Asia Drybulk Shipping Sector --------------------------------------- Maintain MARKET WEIGHT
Liquidity reality check – no early signs of financial distress
Hung Bin Toh / Research Analyst / 852 2101 7481 / hungbin.toh@credit-suisse.com Sam Lee / Research Analyst / 852 2101 7186 / sam.lee@credit-suisse.com
● Most carriers do not show early signs of short-term financial
distress. China Shipping Dev. (CSD) appears to be relatively more
disadvantaged, but we are not concerned, given its low gearing,
our expectation of profitability and its status as a state-owned
enterprise backed by the country’s second-largest shipping group.
● Even assuming a worst-case scenario of continuous loss-making
for most carriers in the next two years, it would not be significantly
financially distressed if drastic measures such as cutting capex and
returning charter fleets are taken.
● While prolonged loss-making could worsen things, we think a new
equilibrium would be established after two years of adjustment,
with the industry returning to a breakeven situation, at the very
least. In any case, scheduled vessel delivery should peak in 2010E
and start to come off in 2011E, so oversupply pressure should
ease by then.
For more details on our sector view, please refer to our sector report,
Who will survive this down-cycle?, published on 3 November.
Reality check on carriers’ financial strength
We check carriers’ current financial positions by looking at their net
debt (or cash) positions, net gearing and budgeted capex (Figure 1).
China Cosco (CCH), Pacific Basin (PB) and U-Ming were all in net
cash positions as of 1H08. CCH, CSD and STX Pan Ocean (STX PO)
have the largest capex budgeted in absolute dollar terms. We project
CCH, Maybulk and U-Ming will still be in net cash positions, while
others have low gearing levels of <11%, except for CSD and STXPO.
For CSD and STXPO, net gearing could rise to 37% and 47%,
respectively, in FY10E, still acceptable, in our view.
Figure 1: Gearing is largely at comfortable level for the sector
1H08 Net
debt/(cash)
Capex (US$ mn)
Net gearing
Net interest
coverage (x)
US$mn 2009E 2010E 2009E 2010E 2009E 2010E
CCH -1,054 2,557 2,505 -18% -5% 11.9 23.6
CSD 688 980 881 32% 37% 38 29.3
Maybulk 104 9 9 -66% -66% cash cash
Pac Basin -158 196 312 -10% 12% 2 -0.5
Sincere Nav. 176 74 69 21% 11% 29.7 105.6
STX PO 205 800 800 20% 46% 23.8 3.8
U-Ming Marine -468 19 35 -61% -61% cash cash
Source: Company data, Credit Suisse estimates.
We further use three criteria to assess the likelihoods of carriers
facing short-term cash flow problems (Figure 2). Among the carriers
which were in net debt, as of 1H08, only CSD and Maybulk had shortterm
debt greater than gross cash. None of the carriers had short-term
debt accounting more than 50% of total debt. Similarly, only CSD had
more current liabilities than current assets as at 1H08.
Figure 2: No early signs of short-term financial distress
ST debt/ Total
debt (%)
Current
ratio (x)
ST debt >
cash
>50% debt
in ST CL > CA
CCH 20 1.7 N N N
CSD 50 0.3 Y N Y
Maybulk 2 22.3 Y N N
Pac Basin 3 6.2 N N N
Sincere Nav. 15 1.0 N N N
STX PO 13 2.0 N N N
U-Ming Marine 41 2.2 N N N
Source: Company data, Credit Suisse estimates.
Stress-testing balance sheet under 554 BDI for two years
Under this scenario, we assume a dire situation with BDI at historical
low of 554 points for 2009-10E, and given the ultra-low spot freight
rates, all previously signed customers’ contracts at higher rates will
not be honoured. Given the lack of profitability in the chartering
business, we assume carriers will return all of their charter fleet and
only hold on to their owned fleet to ride the down-cycle.
Figure 3: Stress-testing balance sheet under 554 BDI for 2 years
FY2010 FY2010 Net FY2010 EBITDA
Net profit gearing (%) interest coverage
(full capex) (full capex) (only maintenance
capex)
(full capex) (only maintenance
capex)
CCH -8,587 35 Net cash -2.7 -2.6
CSD 1,094 69 21.5 14 26
Maybulk -63 Net cash Net cash -5.1 -5.1
PB -106 Net cash Net cash -0.3 -0.3
Sincere -1,464 69 32 1.2 1.4
STX PO -272 75 Net cash -0.7 -0.2
U-Ming -3,979 Net cash Net cash 52.8 25.3
Source: Company data, Credit Suisse estimates.
