Docstoc

Cyclical in nature

Document Sample
Cyclical in nature Powered By Docstoc
					                   HK IPO Report
                   Hong Kong Equity Research                                                                                                 Thursday, June 3, 2004
www.Primasia.com




                   China Shipping Container Line (2866.HK) NEUTRAL
                   Cyclical in nature                                                                                                                  IPO Price
                   Business Description: CSCL is principally engaged in the operation and management of container shipping
                                                                                                                                                       HK$3.175 ~ 4.175
                   businesses. Its business is mainly comprised of international and domestic container shipping. It is one of the                     Deadline for
                                      th
                   world’s largest (10 position as in April 04) and fastest growing container shipping companies. It operates a
                   fleet of 113 vessels with total operating capacity of about 215,691 TEU.
                                                                                                                                                       subscription: Wed 9
                                                                                                                                                       June 2004
                           Key Message:. Being the dominant market leader in the Chinese domestic container                                            Listing date: Wed 16
                           shipping market, we believe that the Group will be one of the major beneficiaries on
                                                                                                                                                       June 2004
                           the rapidly growing export industries of China.
                                                                                                                                                       HSI : 11,929.9

                           Analysis/Outlook: The Group currently has a large fleet size of 113 vessels. However,                                       At a Glance
                           it should be noted that about 70% of them are chartered in, either in the form of time
                           charter or bareboat charter, from third parties. Nearly half of which would be subject to
                           renewal in the next one to three years or would be on monthly renewal basis. While                                          Sector: Shipping
                           chartering would provide a certain degree of flexibility to the Group in terms of CAPEX,
                           it will expose to the risk of increasing chartering fees in the future.                                                     No of vessels: 113
                           In order to capture more market share in the sector, the Group is actively increasing its                                   Total operating capacity:
                                                th
                           fleet size. As at 30 April 2004, it has already committed a total consideration of nearly                                   215,691TEU
                           US$1,300m for purchasing container vessels in the next few years. After the full delivery of
                                                                                                                                                       Geographical Revenue
                           vessels by 2007, the total TEU under the Group will increase to 434,000TEU, representing                                    Breakdown:
                           the CAGR FY03 – 07 at 22%. Among the increment of capacity, there are about 40% of                                          -    China: 7%
                           them would be on time chartering basis.                                                                                     -    N.America: 44.0%
                           In order to fund for the new shipping building, the Group has a high gearing ratio at 166%                                  -    Europe/Mediterranean:
                                                                                                                                                            31.0%
                           as at the end of 2003. Further borrowing may be needed in case of further expansion of                                      -    Australia: 5.0%
                           the vessel capacity. Thus, we think that it would be exposed to interest rate risk. On the                                  -    East & SE Asia: 8.0%
                           other hand, given this situation, we expect the Group may not be able to have a decent                                      -    Others: 5.0%
                           dividend policy in the near future.                                                                                         Operating Cost Breakdown:
                           Given that North America is the largest market to the Group, its business prospect is, to a                                 -   Bunkers : 37.0%
                           large degree, tied to the economy status there. With the continuous strength of the US                                      -   Depreciation &
                           economy, we expect the import demand of US from China will remain robust in the                                                 amortization: 9.7%
                                                                                                                                                       -   Operating lease rental:
                           foreseeable future. Indeed, the market expects the freight rates on major East/West trade                                       45.9%
                           routes in the next two years will maintain the strength and this should in turn benefit the                                 -   SG&A: 7.4%
                           business of the Group. On the other hand, the inter-regional trade activities between China
                                                                                                                                                       Major competitors: COSCO
                           and SE Asian countries are growing rapidly, this would be another earnings driver to the                                    Container Lines, OOCL, etc
                           Group.
                                                                                                                                                       No. of Employees: Approx.
                                                                                                                                                       2,770
                           Primasia View:. While the listing price of the counter is set at relatively undemanding
                           valuations with the prospective PER at 6.5X to 8.5X, we believe this reflects the fact that                                 Sales per employee: Approx.
                           the earnings track record of the Group is volatile, as the shipping industry tends to be                                    Rmb5.5m
                           cyclical in nature. In the next one to two years, we expect the Group will continue to
                                                                                                                                                       Earnings Drivers:
                           benefit from the strength of the international freight rate. The risk factors to the counter                                1.   Increase of vessel capacity
                           will be the higher chartering fees on renewal, continuous increase of fuel cost and                                         2.   Increase of freight rate
                           excessive supply of vessel capacity globally.                          Opinion: NEUTRAL                                     3.   Decrease of fuel cost
                                                                                                                                                       -
                   Trading record and valuations                                   Offer Details                                                       Use of Proceeds (Rmb m):
                                                                                                                                                       1.   Acquiring vessels –
                   YE Dec (Rmb mn)                  2001        2002        2003   No of shares offered (m H shares)                         2,420          Rmb2,500m
                   Revenue                       7,795.4    10,522.2    15,276.2   Gross proceeds (HK$bn)*                                      8.9    2.   Acquiring containers -
                   Gross profit                (1,005.8)        (6.3)    2,266.3   Outstanding shares (m shs)                                6,030          Rmb500m
                   Operating profit            (1,081.3)     (226.0)     1,859.4   Market cap of shares (HK$bn)*                              23.5     3.   Capital injection into
                                                                                   Offer structure                                   Placing: 95%           subsidiary – Rmb500m
                   EBITDA                        (747.5)       160.7     2,397.3
                                                                                                                                                       4.   Debt repayment –
                   Net profit                  (1,338.4)     (597.1)     1,382.9                                                          IPO: 5%           Rmb3,000m
                   Basic EPS (Rmb)                 (0.74)      (0.32)       0.46   Major shareholder after listing                 China Shipping      5.   Working capital – The
                   Gross profit margin         -12.9%        -0.1%       14.8%                                                             (59.9%)          balance
Hong Kong




