Asia Pacific Shipping: 2017 shipping outlook

Deutsche Bank Markets Research Asia China Transportation Industry Asia Pacific Shipping Date 5 December 2016 Forecast Change 2017 shipping outlook New order of preference: dry bulk > tankers > containers ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Sky Hong, CFA Research Analyst (+852 ) 2203 6131 sky.hong@db.com Joe Liew, CFA Research Analyst (+81) 3 5156-6725 joe.liew@db.com Key Changes Company Target Price Rating 1919.HK 1.10 to 1.00(HKD) - 2343.HK 1.42 to 2.05(HKD) - 2603.TW 10.60 to 10.00(TWD) - 2609.TW 4.40 to 2.70(TWD) - Source: Deutsche Bank Top picks China Shipping Development (1138.HK),HKD4.49 Buy China Cosco Hldgs (1919.HK),HKD3.11 Sell Pacific Basin Shipping Ltd (2343.HK),HKD1.21 Buy Source: Deutsche Bank Companies Featured China Shipping Development (1138.HK),HKD4.49 Buy Pacific Basin Shipping Ltd (2343.HK),HKD1.21 Buy China Cosco Hldgs (1919.HK),HKD3.11 Sell Orient Overseas Int'l (0316.HK),HKD33.85 Buy Evergreen Marine (2603.TW),TWD11.55 Hold Yang Ming Marine (2609.TW),TWD5.40 Sell Source: Deutsche Bank We prefer dry bulk. US election result likely means upside potential for demand and, along with falling fleet supply, could drive a multi-year upcycle in the sector. We still like tankers. While new supplies are set to rise, a positive ton-mile impact and continuing floating storage could still mean a good year in 2017. We remain cautious about containers. A cloudy trade outlook, coupled with rising deliveries in mega vessels, could continue to hamper the sector. Buy Pacific Basin and CSD; Sell China Cosco and Yang Ming. Dry bulk – a multi-year upcycle Based on US President-elect Donald Trump’s recent comments the increase in infrastructure spending should boost demand for dry bulk. China, in order to counter export downside risk, is likely to spend more on infrastructure domestically and accelerate investment under its One Belt, One Road programme (OBOR), which would also drive dry bulk demand. Our base case demand forecast is 2% for 2017-18, but the new government’s policies could potentially lift growth to 3.5-4.6% by our estimates. In supply, many “dead” orders still sit on order books and robust scrapping is set to continue with ballast water regulations. We expect global fleets to grow 1.1% in 2017 and shrink 0.5% in 2018. Tankers – positive factors exist True, new supplies still look large, but a number of positive factors should not be ignored. As countries in Far East such as China increasingly source crude oil from West Africa, the distance of cargoes travelled will continue to rise. In terms of supply, ship owners are likely to scrap vessels of over 15 years old as ballast water treatment regulations have become effective. After the recent OPEC output cut, rising expectation of crude price increases should continue to drive floating storage in 2017. Overall, we expect VLCC fleet utilization to stay at a healthy level of 82% in 2017 (vs. 83-84% in 2015-16). Containers – still negative The multiple in global container trade to global GDP dropped from an average of 2.4x post-GFC to 1.3x for 2013-15 and merely 0.4x in 2015. The contraction in global value chain contributed to 1/3 of the multiple compression, by our estimates. As manufacturing re-shoring and onshoring in the US are likely to accelerate post elections, the global value chain contraction is likely to speed up. In supply, >900k TEU is scheduled to hit the water in 2017-18 (vs. 436k TEU in 2016), which would force Asia-Europe and Transpacific fleet capacity to grow at c.10% in 2017 (vs. 2% demand growth). Buy Pacific Basin and CSD; Sell China Cosco and Yang Ming We raise Pacific Basin’s target price by 40% to HK$2.05, based on 1.0x P/B. We think this looks reasonable due to its ROE to cover the cost of equity ahead. The company is more or less the only pure dry bulker in the region, and hence has scarcity value. We believe CSD could raise its 2016E dividend payout ratio to 40%, which would offer a 6.7% yield. We do not rule out that its parent might initiate a share buyback plan after receiving a higher dividend. We maintain our Sell on China Cosco and Yang Ming on a tough sector outlook. For investors who want to play containers, we sugges