Based on the assumptions, we estimate that all carriers, except for
CSD, would be loss- making (Figure 3). CSD would still be profitable
from its tanker business, part of which is domestic business based on
a cost plus model. Assuming capex to continue as budgeted, carriers’
interest coverage would mostly be negative, but net gearing would still
be at acceptable levels (albeit higher) given their current strong
balance sheets. CSD, Sincere and STXPO will have their gearings
rising to around 70%.
Valuation metrics
Bblg Shr px Latest Mkt cap Rating Target Upside P/B (x) P/E (x) Pre-X ROE (%)
Company Code c’rrcy price US$ mn price (%) 08E 09E 08E 09E 08E 09E Target-implied P/B and methodology
CCH 1919 HK HK$ 4.30 5,668 O 6.00 39.5 0.6 0.6 1.7 6.1 41 9 SOTP, 0.5x FY09 P/B for drybulk and container
CSD 1138 HK HK$ 7.13 3,060 O 11.20 57.1 1.1 1.0 3.3 7.0 35 15 1.5X FY09E P/B with 15% ROAE
Maybulk MBC MK RM 2.40 681 U 1.80 -25.0 1.2 1.3 4.0 10.4 18 12 1.0X FY09E P/B with 12% ROAE
Pac Basin 2343 HK HK$ 4.25 927 N 3.50 -17.6 0.6 0.6 1.5 19.7 37 3 0.5X FY09E P/B with 3% ROAE
Sincere 2605 TT NT$ 24.50 424 O 29.00 18.4 1.0 0.8 4.3 4.4 23 21 1.0X FY09E P/B with 21% ROAE
STX PO STX SP S$ 0.97 1,349 N 0.85 -12.4 0.6 0.5 2.1 12.0 36 5 0.5X FY09E P/B with 5% ROAE
U-Ming 2606 TT NT$ 40.30 1,054 U 30.00 -25.6 1.3 1.4 3.4 7.3 40 18 1.0X FY09E P/B with 18% ROAE
Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM; Source: Company data, Credit Suisse estimates
Liquidity reality check – no early signs of financial distress
Hung Bin Toh / Research Analyst / 852 2101 7481 / hungbin.toh@credit-suisse.com Sam Lee / Research Analyst / 852 2101 7186 / sam.lee@credit-suisse.com
● Most carriers do not show early signs of short-term financial
distress. China Shipping Dev. (CSD) appears to be relatively more
disadvantaged, but we are not concerned, given its low gearing,
our expectation of profitability and its status as a state-owned
enterprise backed by the country’s second-largest shipping group.
● Even assuming a worst-case scenario of continuous loss-making
for most carriers in the next two years, it would not be significantly
financially distressed if drastic measures such as cutting capex and
returning charter fleets are taken.
● While prolonged loss-making could worsen things, we think a new
equilibrium would be established after two years of adjustment,
with the industry returning to a breakeven situation, at the very
least. In any case, scheduled vessel delivery should peak in 2010E
and start to come off in 2011E, so oversupply pressure should
ease by then.
For more details on our sector view, please refer to our sector report,
Who will survive this down-cycle?, published on 3 November.
Reality check on carriers’ financial strength
We check carriers’ current financial positions by looking at their net
debt (or cash) positions, net gearing and budgeted capex (Figure 1).
China Cosco (CCH), Pacific Basin (PB) and U-Ming were all in net
cash positions as of 1H08. CCH, CSD and STX Pan Ocean (STX PO)
have the largest capex budgeted in absolute dollar terms. We project
CCH, Maybulk and U-Ming will still be in net cash positions, while
others have low gearing levels of <11%, except for CSD and STXPO.
For CSD and STXPO, net gearing could rise to 37% and 47%,
respectively, in FY10E, still acceptable, in our view.
Figure 1: Gearing is largely at comfortable level for the sector
1H08 Net
debt/(cash)
Capex (US$ mn)
Net gearing
Net interest
coverage (x)
US$mn 2009E 2010E 2009E 2010E 2009E 2010E
CCH -1,054 2,557 2,505 -18% -5% 11.9 23.6
CSD 688 980 881 32% 37% 38 29.3
Maybulk 104 9 9 -66% -66% cash cash
Pac Basin -158 196 312 -10% 12% 2 -0.5
Sincere Nav. 176 74 69 21% 11% 29.7 105.6
STX PO 205 800 800 20% 46% 23.8 3.8
U-Ming Marine -468 19 35 -61% -61% cash cash
Source: Company data, Credit Suisse estimates.
