China Shipping Container Lines
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Market calls

China Shipping Container Lines (2866) was a big mover last week, rising 13.3 per cent on Thursday alone. The jump came despite no particularly positive news about the issuer and a downbeat outlook for the shipping sector. For example, MISC - Southeast Asia's largest shipping line by market value - signalled last week its intention to get out of its unprofitable container business.

In the meantime, analysts are trying to make sense of its huge gains last week.

Lawrence Li (UOB Kay Hian) cites the release of a Deutsche Bank report on Wednesday that raised its rating on the Asian container sector to overweight.

Li also notes that CSCL's big gains on Thursday followed news that six central banks had cut the cost of their US dollar funding. Li says it created positive sentiment for the shipper, partly because it had announced plans on Tuesday to spend US$754 million on eight new vessels. Li says the central banks' funding cut encouraged investors, who say CSCL will have access to cheaper financing for this purchase.

'The market believes CSCL will benefit from the monetary easing,' says Li. 'Shipping finance will remain tight. But, sentiment-wise, it's a positive for CSCL.'

Philip Chow (CLSA) attributes CSCL's upswing partly to 'a bit of short covering' but puts it down mainly to investors' reactions to Thursday's news of the central bank rate cuts, which propelled markets globally and pushed Hong Kong equities up 5.63 per cent. Chow says the event sent investors after high-beta stocks (that move in line with the broader market), of which CSCL is one.

'The stocks that went up [on Thursday] were shipping and copper. They were risk-on trades. These are high-beta names that reacted aggressively to macro sentiment,' says Chow.

Chow says the outlook for CSCL remains dim. 'Shipping rates are in free fall. The demand outlook for 2012 is better. But what is haunting the industry is the fact that there are too many ships,' he says. 'I don't see a chance of a significant rebound in shipping until the first quarter or first half of next year.'

Moses Ma (ICBC) says last week's rally in CSCL shares was a bounce for a stock that has been heavily sold down this year. He notes that, following the rally, CSCL shares were priced at 0.7 times the firm's book value. That is still a little below Ma's target of 0.8 times book value.

His outlook for the container sector is negative for the usual reason: an oversupply of ships. 'I think the freight rate may increase next year, but the question is whether margin will remain low.'

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