China Shipping Container Lines (2866) by klutzfu61

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									                                                                                                                   Internal circulation

                                                                                                                            10 Aug 2007

                                                             China Shipping Container Lines (2866)
China Shipping


1H07 results brief                                               1H07 result highlights. CSCL posted a 24.4% yoy top-line growth,
                                                                 thanks to respective 92.0% and 46.9% turnover growth in China
                                                                 domestic and Asia Pacific lines. Pacific Ocean line underperformed other
Not rated                                                        business lines, due to the sluggish demand for Western American
                                                                 shipping lines. Despite a slight increase of 5.3% in container volume,
                                                                 revenue from Europe/Med line jumped by 30.5% and accounts for 31.0%
Share data                                                       of total revenue (29.6% in 1H06), driven by strengthening load factor and
Bloomberg code                                 2866 HK           rising freight rate. A spectacular 283% operating profit growth and 1323%
Share price (HK$)*                                 6.99          net profit growth were attributable to higher profit margin from
Total issued shares (mn)                          6,030          Europe/Med line, decreasing finance cost and lower effective tax rate
Market cap. (HK$mn)                              42,150          (15.5% in 1H07 vs. 51.5%). Overall GPM was enhanced from 4.3% in
52-wk hi/lo                                    7.09/1.75         1H06 to 10.2% in 1H07. EPS was RMB19 cents with no dividend
                                                                 declared. Instead, CSCL proposed to distribute 5.5 bonus shares to
Average turnover (mn share)                        4.85
                                                                 every 10 ordinary shares.
Major shareholders                                      %
Cheung Kong Group                                  24.9          Effective cost control. During the period, the Group has optimized its
Baring Ast Mgt                                         9.3       operation to control the fixed costs, port charges and fuel consumption.
Citigroup                                              5.3
                                                                 Operating cost per TEU dropped by 7.4% yoy. To hedge a sharp rise in
Source: Bloomberg
                                                                 oil price, CSCL has locked in 750,000 tones of fuel at US$55-57/ton,
                                                                 representing a 70-80% saving compared to the market price. Further, the
Stock price performance                                          Group has contracted US$100mn with mainland banker to hedge RMB
                                                                 appreciation.

                                                                 2H07 outlook. In 2H07, CSCL will continue to optimize its fleet
                                                                 composite and allocate more 8,000+ TEUs fleets to its Europe/Med line
                                                                 to capture rising opportunities from the market. We expect revenue
                                                                 contribution from Europe/Med line may further increase to 35% to 40% in
                                                                 2H07. CSCL also plans to increase investment to explore shipping
                                                                 business in Asia Pacific and China market. As the company enters into
                                                                 peak season (Jul, Aug, Sep) in the second half of the year, we expect a
Source: Bloomberg
                                                                 better performance in 2H07 than 1H07.

Financials                                                       See-rail combined transportation business. CSCL commenced first
 FYE Dec             FY05     FY06     1H06F     1H07            sea-rail line, from Yangshan (Jiangsu Province) to America in Feb 07.
 RMBmn                                                           The Group seeks to ally with China Railway Container Transportation Co
 Turnover            28,374 30,502     6,395     6,807           to expand its sea-rail combined shipping business in Eastern China.
 Gross profit        5,044    2,111     603      1,771           Particularly, a new sea-rail line, Longhai (East China) – Lianyun Ports
 Operating profit    4,731    1,670     414      1,586           (CSCL owns 55% stake) – Overseas, is under preliminary study.
 Net profit          3,585     865      83       1,160
                                                                 Capex plan and effective tax rate. CSCL targets to increase its
 EPS (RMB)            0.59    0.14     0.01       0.19
                                                                 handling capacity from 446,000 TEUs in 2007 to 650,000 TEUs by 2011,
 y-o-y chg (%)         -      (76.3)     -      1323%
                                                                 implying a 4-year CAGR of 10%. Effective tax rate is expected to
 GPM                 17.8%    6.9%     4.3%      10.2%           increase progressively from 15% (preferential rate for CSCL) in FY07 to
 Gearing             30.4%    46.0%    49.0%     37.2%           25% in FY12. Net debt to equity ratio stood at 8.0% vs cash at hand of
 DPS (HK$)           0.04     0.12       -         -             RMB3,866mn as at the end of 1H07.
 ROAE (%)            23.2      5.2       -         -
Source: Company data, Bloomberg
                                                                 Planning A-share IPO. CSCL announces A-share IPO to raise over
                                                                 RMB10b (enlarge issued capital by 20%) to finance its capex and asset
                                                                 acquisition. CSCL is considering to acquire shipping related assets,
Wang Ren
                                                                 mainly including ports, logistic networks and container manufacturing
wangren@ccbintl.com
                                                                 business from its parent company.
(852) 2532 6542




