HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

We spoke with <a href="https://www.smartkarma.com/entities/sitc-international-holdings" target="_blank" data-smartkarma-citation="entities:15301:1" rel="noopener">SITC International (1308 HK)</a> on the impact of the COVID-19 outbreak. Its cargo volume has now returned to 80% of the normal post-CNY level with relatively stable freight rate, but unit cost for 1H20 will be higher due to lower utilisation. The exit of competitors provides it the opportunity to gain market share and further expand into Southeast Asia, which is positive to its long-term development. Similar to all transportation companies, SITC will experience a tough 1H20 with immense pressure which weakens its profitability in the period. However, SITC is among the most solid ones in the sector, with net cash on hand of over US$170m at end-FY19. Its share price is also resilient - down by just 9% from its pre-outbreak peak of HK$9.95.

We spoke with SITC International (1308 HK) on the impact of the COVID-19 outbreak. Its cargo volume has now returned to 80% of the normal post-CNY level with relatively stable freight rate, but unit cost for 1H20 will be higher due to lower utilisation. The exit of competitors provides it the opportunity to gain market share and further expand into Southeast Asia, which is positive to its long-term development. Similar to all transportation companies, SITC will experience a tough 1H20 with immense pressure which weakens its profitability in the period. However, SITC is among the most solid ones in the sector, with net cash on hand of over US$170m at end-FY19. Its share price is also resilient - down by just 9% from its pre-outbreak peak of HK$9.95.

SITC International (1308 HK): Latest Update Post COVID-19 Outbreak

Equity analyst - Containers, Drewry Maritime Financial Research

Nilesh Tiwary

Equity analyst - Containers

Maritime Sector, Equity & Credit Research

Drewry Maritime Financial Research

With no ties to other players in the shipping, finance or banking world, we provide a uniquely impartial view of the markets and companies we cover. Our parent organization, Drewry is a leading independent provider of research services to the maritime and shipping industry, employing over 100 professionals across an international network of offices in London, Delhi, Singapore and Shanghai. Combining our market-leading resources with seasoned sector expertise DFRS offers a highly differentiated and comprehensive range of investment and financial research services to lenders and prospective investors in publicly listed maritime and shipping companies. The full service of reports, supporting resources and sector orientated webinars provides our clients with the most complete picture of the organisations under coverage as is possible. We have been charting and analysing the world’s maritime markets for more than 40 years. This unrivalled intelligence and understanding provides the foundation of our research service. Our analysts have access to one of the most up-to-date, comprehensive and reliable sources of market insight and research data available today. We look at globally listed companies within the following sectors: Port Operators, Container Shipping, Container Manufacturing & Leasing, LNG Shipping, Dry Bulk Shipping and Tanker Shipping. Combine in-depth sector expertise with financial analysis focusing on over 50 stocks globally.

Thematic (Sector/Industry)

<div>Most of the shipping stocks fell in the third week of January after the breakout of the corona virus caused multiple casualties in China. Nonetheless, we expect limited impact on container shipping companies in the longer term. However, if the severity of the outbreak increases, industrial production and retail sales could be affected, leading to rising inventory on ports. In addition, some carriers have warned of a temporary shortage of containers because, 1) Chinese New Year has been extended in China, 2) a shortage of customs and port labour could hold containers. Meanwhile, our overall view remains unchanged towards the stocks under coverage. If the situation is well managed and contained and depending on economic impact and valuations, we may consider revising our fair values. For now, the shock to demand and the macro environment would more likely be short term rather than the long term.</div>

Most of the shipping stocks fell in the third week of January after the breakout of the corona virus caused multiple casualties in China. Nonetheless, we expect limited impact on container shipping companies in the longer term. However, if the severity of the outbreak increases, industrial production and retail sales could be affected, leading to rising inventory on ports. In addition, some carriers have warned of a temporary shortage of containers because, 1) Chinese New Year has been extended in China, 2) a shortage of customs and port labour could hold containers. Meanwhile, our overall view remains unchanged towards the stocks under coverage. If the situation is well managed and contained and depending on economic impact and valuations, we may consider revising our fair values. For now, the shock to demand and the macro environment would more likely be short term rather than the long term.

