Equity Research Analyst, Maritime sector, Drewry Maritime Financial Research

Ankush Kathuria CFA, FRM

Equity Research Analyst, Maritime sector

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)

Turkey Industrials / Thematic (Sector/Industry)

Shanghai Electric Group Company (601727 CH)

Port Operators Outlook 2017 - Returns to Stay Muted, Throughput Recovery Provides Valuation SupportWith an uptick in economic activity and trade levels in major economies saw strong growth throughput in fourth-quarter 2016. <a href="https://www.smartkarma.com/insights/dfrs-port-operators-signs-of-recovery" target="_blank" data-smartkarma-citation="insights:9134">DFRS Port Operators - Signs of Recovery ?</a> . In 2017, we believe the sector will consolidate in hope of earnings stabilization and the throughput recovery will provide valuation support but overall sector return will stay muted.<ul><li>Lacklustre global trade growth at 3.3% for 2017, as projected by the IMF, is hardly inspiring. With structural changes in consumption (For example, miniaturisation and near/on-shoring), Drewry projects global container volume to grow at less than 2% p.a. through 2020.</li><li>In our 2H2016 outlook, we highlighted port valuation downshifting from growth to value, pressured by structural changes in trade demand and container shipping sector. Expansion of alliances and an exponential increase in ship sizes between 2009 and 2016 had terminal operators playing the catch up to service their clients. The capex budget is targeted to meet clients’ requirements, while the budget for new investments moderated. Throughput for most ports rebounded in 4Q16. Even as the trend continues, a return to strong profitability (prior to 2007, ROE&gt;10%) is unlikely to be in the piping.</li><li>Although the orderbook for mega-vessels has thinned, bigger vessels with lumpy container volumes continue to cascade down smaller trade lanes. As most of their customers are loss making, terminal operators (particularly for transhipment hubs) are ineffective in offsetting the elevated opex through tariff increase.</li><li>Ports are in consolidation phase, and the pace of consolidation is likely to accelerate this year. Generally, bigger players have easier access to funding, thereby they are expected to be active in the port M&amp;A space even as the sector is reining on escalating leverage. Among the 11 port operators under coverage, we believe DP World, China Merchants Port Holdings and Cosco Shipping Ports have the financial scope to expand their portfolios in 2017.</li><li>As much as scale benefits shipping lines, scale among terminal operators may lift profitability in 2017. Besides M&amp;A between terminal operators, alliance between terminal operators are taking place. For example, five of the world’s largest port companies have filed an agreement with Federal Maritime Commission to officiate an information sharing platform. The move comes on the back of the sector’s weak profitability, although the agreement does not directly suggest coordinated efforts to boost profitability.</li><li>Even companies with deep pockets may be unable to invest in high-quality terminal assets with gateway traffic. While transhipment hubs are risky and generally avoided, the lack of investment opportunities in the current economic climate urge port operators to this alternative, but not without mitigating risks involved.</li><li>Our long pick for 2017 is ICTSI, swooping in on depressed valuations with a rebound in emerging markets. We remain short on Westports on prospective cargo losses. </li></ul>Key sectoral calls for 2017<ul><li>ICTSI (ICT PM, Attractive, PHP 95)– Despite having vacant terminals in its portfolio, ICTSI management delivered strong profitability in Fy16. Nothing fundamentally has changed for a company specialising in operating terminals under two million teus capacity. ICTSI’s investment in Australia will be operational this year, marking the second developed market terminal in a portfolio of assets in developing markets. Cheap valuation underpins our call for ICTSI to outperform this year.