An Optimistic View of Container Stocks

I met this morning with Tom Kim, the Hong Kong-based transport analyst for Goldman Sachs, and learned more about his upbeat assessment of container shipping companies. On April 3 he upgraded several container stocks, lifting Hanjin, NOL and Evergreen from sell to neutral, Thailand-based Regional Container Line from neutral to buy and China Shipping Container Line from sell to buy. He sees several developments that lead to the conclusion that since “the broader economy has bottomed” the time has come to take a fresh look at the downtrodden container sector. The sector is still trading well below its book value, so it’s cheap from an investment perspective. But there are other, fundamental reasons why he believes the sector is worth a second look.
- Container lines are acting more aggressively than in past downturns to reduce costs. The current capacity taken out of service, currently 10.4 percent of the global fleet according to AXS-Alphaliner, is two and a half times the percentage laid up during an earlier severe shipping recession in the 1980s, he said. This is a sign the carriers are learning from the experience. “The speed and aggressiveness in responding to the over-supply situation has been very, very constructive,” he said. This, by the way, is in contrast to a recent Drewry’s report that argued that container lines aren’t cutting costs nearly fast enough.
- Volumes will begin to rebound later this year. Kim believes the head-haul east-west Asian trades (Eastbound trans-Pacific and Westbound Asia-Europe) will decline 12% this year but will recover to 5-6% growth in the next few years beginning in 2010. “Demand is going to be pretty weak for some time,” he said, noting that he is more optimistic than other analysts about a recovery next year. He believes that year-on-year growth could begin in the 4th quarter of this year.
- Idled capacity will not necessarily re-enter service at a rapid pace. “I’m not sure the industry brings back capacity at the rate many people assume,” he said. “I think the industry is in shell-shock, so any green shoots of optimism will be greeted with skepticism.” He also notes that the orderbook is declining as a percentage of the global fleet and delayed deliveries are slowing fleet expansion.

- As a result, load factors may increase faster than some anticipate. As volumes increase, a modest pace of capacity re-introduction may well increase load factors on vessels.
- Rates are bottoming out. Spot rate indicators on the Asia-Europe trade are showing signs of leveling off, and carriers are aggressively seeking to implement rate increases (a list of recent Maersk press releases, dominated by GRI announcements, gives an indication of this:
- Chartered ships will have nowhere to go. Half of global container capacity is chartered, Kim said, but unlike bulk ships or tankers, which can fluidly enter service, container ships can only be chartered to operators with a network. “Shipowners are not going to have a lot of opportunity except to drop charter rates. But pricing alone will not entice a new operator into the market.”

Kim says that conditions will be tough in the container sector for the next 12-18 months, but at least from his perspective, things may be turning around.

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