Container Shipping - Coronavirus and Initial Thoughts

<a href="https://www.smartkarma.com/entities/sitc-international-holdings" target="_blank" data-smartkarma-citation="entities:15301:1" rel="noopener">SITC International (1308 HK)</a> is expected to declare a special dividend when it holds a board meeting on 20 Dec 2019, and we believe this will lift its payout ratio to 83% in FY19, from 71% in FY18. This showcases the company's underlying operation is sound, financial health is solid and management is confident on outlook.Our discussion with the company suggests that momentum has improved in 4Q19 with stronger freight rate and volume, after a dip in 3Q19. In the longer term, it has taken proactive moves to lower its cost and capture the structural trend of manufacturing migration from North Asia to South/Southeast Asia. Despite an 18.7pp outperformance in 2019, we continue to like SITC.

SITC International (1308 HK) is expected to declare a special dividend when it holds a board meeting on 20 Dec 2019, and we believe this will lift its payout ratio to 83% in FY19, from 71% in FY18. This showcases the company's underlying operation is sound, financial health is solid and management is confident on outlook.Our discussion with the company suggests that momentum has improved in 4Q19 with stronger freight rate and volume, after a dip in 3Q19. In the longer term, it has taken proactive moves to lower its cost and capture the structural trend of manufacturing migration from North Asia to South/Southeast Asia. Despite an 18.7pp outperformance in 2019, we continue to like SITC. 

SITC International (1308 HK): Positive Picture for 2020

The 3Q19 operating statistics announced by <a href="https://www.smartkarma.com/entities/sitc-international-holdings" target="_blank" data-smartkarma-citation="entities:15301:1" rel="noopener">SITC International (1308 HK)</a> showed that the average freight rate growth has moderated in the quarter. However, this is offset by a slight pick-up in overall container volume, which continued to fuel a healthy rise in revenue for the quarter.We expect the retreat in average bunker price in 3Q19 is one of the reasons for the lower freight rate, as surcharges may have adjusted marginally. Also, change in volume mix may also contribute to the pullback. We do not expect the trend to affect the profitability of the company. In fact, with the bunker price dropped by almost 9% YoY in 2H19, SITC's margin will potentially be better when compared with last year.

The 3Q19 operating statistics announced by SITC International (1308 HK) showed that the average freight rate growth has moderated in the quarter. However, this is offset by a slight pick-up in overall container volume, which continued to fuel a healthy rise in revenue for the quarter.We expect the retreat in average bunker price in 3Q19 is one of the reasons for the lower freight rate, as surcharges may have adjusted marginally. Also, change in volume mix may also contribute to the pullback. We do not expect the trend to affect the profitability of the company. In fact, with the bunker price dropped by almost 9% YoY in 2H19, SITC's margin will potentially be better when compared with last year. 

SITC International (1308 HK): Moderating Freight Rate in 3Q19 Not a Concern

<a href="https://www.smartkarma.com/entities/sitc-international-holdings" target="_blank" data-smartkarma-citation="entities:15301:1" rel="noopener">Sitc International (1308 HK)</a> is an exceptional shareholder value creator, despite its operation in a traditional volatile low-return container shipping industry. Since its listing in 2010, it has delivered a 76% profit growth, achieved a 4.7ppt improvement in ROE to 19.7% and sustained a steadily rising dividend payout ratio from 36% to 71%.
SITC's share price has increased by over 70% since its IPO, with aggregate dividends of HK$2.16 being paid, translating into a return of 10% annually over such period. Moreover, it is currently still in a net cash position. 
We believe SITC's niche market focus, sound business model and excellent management quality will sustain this trend. With projected ROE to further expand in the next two years, the stock's current valuations are inexpensive, in our view.

Sitc International (1308 HK) is an exceptional shareholder value creator, despite its operation in a traditional volatile low-return container shipping industry. Since its listing in 2010, it has delivered a 76% profit growth, achieved a 4.7ppt improvement in ROE to 19.7% and sustained a steadily rising dividend payout ratio from 36% to 71%.
SITC's share price has increased by over 70% since its IPO, with aggregate dividends of HK$2.16 being paid, translating into a return of 10% annually over such period. Moreover, it is currently still in a net cash position. 
We believe SITC's niche market focus, sound business model and excellent management quality will sustain this trend. With projected ROE to further expand in the next two years, the stock's current valuations are inexpensive, in our view.

SITC International (1308 HK): Creator of Shareholder Value

Hong Kong

Orient Overseas International Ltd, through its subsidiaries, owns and leases ships, operates terminals, and provides freight forwarding and container transportation services.  The Company also develops and invests in properties, leases equipment, and invests in securities.

Pacific Basin Shipping Limited, through its subsidiaries, provides marine transportation services and logistical support to its customers through the commercial operation of a large, modern, and uniformly-sized fleet of shallow-draft Handysize dry bulk carriers.

