-BoxDec20.png?1609781008" class="editor-image img-responsive" data-smartkarma-image-id="180980"></figure></section><p>Within container shipping space, recent share price performance suggests investors believe the benefits of the cyclical upturn will mainly accrue to carriers like <a href="https://www.smartkarma.com/entities/evergreen-marine-corp-ltd" target="_blank" data-smartkarma-citation="entities:15428:1" rel="noopener">Evergreen Marine Corp (2603 TT)</a>.</p><p>To maintain a positive view on container carriers in the near- and medium-term, investors must embrace several key assumptions regarding demand, supply, and fuel prices. We lay out five of these key assumptions and the risks associated with them. </p><p>We conclude that investors may not fully appreciate all the risks facing the sector in early 2021. </p>

Within container shipping space, recent share price performance suggests investors believe the benefits of the cyclical upturn will mainly accrue to carriers like Evergreen Marine Corp (2603 TT).To maintain a positive view on container carriers in the near- and medium-term, investors must embrace several key assumptions regarding demand, supply, and fuel prices. We lay out five of these key assumptions and the risks associated with them. We conclude that investors may not fully appreciate all the risks facing the sector in early 2021. 

The Shaky Assumptions Behind Recent Strong Performance of Asian Container Carriers

<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/178/836/original/BANNER-CARGO.png?1608075975" class="editor-image img-responsive" data-smartkarma-image-id="178836"></figure></section><p>Strong North American imports continued in November, and it appears the usual peak season may be stretching into mid-December and even January. Average freight rates in November -- spot and contract combined --  rose by about 13% YoY for a second consecutive month. </p><p>But bunker (fuel) prices are also up compared to earlier in 2020. A spike in fuel prices in Q420 will likely eat into the nice gains in profitability shown by many carriers in Q220 and Q320. </p><p>Shares of carriers have performed very well after bottoming in the first half of the year, but in our view valuations now look stretched. Betting on further gains after these stocks have doubled and tripled over the course of a few months is very risky, in our view. </p>

Strong North American imports continued in November, and it appears the usual peak season may be stretching into mid-December and even January. Average freight rates in November -- spot and contract combined --  rose by about 13% YoY for a second consecutive month. But bunker (fuel) prices are also up compared to earlier in 2020. A spike in fuel prices in Q420 will likely eat into the nice gains in profitability shown by many carriers in Q220 and Q320. Shares of carriers have performed very well after bottoming in the first half of the year, but in our view valuations now look stretched. Betting on further gains after these stocks have doubled and tripled over the course of a few months is very risky, in our view. 

TRACKING TRAFFIC/Containers & Air Cargo: Volumes, Rates & Bunker All Firmer | Valuations Get Weird

<p>In this new monthly research product we introduce three Long / Short pair trade ideas in Chinese travel, Chinese express and logistics, and global container shipping. </p>
<p>These pair trade ideas are based mainly on expected fundamental change in each segment over the next 6-12 months. We'll focus on Asia, but occasionally we may place non-Asian names on either side of our pair ideas. Besides examining key secular and cyclical trends in each segment, we will consider relative valuations, and we'll strive to identify key catalysts and risks for each stock. </p>
<p>Broadly, the idea behind this new product is to identify and <em>own</em> companies we expect to profitably gain share or to reap outsized benefits from important secular and cyclical trends, then <em>short</em> names in the same segment that stand to lose the most to the 'winners' we select. </p>
<p>We'll be back in about a month with our first updates on these three proposed pairs!</p>

In this new monthly research product we introduce three Long / Short pair trade ideas in Chinese travel, Chinese express and logistics, and global container shipping. 
These pair trade ideas are based mainly on expected fundamental change in each segment over the next 6-12 months. We'll focus on Asia, but occasionally we may place non-Asian names on either side of our pair ideas. Besides examining key secular and cyclical trends in each segment, we will consider relative valuations, and we'll strive to identify key catalysts and risks for each stock. 
Broadly, the idea behind this new product is to identify and own companies we expect to profitably gain share or to reap outsized benefits from important secular and cyclical trends, then short names in the same segment that stand to lose the most to the 'winners' we select. 
We'll be back in about a month with our first updates on these three proposed pairs!

TRACKING TRAFFIC/Three Suggested Pair Trades in Travel, Express & Shipping

<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/172/990/original/BANNER-CARGO.png?1605979844" class="editor-image img-responsive" data-smartkarma-image-id="172990"></figure></section><p>Average container rates popped in October, up almost 14% YoY according to our proprietary model. Container volumes out of Asia and into the North American West coast remained firm, too.</p><p>Carriers (and their customers) have once again begun complaining about a shortage of containers at key origins in Asia. We believe this equipment shortage also supports firmer container rates.</p><p>Firming rates and volumes, combined with relatively low fuel prices, are delivering a surprisingly good year to container carriers, Covid19 be damned. But we feel most of the good news has been reflected in share prices, many of which have more than doubled from lows in H1 2020. </p>

Average container rates popped in October, up almost 14% YoY according to our proprietary model. Container volumes out of Asia and into the North American West coast remained firm, too.Carriers (and their customers) have once again begun complaining about a shortage of containers at key origins in Asia. We believe this equipment shortage also supports firmer container rates.Firming rates and volumes, combined with relatively low fuel prices, are delivering a surprisingly good year to container carriers, Covid19 be damned. But we feel most of the good news has been reflected in share prices, many of which have more than doubled from lows in H1 2020. 

TRACKING TRAFFIC/Containers & Air Cargo: October Rates Pop | LA Volumes Strong | Box Shortage?

South Korea

HMM Co., Ltd. provides marine transportation services.  The Company commands different types of vessels including full container vessels, oil tankers, car carriers, LNG carriers, bulk carriers, and tramps.

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HMM Co., Ltd. (011200 KS)

Planned ZIM IPO: Opportunistic Listing Near Cycle Peak for Minor Industry Player

ZIM is pursuing an IPO in the US as the container shipping cycle is approaching a peak. In this note we attempt to give investors context that...

Tracking Traffic

The Shaky Assumptions Behind Recent Strong Performance of Asian Container Carriers

Container carriers have performed very well since mid-2020, and we concede we underestimated the strength of spot rates in recent weeks. But...

Tracking Traffic

TRACKING TRAFFIC/Containers & Air Cargo: Volumes, Rates & Bunker All Firmer | Valuations Get Weird

Volumes and average freight rates firmed again in November, but so did fuel prices. Many shares of container carriers also jumped (again) this...

Tracking Traffic

TRACKING TRAFFIC/Three Suggested Pair Trades in Travel, Express & Shipping

We're introducing a monthly pair trade idea product to go along with our monthly products covering Chinese travel and tourism, Chinese express, and...

Tracking Traffic

TRACKING TRAFFIC/Containers & Air Cargo: October Rates Pop | LA Volumes Strong | Box Shortage?

Container rates rose again in October, and fuel costs remain low. Although carriers likely continue to enjoy solid profitability, we believe shares...

Tracking Traffic

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