                   Operating profit margin     -13.9%        -2.1%       12.2%     Free float (%)                                             40.1
                   EBITDA margin                 -9.6%        1.5%       15.7%     FY04F weighted average PER (x)                      6.5X – 8.5X
                   Net profit margin           -17.2%        -5.7%        9.1%     Public offer period                              June 4 ((Fri) –
                   ROA (%)                     -21.6%        -6.8%       10.3%                                                       June 9 (Wed)
                   P/CFPS                            NA          NA          4.3   Listing date                                     June 16 (Wed)
                                                                                   Lead manager                                     BNP Peregrine
                                                                                   *Assumes the offer price at $3.675 per H share, which is the mid-
                                                                                   point of the stated range of between HK$3.175~HK$4.175 per H
                                                                                   share

                   David Foo, CFA (852)-2519 7622 · DavidFoo@Primasia.com                                                                                                      1 of 4
IPO Report                                                                                                                                                  CSCL (2866.HK)




                         Revenue per Market                                                    Volume per International Market
                East and SE
                   Asia        Others     China
                                5%         7%                                                                                                              Europe/
        Australia   8%                                                                                                                                   Mediterranean
          5%                                                                                                                                                 29%




                                                                                   N.America                                                                       Australia
                                                         N.America                                                                                                   6%
                                                                                     40%
     Europe/                                                44%
   Mediterranean                                                                                                                                          East and SE
       31%                                                                                                                   Others                          Asia
                                                                                                                              4%                             21%




                    Average Freight Rate per TEU                                                    Average Freight Rate per TEU

        5500                                                                        9000

        5300                                                                        8000
        5100                                                                        7000
        4900                                                                        6000
        4700
  Rmb




                                                                                    5000
                                                                             Rmb




        4500
                                                                                    4000
        4300
                                                                                    3000
        4100
        3900                                                                        2000

        3700                                                                        1000
        3500                                                                           0
                                                                                               N.America   Europe/Mediterranean   Australia     East and SE Asia     Others
                  1999        2000      2001      2002    2003



 Source: Company


Use of Proceeds
                                                                                                                                               (Rmb mn)
Acquiring vessels                                                                                                                                   2,500
Acquiring containers                                                                                                                                  500
Capital injection into subsidiary                                                                                                                     500
Debt repayment                                                                                                                                      3,000
General working capital                                                                                                                       The balance
Source: Company


SWOT Analysis
Strengths                                                            Weaknesses
     The Group is the 10th largest container                             High debt level. Interest expense will
     shipping company in the world in terms of                           increase sharply in case of interest rate hike.
     operating capacity.
     The growth rate vessel capacity increment is                         Shipping industry is cyclical in nature.
     fast. The CAGR 03-07 will be at 22%
Opportunities                                                        Threats
     The freight rates on major East/West trade                           May subject to increase of chartering fees on
     routes may remain strong in the near terms                           renewal which will take place in the next few
     and this should in turn benefit the business of                      years for most of its chartered vessels.
     the Group.
     The inter-regional trade activities between                          Freight rate may peak after 2005 as vessel
     China and SE Asian countries are growing                             capacity growth may outpace demand
     rapidly. This would be another earnings                              growth.
     driver to the Group.