</li><li>Westports (WPRTS MK, Unattractive, MYR 2.77) – Mega-port project in the pipeline next to its flagship terminal puts a nail in the coffin of Westports. The reconfiguration of alliances will see Ocean Alliance volumes moving from Westports to PSA Singapore. Without an alliance to back the transhipment terminal, Westports’ expansion of CT9 is not required. Overcapacity at Straits of Malacca is expected to weigh on the profitability of Westports, which does not justify the 21x P/E valuation compared with our Drewry Port Index average 19x P/E.</li></ul>Chinese Port Operators <ul><li>CMPH (144 HK, Neutral, HKD 18.3)– The largest port operator in China faces significant headwind, as Chinese ports throughput slows and its associate stake in CIMC drags earnings. The state-owned enterprise consolidates domestic assets at premium, detracting value from investors who have shorter investment horizon. </li><li>Cosco Shipping Ports (1199 HK, Neutral, HKD 9.3)– Backed by its parent Cosco, and potentially Ocean Alliance, profitability of Cosco Shipping Ports is unlikely to surprise. Risk mitigation is a key theme for Cosco Shipping Ports as it ventures abroad, the first of which is partnering with Qingdao Port International for its Khalifa Port CT2 project.</li><li>Hutchison Port Holdings Trust (HPHT SP, Neutral, USD 0.44) – With significant debt repayment due in 2019, investors turned their back on the dividend-rich Trust. The valuable land asset Hong Kong International Terminal is sitting on, which could be unlock should management chooses to do so, underpins our Neutral recommendation.</li><li>Tianjin Port Development (3382 HK, Neutral, HKD 1.5) – Discussion on valuation is underway following a high-level decision to transfer port operations to parent Tianjin Port Co. Subsequent to the transaction, and a presumed cash payout, 3382 HK will be left with tugboat operations.</li><li>Dalian Port (2880 HK, Unattractive, HKD 1.2) – Capital injection by CMPH relieved debt burden of Dalian Port. However, valuation is unlikely to be hike on overcapacity concerns in the Bohai Rim. Commodity trading division of the business is also under pressure.</li></ul>Global Port Operators <ul><li>DP World (DPW DU, Neutral, USD 22.1) – Despite an elevated leverage, DP World has secured capital for expanding its portfolio, putting the fourth largest global terminal operator well on track to achieve 100 million teu gross capacity target by 2020. Investors have made gains from shrewd investments by the company, following transaction of Fairview Container Terminal at 24X EV/EBITDA less than two years after it acquired the terminal at less than 14x EV/EBITDA. We see more monetisation efforts in 2017.</li><li>Global Ports Investments (GLPR LI, Attractive, USD 5.7) – Moderating geopolitical pressure heightens investor sentiment for Russia’s largest port operator. Barring new prohibitive sanctions, Baltic trade recovery which begun in 2H2016 is expected to continue into 2017.</li><li>Hamburger Hafen und Logistiks (HHFA GR, Neutral, EUR 17.3) – Dredging of river Elbe remains clouded in uncertainty, and the halt-work order is unlikely to be lifted this year. Traction in transhipment volume and contribution from Intermodal business support its valuation.</li><li>Santos Brasil (STBP3 BZ, Unattractive, BRL 1.9) – Caught in the middle, between capital commitments to expand port and the prospect of losing its significant customer Hamburg Sud to rival BTP. Equity funding is likely given that profitability is mired in the red with no turnaround in sight.</li></ul>

