HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

With an 11.4% YoY profit growth, <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>'s FY19 result did not disappoint us.  Moreover, it raised its final DPS by 3.8% even after the announcement of a special DPS in Dec-2019, making full-year dividend payout ratio at 117%, suggesting confidence in its core competence and operating outlook. Its volume has gradually resumed in Mar and freight rate remained solid despite Covid-19 outbreak.We stay positive on SITC though we expect pressure in FY20. This is a great company generating ~20% ROE, with low gearing and high dividend payout, exhibiting good corporate governance and focusing on a growing niche market segment. We see any pull-back in share price an excellent opportunity to accumulate.

With an 11.4% YoY profit growth, SITC International (1308 HK)'s FY19 result did not disappoint us.  Moreover, it raised its final DPS by 3.8% even after the announcement of a special DPS in Dec-2019, making full-year dividend payout ratio at 117%, suggesting confidence in its core competence and operating outlook. Its volume has gradually resumed in Mar and freight rate remained solid despite Covid-19 outbreak.We stay positive on SITC though we expect pressure in FY20. This is a great company generating ~20% ROE, with low gearing and high dividend payout, exhibiting good corporate governance and focusing on a growing niche market segment. We see any pull-back in share price an excellent opportunity to accumulate.   

SITC International (1308 HK): Spectacular Show in FY19, Fundamentals Stay Solid

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

Hong Kong

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)