Sinotrans sees margin dip on volatility and cost of fleet expansion

PUBLISHED : Saturday, 12 March, 2011, 12:00am
UPDATED : Saturday, 12 March, 2011, 12:00am

Sinotrans Shipping expected its gross profit margin to fall this year as volatile market demand and expansion of its global fleet continued to impose pressure on the company.

But an analyst said the shipping operator's 41.3 per cent gross margin, despite dropping 3.3 per cent last year, was still the highest among its peers and that its strong cash position and a low break-even point should help it grow if the market improves next year.

The Hong Kong-listed dry bulk, tanker and container ship operator saw revenue jump 21.6 per cent last year to US$278.5 million, thanks to a rebound in dry bulk seaborne trade, which made up nearly 90 per cent of the company's business.

Higher charter hire income and ocean freight rates boosted earnings, with net profit growing 19.9 per cent year on year to US$127.5 million.

But while the company continued to make profits in the first two months of this year, general manager Tian Zhongshan said the delivery of seven new vessels in the next two years would push capital expenditure to US$226 million this year.

'There will be pressure for us to attain a better [profit margin] this year; the market is looming with uncertainties including economic policies adopted by various governments and excess supply of new ship deliveries,' Tian said. However 'persistent economic recovery will continue to boost demand so it should not be too bad overall'.

Leo Fan, an analyst with Shenyin Wanguo Securities, said the bulk shipping market should remain bearish in the medium term. But the Baltic Dry Index that tracks worldwide international shipping prices of dry bulk cargo will climb from its current 1,472 to 2,500 this year, and to 3,000 the next year. 'Sinotrans has a cost advantage over its global peers ... it will survive this downturn and then grow rapidly due to its low break-even point and large cash position,' he said.

Sinotrans shares closed 1.46 per cent lower at HK$2.7 yesterday, compared to a 1.55 per cent decline in the Hang Seng Index.

A final dividend of six HK cents will be paid per share.

Capital expenditure

Delivery of seven new vessels in the next two years will push the company's capital expenditure to, in US dollars: $226m