Port Operators Outlook 2017 - Returns to Stay Muted, Throughput Recovery Provides Valuation SupportWith an uptick in economic activity and trade levels in major economies saw strong growth throughput in fourth-quarter 2016. DFRS Port Operators - Signs of Recovery ? . In 2017, we believe the sector will consolidate in hope of earnings stabilization and the throughput recovery will provide valuation support but overall sector return will stay muted.Lacklustre global trade growth at 3.3% for 2017, as projected by the IMF, is hardly inspiring. With structural changes in consumption (For example, miniaturisation and near/on-shoring), Drewry projects global container volume to grow at less than 2% p.a. through 2020.In our 2H2016 outlook, we highlighted port valuation downshifting from growth to value, pressured by structural changes in trade demand and container shipping sector. Expansion of alliances and an exponential increase in ship sizes between 2009 and 2016 had terminal operators playing the catch up to service their clients. The capex budget is targeted to meet clients’ requirements, while the budget for new investments moderated. Throughput for most ports rebounded in 4Q16. Even as the trend continues, a return to strong profitability (prior to 2007, ROE&gt;10%) is unlikely to be in the piping.Although the orderbook for mega-vessels has thinned, bigger vessels with lumpy container volumes continue to cascade down smaller trade lanes. As most of their customers are loss making, terminal operators (particularly for transhipment hubs) are ineffective in offsetting the elevated opex through tariff increase.Ports are in consolidation phase, and the pace of consolidation is likely to accelerate this year. Generally, bigger players have easier access to funding, thereby they are expected to be active in the port M&amp;A space even as the sector is reining on escalating leverage. Among the 11 port operators under coverage, we believe DP World, China Merchants Port Holdings and Cosco Shipping Ports have the financial scope to expand their portfolios in 2017.As much as scale benefits shipping lines, scale among terminal operators may lift profitability in 2017. Besides M&amp;A between terminal operators, alliance between terminal operators are taking place. For example, five of the world’s largest port companies have filed an agreement with Federal Maritime Commission to officiate an information sharing platform. The move comes on the back of the sector’s weak profitability, although the agreement does not directly suggest coordinated efforts to boost profitability.Even companies with deep pockets may be unable to invest in high-quality terminal assets with gateway traffic. While transhipment hubs are risky and generally avoided, the lack of investment opportunities in the current economic climate urge port operators to this alternative, but not without mitigating risks involved.Our long pick for 2017 is ICTSI, swooping in on depressed valuations with a rebound in emerging markets. We remain short on Westports on prospective cargo losses. Key sectoral calls for 2017ICTSI (ICT PM, Attractive, PHP 95)– Despite having vacant terminals in its portfolio, ICTSI management delivered strong profitability in Fy16. Nothing fundamentally has changed for a company specialising in operating terminals under two million teus capacity. ICTSI’s investment in Australia will be operational this year, marking the second developed market terminal in a portfolio of assets in developing markets. Cheap valuation underpins our call for ICTSI to outperform this year.Westports (WPRTS MK, Unattractive, MYR 2.77) – Mega-port project in the pipeline next to its flagship terminal puts a nail in the coffin of Westports. The reconfiguration of alliances will see Ocean Alliance volumes moving from Westports to PSA Singapore. Without an alliance to back the transhipment terminal, Westports’ expansion of CT9 is not required. Overcapacity at Straits of Malacca is expected to weigh on the profitability of Westports, which does not justify the 21x P/E valuation compared with our Drewry Port Index average 19x P/E.Chinese Port Operators CMPH (144 HK, Neutral, HKD 18.3)– The largest port operator in China faces significant headwind, as Chinese ports throughput slows and its associate stake in CIMC drags earnings. The state-owned enterprise consolidates domestic assets at premium, detracting value from investors who have shorter investment horizon. Cosco Shipping Ports (1199 HK, Neutral, HKD 9.3)– Backed by its parent Cosco, and potentially Ocean Alliance, profitability of Cosco Shipping Ports is unlikely to surprise. Risk mitigation is a key theme for Cosco Shipping Ports as it ventures abroad, the first of which is partnering with Qingdao Port International for its Khalifa Port CT2 project.Hutchison Port Holdings Trust (HPHT SP, Neutral, USD 0.44) – With significant debt repayment due in 2019, investors turned their back on the dividend-rich Trust. The valuable land asset Hong Kong International Terminal is sitting on, which could be unlock should management chooses to do so, underpins our Neutral recommendation.Tianjin Port Development (3382 HK, Neutral, HKD 1.5) – Discussion on valuation is underway following a high-level decision to transfer port operations to parent Tianjin Port Co. Subsequent to the transaction, and a presumed cash payout, 3382 HK will be left with tugboat operations.Dalian Port (2880 HK, Unattractive, HKD 1.2) – Capital injection by CMPH relieved debt burden of Dalian Port. However, valuation is unlikely to be hike on overcapacity concerns in the Bohai Rim. Commodity trading division of the business is also under pressure.Global Port Operators DP World (DPW DU, Neutral, USD 22.1) – Despite an elevated leverage, DP World has secured capital for expanding its portfolio, putting the fourth largest global terminal operator well on track to achieve 100 million teu gross capacity target by 2020. Investors have made gains from shrewd investments by the company, following transaction of Fairview Container Terminal at 24X EV/EBITDA less than two years after it acquired the terminal at less than 14x EV/EBITDA. We see more monetisation efforts in 2017.Global Ports Investments (GLPR LI, Attractive, USD 5.7) – Moderating geopolitical pressure heightens investor sentiment for Russia’s largest port operator. Barring new prohibitive sanctions, Baltic trade recovery which begun in 2H2016 is expected to continue into 2017.Hamburger Hafen und Logistiks (HHFA GR, Neutral, EUR 17.3) – Dredging of river Elbe remains clouded in uncertainty, and the halt-work order is unlikely to be lifted this year. Traction in transhipment volume and contribution from Intermodal business support its valuation.Santos Brasil (STBP3 BZ, Unattractive, BRL 1.9) – Caught in the middle, between capital commitments to expand port and the prospect of losing its significant customer Hamburg Sud to rival BTP. Equity funding is likely given that profitability is mired in the red with no turnaround in sight.

China Railway Construction Corp (1186 HK)

China Communications Construction (1800 HK)

Shanghai Electric Group Company (2727 HK)

Metallurgical Corporation of China Ltd (1618 HK)

Shanghai International Port Group (600018 CH)

International Consolidated Airlines Group (IAG LN)

International Consolidated Airlines Group

Port Operators Outlook 2017 - Returns to Stay Muted, Throughput Recovery Provides Valuation Support