We further use three criteria to assess the likelihoods of carriers
facing short-term cash flow problems (Figure 2). Among the carriers
which were in net debt, as of 1H08, only CSD and Maybulk had shortterm
debt greater than gross cash. None of the carriers had short-term
debt accounting more than 50% of total debt. Similarly, only CSD had
more current liabilities than current assets as at 1H08.
Figure 2: No early signs of short-term financial distress
ST debt/ Total
debt (%)
Current
ratio (x)
ST debt >
cash
>50% debt
in ST CL > CA
CCH 20 1.7 N N N
CSD 50 0.3 Y N Y
Maybulk 2 22.3 Y N N
Pac Basin 3 6.2 N N N
Sincere Nav. 15 1.0 N N N
STX PO 13 2.0 N N N
U-Ming Marine 41 2.2 N N N
Source: Company data, Credit Suisse estimates.
Stress-testing balance sheet under 554 BDI for two years
Under this scenario, we assume a dire situation with BDI at historical
low of 554 points for 2009-10E, and given the ultra-low spot freight
rates, all previously signed customers’ contracts at higher rates will
not be honoured. Given the lack of profitability in the chartering
business, we assume carriers will return all of their charter fleet and
only hold on to their owned fleet to ride the down-cycle.
Figure 3: Stress-testing balance sheet under 554 BDI for 2 years
FY2010 FY2010 Net FY2010 EBITDA
Net profit gearing (%) interest coverage
(full capex) (full capex) (only maintenance
capex)
(full capex) (only maintenance
capex)
CCH -8,587 35 Net cash -2.7 -2.6
CSD 1,094 69 21.5 14 26
Maybulk -63 Net cash Net cash -5.1 -5.1
PB -106 Net cash Net cash -0.3 -0.3
Sincere -1,464 69 32 1.2 1.4
STX PO -272 75 Net cash -0.7 -0.2
U-Ming -3,979 Net cash Net cash 52.8 25.3
Source: Company data, Credit Suisse estimates.
Based on the assumptions, we estimate that all carriers, except for
CSD, would be loss- making (Figure 3). CSD would still be profitable
from its tanker business, part of which is domestic business based on
a cost plus model. Assuming capex to continue as budgeted, carriers’
interest coverage would mostly be negative, but net gearing would still
be at acceptable levels (albeit higher) given their current strong
balance sheets. CSD, Sincere and STXPO will have their gearings
rising to around 70%.
Valuation metrics
Bblg Shr px Latest Mkt cap Rating Target Upside P/B (x) P/E (x) Pre-X ROE (%)
Company Code c’rrcy price US$ mn price (%) 08E 09E 08E 09E 08E 09E Target-implied P/B and methodology
CCH 1919 HK HK$ 4.30 5,668 O 6.00 39.5 0.6 0.6 1.7 6.1 41 9 SOTP, 0.5x FY09 P/B for drybulk and container
CSD 1138 HK HK$ 7.13 3,060 O 11.20 57.1 1.1 1.0 3.3 7.0 35 15 1.5X FY09E P/B with 15% ROAE
Maybulk MBC MK RM 2.40 681 U 1.80 -25.0 1.2 1.3 4.0 10.4 18 12 1.0X FY09E P/B with 12% ROAE
Pac Basin 2343 HK HK$ 4.25 927 N 3.50 -17.6 0.6 0.6 1.5 19.7 37 3 0.5X FY09E P/B with 3% ROAE
Sincere 2605 TT NT$ 24.50 424 O 29.00 18.4 1.0 0.8 4.3 4.4 23 21 1.0X FY09E P/B with 21% ROAE
STX PO STX SP S$ 0.97 1,349 N 0.85 -12.4 0.6 0.5 2.1 12.0 36 5 0.5X FY09E P/B with 5% ROAE
U-Ming 2606 TT NT$ 40.30 1,054 U 30.00 -25.6 1.3 1.4 3.4 7.3 40 18 1.0X FY09E P/B with 18% ROAE
Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM; Source: Company data, Credit Suisse estimates
