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 Bottom-Up

<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/182/768/original/BANNER-BoxDec20.png?1610728156" class="editor-image img-responsive" data-smartkarma-image-id="182768"></figure></section>[Review rates, volume growth (both strong, again), but note some cracks: US weak retail sales in December vs expectations, rising fuel costs, these threaten positive narrative]Wondering about spot container rates versus "achieved" rates? The three Taiwanese carriers show us why spot exposure, not spot rates, is the key determinant of monthly sales momentum. Fuel prices continue to rise and are now over 60% higher than they were in April 2020. High and rising fuel prices pose a threat to container carrier profitability in the near-term, in our view. We also offer brief notes on ZIM's planned IPO and weak US retail sales in December. We conclude by highlighting YTD share performance and current Price-to-book valuations close to 2.0 times.

[Review rates, volume growth (both strong, again), but note some cracks: US weak retail sales in December vs expectations, rising fuel costs, these threaten positive narrative]Wondering about spot container rates versus "achieved" rates? The three Taiwanese carriers show us why spot exposure, not spot rates, is the key determinant of monthly sales momentum. Fuel prices continue to rise and are now over 60% higher than they were in April 2020. High and rising fuel prices pose a threat to container carrier profitability in the near-term, in our view. We also offer brief notes on ZIM's planned IPO and weak US retail sales in December. We conclude by highlighting YTD share performance and current Price-to-book valuations close to 2.0 times.

TRACKING TRAFFIC/Containers & Air Cargo: Spot Vs 'Achieved' Rates | Fuel Prices Up | US Retail Weak

Equity Capital Markets

ZIM Integrated Shipping Services / Equity Capital Markets

<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/183/499/original/BANNER-ECM.png?1611103790" class="editor-image img-responsive" data-smartkarma-image-id="183499"></figure></section>On the afternoon of January 19th, <a href="https://www.smartkarma.com/entities/zim-integrated-shipping-services-ltd" target="_blank" data-smartkarma-citation="entities:31124:1" rel="noopener">ZIM Integrated Shipping Services (ZIM US)</a> filed an updated prospectus, which includes preliminary 2020 financials and details of its planned IPO.At the proposed US$16-19 per share IPO price range, ZIM appears reasonably price compared to peers <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> and <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>. The smaller of these comparables, mid-sized Taiwanese "pure play" Evergreen, may be a better comp for ZIM than industry giant Maersk, which also has significant non-container shipping revenues. Current data suggest container shipping market conditions will remain strong in the near-term, but we believe some risks to that positive narrative are emerging. Chief among these risks are rising fuel costs and weaker-than-expected US retail sales. It may be that ZIM is pricing its IPO aggressively in order to quickly complete its listing before these risks become more tangible.A bigger question is, do investors really want to increase exposure to the container shipping industry near the cycle's peak?

On the afternoon of January 19th, ZIM Integrated Shipping Services (ZIM US) filed an updated prospectus, which includes preliminary 2020 financials and details of its planned IPO.At the proposed US$16-19 per share IPO price range, ZIM appears reasonably price compared to peers Evergreen Marine Corp (2603 TT) and AP Moeller - Maersk A/S (MAERSKB DC). The smaller of these comparables, mid-sized Taiwanese "pure play" Evergreen, may be a better comp for ZIM than industry giant Maersk, which also has significant non-container shipping revenues. Current data suggest container shipping market conditions will remain strong in the near-term, but we believe some risks to that positive narrative are emerging. Chief among these risks are rising fuel costs and weaker-than-expected US retail sales. It may be that ZIM is pricing its IPO aggressively in order to quickly complete its listing before these risks become more tangible.A bigger question is, do investors really want to increase exposure to the container shipping industry near the cycle's peak?

ZIM at IPO Price Range Looks Reasonable Vs Peers, But Should Investors Add Container Exposure Now?

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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 (<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).
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 <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.




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

<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>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.

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

Earlier this week <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> posted the company's best quarterly results in years, with Operating Profit improving over 300% YoY and Net Profit turning from a small loss in 2019 to a tidy profit this year. We believe lower fuel prices accounted for around 3/4 of the YoY improvement in Evergreen's gross profit in Q2. The company also likely benefited from slightly higher average freight rates. Revenue in the period actually declined by 7% YoY due to lower freight volume. Improved capacity discipline by many carriers combined with a modest improvement in demand since Q1 should allow Evergreen to remain profitable in the latter half of 2020. However, the most dramatic YoY gains related to lower fuel costs are likely behind us already. Evergreen's shares are up ~45% from the trough in Q1 during the peak of the pandemic, but they still trade at only about 0.80x stated book value. We believe there is a good chance Evergreen issues a cash dividend paid from 2020 earnings, likely in the NT$0.20-0.30 per share range.

Earlier this week Evergreen Marine Corp (2603 TT) posted the company's best quarterly results in years, with Operating Profit improving over 300% YoY and Net Profit turning from a small loss in 2019 to a tidy profit this year. We believe lower fuel prices accounted for around 3/4 of the YoY improvement in Evergreen's gross profit in Q2. The company also likely benefited from slightly higher average freight rates. Revenue in the period actually declined by 7% YoY due to lower freight volume. Improved capacity discipline by many carriers combined with a modest improvement in demand since Q1 should allow Evergreen to remain profitable in the latter half of 2020. However, the most dramatic YoY gains related to lower fuel costs are likely behind us already. Evergreen's shares are up ~45% from the trough in Q1 during the peak of the pandemic, but they still trade at only about 0.80x stated book value. We believe there is a good chance Evergreen issues a cash dividend paid from 2020 earnings, likely in the NT$0.20-0.30 per share range.

Evergreen Marine (2603:TT) Posts Best Quarterly Earnings in Years, Mainly on Lower Fuel Costs

Japan

Kawasaki Kisen Kaisha, Ltd. operates marine cargo and passenger transportation around the world.  The Company provides ocean liner, bulk carrier, car carrier, unscheduled specialized carrier, and energy transportation services. The Company also offers insurance, warehousing, and land transportation services.  Items transported include automobile, grain, petroleum, coal, iron ore, and wood chip.

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Kawasaki Kisen Kaisha (9107 JP)

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Although December container volumes and average pricing improved, we see increasing risks, including rising fuel prices and lackluster US retail...

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ZIM at IPO Price Range Looks Reasonable Vs Peers, But Should Investors Add Container Exposure Now?

ZIM at the mid-point of its IPO price range does not look expensive, but the bigger question is: why add container exposure near the peak of the...

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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...

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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

Evergreen Marine (2603:TT) Posts Best Quarterly Earnings in Years, Mainly on Lower Fuel Costs

Earlier this week Evergreen Marine Corp (2603 TT) posted the company's best quarterly results in years, with Operating Profit improving over 300%...

Tracking Traffic

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