                                                                                                                                                                               2 of 4
IPO Report                                                                   CSCL (2866.HK)




Financial Ratios
FY Dec                                    2001A             2002A           2003A
Gross profit margin                        -12.9%             -0.1%          14.8%
Operating profit margin                    -13.9%             -2.1%          12.2%
EBITDA margin                                  -9.6%           1.5%          15.7%
Net profit margin                          -17.2%             -5.7%           9.1%
Debt/Equity                             -1,269.2%         1,821.9%          165.7%
ROA                                        -21.6%             -6.8%          10.3%
P/Sales per share                                0.9                0.7         0.8
P/CFPS                                           NA                 NA          4.3
P/FCFPS                                          NA                 NA          NA
Source: Company



Consolidated Income Statement
FY Dec (Rmb mn)                     2001A                2002A              2003A
Turnover                            7,795.4             10,522.2           15,276.2
Cost of sales                      (8,801.3)           (10,528.5)         (13,009.9)
Gross profit                       (1,005.8)                (6.3)           2,266.3
SG&A                                  (75.5)              (219.7)            (406.9)
Operating profit                   (1,081.3)              (226.0)           1,859.4
EBITDA                              (747.5)                160.7            2,397.3
Net finance charges                 (276.0)               (383.3)            (459.4)
Share of profits of associates          7.1                  4.1                7.0
Pretax profit                      (1,350.3)              (605.2)           1,406.9
Taxation                               12.7                 10.2               (9.6)
Minority interests                     (0.9)                (2.0)             (14.5)
Net profit                         (1,338.4)              (597.1)           1,382.9
EPS (Rmb)                             (0.74)               (0.32)              0.46
Source: Company



Consolidated Cash Flow Statement
FY Dec (Rmb m)                      2001A                2002A              2003A
Operating cash flow                (379.00)             (440.00)           2,716.00
Investing cash flow                (551.00)            (1,415.00)         (3,390.00)
Financing cash flow                  895.00             1,998.00           1,643.00
Net change in cash flow             (35.00)               143.00             969.00
Source: Company




                                                                                              3 of 4
IPO Report                                                                                                            CSCL (2866.HK)




Consolidated Balance sheet
FY Dec (Rmb m)                                                       2001A                 2002A                  2003A
Non current assets
 Fixed assets                                                       4,001.7                5,403.2                9,087.8
 Deferred tax assets                                                    62.0                  74.0                   87.6
 Investment in associated co.                                           60.2                  61.8                   46.3
 Investment securities                                                  70.6                  70.6                     0.0
                                                                     4,194.5               5,609.6                9,221.7
Current assets
 Bunkers, at cost                                                     117.3                  171.4                  195.0
 Trade and notes receivables                                        1,465.9                2,075.2                2,361.0
 Prepayment and other receivables                                       42.2                 283.7                  221.9
 Bank balances and cash                                               371.6                  515.3                1,484.5
 Restricted bank balances                                                0.0                  83.0                     0.0
                                                                     1,997.0               3,128.7                4,262.4
Total assets                                                         6,191.4               8,738.3               13,484.1


Current liabilities
 Trade and notes payables                                            1,020.8               1,218.5                1,484.2
 Accruals and other payables                                          120.1                  142.8                  390.1
 Amount due to ultimate holding co.                                 1,260.6                2,016.8                   77.5
 ST bank loans                                                      1,315.1                1,588.6                1,389.7
 LT bank loans - current portion                                      145.0                   26.0                  387.5
 Finance lease obligations - current portion                          178.0                  238.2                  334.2
                                                                     4,039.7               5,230.9                4,063.2
Non current liabilities
 LT bank loans                                                      1,160.3                2,019.8                4,232.8
 Finance lease obligations                                           1,192.2               1,273.8                1,519.9
                                                                     2,352.6               3,293.6                5,752.7
Minority interests                                                       5.6                  14.3                   41.5
Shareholders equity                                                  (206.5)                 199.5                 3626.7
Total liab. & s’holder equity                                        6,191.4               8,738.3               13,484.1
Source: Company




This document is for information only and for the use of the recipient. It is not to be reproduced or copied or made
available to others. Under no circumstances is it to be considered as an offer to sell or a solicitation to buy any security.
While the information contained herein is from sources believed reliable, we do not represent that it is accurate or
complete and it should not be relied upon as such. We, or our affiliates, may from time to time have positions in, or
options on, and buy and sell securities referred to herein. We, or our affiliates, may from time to time solicit from, or
perform investment banking or other services for, any company mentioned in this document.




                                                                                                                                       4 of 4

				
DOCUMENT INFO