See the last page for analyst certification and important disclosures, including investment banking relationships.
Segment breakdown

                           Container volume                                                               Turnover

      100%                                                                        100%
                                                Pacific Ocean                                                                      Pacific Ocean
                  25.3%             23.2%
       80%                                                                         80%        45.8%            39.2%
                                                Europe/Med                                                                         Europe/Med
                                    21.5%
       60%        25.7%                                                            60%
                                    18.9%       Asia Pacific                                                   31.0%               Asia Pacific
       40%        16.4%                                                            40%        29.6%
                                                China domestic                                                    13.7%            China domestic
       20%        30.7%             33.3%                                          20%        11.6%
                                                                                               7.0%               10.8%
        0%          1.9%             3.1%       Others                              0%         6.0%               5.2%             Others

                    1H06            1H07                                                       1H06               1H07



Source: Company data



                                              Planned capacity expansion

                                                (1,000 TEUs)
                                                  700                               CAGR of 9.8% over 2007 to 2011                          650
                                                                                                                           589
                                                  600                                                       525
                                                                                              516
                                                  500                            446
                                                                397
                                                  400

                                                  300

                                                  200

                                                  100

                                                     0
                                                                2006             2007E       2008E          2009E          2010E            2011E



                                              Source: Company data, CCB Int’l Securities



                                              Valuation. CSCL is currently trading at about 18% premium to its peer. We
                                              consider expanding China market, see-rail lines and strong earning from
                                              Europe/Med lines as potential rerating catalysts. Key risk considerations include
                                              industry cycle and global economic slow-down.

                                                   Company             Ticker      Price    Mkt cap          PE(X)          P/B     ROE           Yield
                                                                                   (HK$)   (HK$'mn)   06A    07F     08F    06A      (%)          (%)
                                              Shipping dev.            1138 HK     20.20    83,594    23.61 17.459 15.659 5.17      23.51         2.51
                                              COSCO                    1919 HK     13.48    176,822   45.51 32.019 25.923 4.92      10.58         1.77
                                              CSCL                     2866 HK     6.99     42,150    21.15 15.995 11.969 2.51      5.19            1.9
                                              Pacific Basin            2343 HK     12.98    20,367    10.43 12.553 11.694 5.33      27.77         8.73
                                              Orient Overseas          316 HK      87.80    54,945    14.71 3.939 10.976 2.58       23.17         3.61
                                              Note: Closing price at of 9 August 2007
                                              Source: Bloomberg



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Rating definitions

Outperform - expected return 10% over the next twelve months
Neutral – expected return between –10% to 10% over the next twelve months
Underperform – expected return < -10% over the next twelve months


Analyst Certification:

Wang Ren, the author of this report, hereby declares that: (i) all of the views expressed in this report accurately reflect his personal views about any
and all of the subject securities or issuers; and (ii) no part of any of their compensation was, is, or will be directly or indirectly related to the specific
recommendations or views expressed in this report. Wang Ren further confirms that (i) neither he nor his respective associates (as defined in the Code
of Conduct issued by the Hong Kong Securities and Futures Commission) have dealt in or traded in the stock(s) covered in this research report within
30 calendar days prior to the date of issue of the report; (ii)) neither he nor his respective associates serve as an officer of any of the Hong Kong listed
companies covered in this report; and (iii) neither he nor his respective associates have any financial interests in the stock(s) covered in this report.


Disclaimers:

CCB International Securities Limited is a wholly-owned subsidiary of China Construction Bank Corporation. Information has been obtained from
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completeness or accuracy except with respect to any disclosures relative to CCBIS and/or its affiliates and the analyst’s involvement with the issuer.
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   CCB International Securities Limited

   Units 2601-2603, 26/F., Tower One, Lippo Centre,
   89 Queensway, Admiralty, Hong Kong
   Tel: (852) 2532 9602
   Fax: (852) 2537 0097




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