Cosco Shipping

Market calls

PUBLISHED : Monday, 09 January, 2012, 12:00am
UPDATED : Monday, 09 January, 2012, 12:00am

Cosco Pacific (1199), which leases containers to shippers and operates ports, was a major mover last week. The firm has benefited from indications that shipping trade flows are rising.

Ken He (DBS Vickers) says the catalyst for last week's rally was favourable purchasing managers index (PMI) data coming from the mainland and the US, indicating manufacturing orders are on the rise. PMI is a leading indicator of trade flows, and of demand for container leasing and port services.

While the container shipping sector remains under cloud due to a glut of ships, the outlook for profits from container leasing (of which Cosco Pacific derives about 70 per cent of its earnings) is favourable.

'Cosco Pacific is undervalued,' says He, noting that the share price is trading at 0.8 times price-to-book (a common pricing measure used in the shipping sector). 'The current valuation is close to the trough valuation in late 2008. We think it's unjustified because the company's earnings outlook is still quite firm.'

He says firms offering container leasing and port services should be outpacing shipping companies given that traffic is robust.

'We expect container trade to grow [in 2012/13] albeit at a slower pace,' He says. 'Earnings will continue to rise in 2012 and 2013 so it does not make sense for the [Cosco Pacific's] share price to drop with shipping lines'.'

Lawrence Li (UOB Kay Hian) agrees that Cosco Pacific got a boost from favourable PMI, and economic data from the US. Investors have been betting on shipping stocks because they see improved prospects for the firms specifically, and also because they see them as high-beta stocks that will go up with the wider market. As such, shipping stocks are bought by investors who want to take a bet on a rising share market.

Li adds that Cosco Pacific will get a seasonal uptick in China's container traffic ahead of the Lunar New Year, as is seen every year.

'Investors see a seasonal increase. [Last week's rally] was just a play on that seasonality,' Li says.

Li has modest expectations for container traffic; he projects slowing growth this year. But he notes an unusual diversity of views expressed by analysts for shipping and ports services. Usually there is much more consensus on where companies are at in this highly cyclical industry. Right now views are split, with some analysts revising their forecasts to a much more positive outlook on container shipping.

Li speculates that investors may be noting opinion is coming round to a more favourable outlook, and are buying container leasing stocks as a bet on an upturn. 'It's an interesting time,' he says.

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