Cathay Pacific Airways Limited operates scheduled airline services. The Company also provides related services, including airline catering, aircraft handling, and engineering.

Chu Kong Shipping Enterprises (Group) Company Limited provides shipping and cargo handling services between Hong Kong and China.  The Company's services include freight forwarding, wharf cargo handling, cargo consolidation, warehouse storage, and trucking.  Chu Kong Shipping also provides container hauling services.

Chu Kong Shipping Enterprises(Grp) (560 HK)

China Merchants Holdings International Company Limited, through its subsidiaries and associated companies, operates container and cargo terminals, port transportation, and airport cargo handling.  The Company also manufactures containers, paint, and trailers as well as operates toll road, shipping, property, and dealing securities businesses.

Shenzhen International Holdings Limited operates as a holding company. The Company, through its subsidiaries, provides investment, construction, and operation of logistic infrastructure facilities, as well as offers value-added logistic services. Shenzhen International serves customers worldwide.

COSCO Shipping Ports Limited, through its subsidiaries, provides shipping container leasing services worldwide.  The Company also operates container terminals and provides container handling, storage, transportation and management services, as well as depot handling and stevedoring services.

Kerry Logistics Network Limited provides logistics services in Asia and internationally. The Company offers integrated logistics services, as well as leases warehousing space in Hong Kong and provides international freight forwarding services.

COSCO SHIPPING International (Hong Kong) Co., Ltd. provides shipping related services. The Company offers shipping, logistics, shipbuilding and ship repair services, ship trading agency services, marine insurance brokerage services, marine equipment and spare parts, coating products, and marine fuel and other related shipping products. COSCO International serves clients around the world.

Yuexiu Transport Infrastructure Ltd., through its subsidiaries, invests in, develops, operates, and manages toll highways, expressways, and bridges in China.

Yuexiu Transport Infrastructure (1052 HK)

COSCO SHIPPING Energy Transportation Co., Ltd. offers marine shipping services. The Company provides refined oil transportation, crude oil transportation, and other services. COSCO SHIPPING Energy Transportation also ships iron ores, dry bulks, coal, and other products.

Cosco Shipping Energy Transportation Co. Ltd. (H) (1138 HK)

Cosco Shipping Energy Transportation Co. Ltd. (H)

Kirby Corporation operates a fleet of inland tank barges.  The Company transports industrial chemicals, refined petroleum products, black oil products, and agricultural chemicals.  Kirby also overhauls and services diesel engines employed in marine, power generation, and rail applications.

Matson Inc., is involved in transportation and logistics.  The Company offers provides  multimodal transportation services to the North American market, including domestic and international rail intermodal service, long haul and regional highway brokerage, supply chain services and LTL transportation services, as well as third-party logistics services.

Yang Ming Marine Transport provides transportation services and handles domestic and foreign maritime services on cargos.  The Company also operates warehouse, wharf, tug, barge, and container freight station services as well as repairs, leases, and sells containers and chassis.

Wan Hai Lines Ltd. provides marine transportation and shipping agent services. The Company also purchases, sells, and leases vessels and containers as well as operates container freight stations.

MISC Berhad owns ships and operates shipping and related services. Through its subsidiaries, the Company provides trucking, warehousing and forwarding service, containers and prime movers repair, and container haulage. MISC Berhad also has operation in trucking and launch operator.

Star Bulk Carriers Corp. is a holding company, which engages in the marine transportation of dry bulk vessels. It ships iron ore, coal, grain, bauxite, fertilizers, and steel products. The company was founded by Petros Alexandros Pappas on December 13, 2006 and is headquartered in Athens, Greece.

Wallenius Wilhelmsen ASA provides shipping and logistics services. The Company offers ocean transportation for cars, trucks, buses, rolling equipment, and breakbulk cargo, as well as supply chain services. Wallenius Wilhelmsen serves agricultural, automotive, and aviation industries worldwide.

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.

Golden Ocean Group Limited operates as an international dry bulk shipping company based in Bermuda. The Company mainly operates in the Capesize and Panamax market segments. Golden Ocean Group's fleet is managed by Golden Ocean Group Management (Bermuda) Limited.

SITC International Holdings Company Ltd. offers marine shipping services.  The Company offers container liner shipping, freight forwarding, customs clearance, shipping agency, and ship brokerage services.  SITC operates in Asia.

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SITC International (1308 HK)