China Shipping Container Lines

Market Calls

PUBLISHED : Monday, 01 August, 2011, 12:00am
UPDATED : Monday, 01 August, 2011, 12:00am

China Shipping Container Lines (2866) filed a profit warning on Thursday on the Hong Kong exchange's website. It said it expects a loss for the first half of this year attributed to the Japanese earthquake, high oil prices and too many ships. Its share price fell 6.9 per cent on the day of the alert.

Philip Chow (Macquarie) has a 'soft sell' rating on China Shipping. He is not concerned about particular problems with the shipper, seeing its losses as a cyclical phenomenon of the sector. 'It's not a CSCL problem,' says Chow. 'The deployment of megaships has compressed freight rates.'

'Megaships' in this context means container ships with capacity of 13,000 TEU (20ft equivalent units). Carriers have been bringing such ships on line for the past year or so. Because the boats are bigger and more efficient, the shippers have been cutting freight rates. The catch is that shippers operating older, less efficient vessels have cut rates to compete, and suffered losses.

Andrew Lee (Nomura) has a reduce rating on CSCL. The container shippers are in the grips of a cyclical downturn thanks to overcapacity and rising costs. Lee says the rate cuts by the big shippers have added to their problems.

'Now that they realise they are going to make losses, they [the big carriers] may be a bit more conservative. They won't be so aggressive [on rate cuts],' Lee says.

Ken He (DBS Vickers) says the negative first-half results were expected. As to why investors then reacted with such a strong sell-off, he suggests a nervous market was looking for a reason to sell. He believes CSCL is a leading indicator of the sector's fortunes, as it is Hong Kong listed, and the HKEx requires firms to issue profit warnings whereas other exchanges do not.

He says that - unlike other carriers - CSCL tends not to lock in its freight rates. When rates go down, it tends to be hit harder and quicker than other carriers. 'Most shipping lines will lock in a three-month contract, but not CSCL,' he says. 'They prefer the spot rate, because they earned a lot in 2006-07, when the spot rate went up a lot.'

The views stated here are those of analysts, and are not stock calls by the South China Morning Post