Asia Container Shipping Sector：How much has the Europe slowdown been discounted?

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/ researchdisclosures or call +1 (877) 291-2683. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 24 May 2010 Asia Pacific Equity Research Transportation / Maintain OVERWEIGHT Asia Container Shipping Sector SECTOR REVIEW How much has the Europe slowdown been discounted? Figure 1: Ship-owners have pricing power, as suggested by strong demand, high load factors, rising freight and vessel charter rates 707580859095100105110Jan -04Jul-04Jan-05Jul-05Jan-06Jul-06Jan -07Jul-07Jan-08Jul-08Jan-09Jul -09Jan -104006008001,0001,2001,4001,6001,8002,000Asia/Europe westbound load factor*CCF I China to Euorpe (RHS)Load f act or%CCF I707580859095100105110Jan -04Jul-04Jan-05Jul-05Jan-06Jul-06Jan -07Jul-07Jan-08Jul-08Jan-09Jul -09Jan -104006008001,0001,2001,4001,6001,8002,000Asia/Europe westbound load factor*CCF I China to Euorpe (RHS)Load f act or%CCF I * Industry and YMM’s data; Source: Clarksons, Company data, Credit Suisse estimates ■ Share prices appear to be discounting earnings losses. Judging by the latest sector P/B multiples, which are back to mid-2009 levels, we think share prices could be discounting a 30%+ decline in Asia/Europe rates and sluggish volume until the end of 2010. The sector is likely to remain loss-making (with some companies possibly just breaking even) in 2010. ■ We are not as negative on demand and supply. 1) Ship-owners have pricing power now; 2) we continue to expect a strong global economic recovery to drive demand; 3) demand momentum remains strong outside of Europe; 4) leading indicators suggest strong Asian exports in the coming months; 5) effective supply growth will remain depressed by new order delays, cancellations, higher scrapping and slow steaming; 6) reactivation of idle fleet is less of a concern. As a result, we are positive on further rate hikes on the back of improving industry supply/demand, and we expect all carriers to return to profitability this year. ■ Value emerges after recent corrections. We think some of the risks on slowing demand have been priced in, and stocks trading at or below historical average P/B levels look attractive again. With our positive view on a cyclical industry recovery and sequential earnings improvement, we think stocks will be rerated. We like OOIL, EMC, WHL and CSCL (upgraded to OUTPERFORM). We have downgraded NOL and YMM to NEUTRAL on valuation and higher investment risks, respectively. Research Analysts Sam Lee 852 2101 7186 sam.lee@credit-suisse.com HungBin Toh 852 2101 7481 hungbin.toh@credit-suisse.com Ingrid Wei 86 21 3856 0379 ingrid.wei@credit-suisse.com Annuar Aziz 603 2723 2084 annuar.aziz@credit-suisse.com Haider Ali 65 6212 3064 haider.ali@credit-suisse.com Henry Kwon 822 3707 3732 henry.kwon@credit-suisse.com Seungwoo Hong 822 3707 3795 seungwoo.hong@credit-suisse.com Thaniya Kevalee 662 614 6219 thaniya.kevalee@credit-suisse.com Anthony Moulder 612 8205 4069 anthony.moulder@credit-suisse.com 24 May 2010 Asia Container Shipping Sector 2 Focus charts Figure 2: Sector 12-month forward P/B at 0.95x is below historical average, and back to mid-2009 level Figure 3: Carriers’ FY10E revenue exposure to Portugal, Ireland, Italy, Greece and Spain and rest of Europe 0.40.60.81.01.21.41.61.82.0Jan-07Apr-07Jul-07Oct-07Jan-08Apr-08Jul-08Oct-08Jan-09Apr-09Jul-09Oct-09Jan-10Apr-10(x)Avg P/B = 1.1x+1SD-1SDBack to mid-09 0%5%10%15%20%25%30%35%40%YangMingCoscoCSCLNOLOOILEvergreenWanHaiPortugal, Italy, Ireland, Greece and SpainRest of EuropeFY10E revenue% Source: Datastream, Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 4: US ISM index historically leads Asian exports, and recent data suggests robust demand in 2H10 Figure 5: Genuine demand on vessel – vessel charter rates rebounding massively, despite falling idle fleet 20304050607080Jan-94Jan-96Jan-98Jan-00Jan-02Jan-04Jan-06Jan-08Jan-10-30%-20%-10%0%10%20%30%40%50%US ISM new order index (lag by 6m)Non-Japan Asia export (3MMA YoY% , RHS)ISMExport YoY% 05,00010,00015,00020,00025,000Oct-08Dec-08Feb-09Apr-09Jun-09Aug-09Oct-09Dec-09Feb-10Apr-10-1%1%3%5%7%9%11%13%4,400 TEU timecharter rateIdle fleet % of total% fleetUS$/day Source: CEIC , Credit Suisse estimates Source: Clarkson, Alphaliner, Credit Suisse estimates Figure 6: Improving demand/supply balance supportive to further freight rates recovery Figure 7: Key assumptions on industry dema