C Shipping Container Line

CSCL HK RT +10.3% = 3.3h$

China Shipping Container Lines (2866, $2.95) 6M Target $3.0 SELL  

Event: China Shipping Container Lines (CSCL) reported in-line 2007 results.

CSCL reported 2007 earnings of RMB3,215mn, up 274% yoy, Net profit was in-line with consensus estimates.

Revenue grew 27% yoy to RMB38.8bn driven by 29% yoy increase in shipping volume to 7.3mn TEU with flat blended freight rate.  Revenue from major trade lanes as follows: 1) Europe (33% of revenue), up 49% with volume up 8%; 2) Asia Pacific (14% of total) – revenue up 40% with volume up 21%; 3) China domestic (11% of total), up 78% with volume up 61%; 4) Pacific Ocean (36% of revenue)– up 4% with volume up 14%.  Europe trade lanes contributed the most to the strong growth amid 8% volume growth and ~40% average rate rise, while rates of Pacific Ocean (36% of total) were weak with ~10% drop yoy.  Thanks to efficient cost control and economies of scale, CSCL’s cost of services merely increased 20% yoy while shipping volume increased 29%. Operating margin largely improved to 11.1% (2006: 5.5%).  Management is cautiously optimistic about container market in 2008 but we would take a rather cautious view with the following concerns: 1) Slowing demand from U.S. amid possible economic recession; 2) further increase in global shipping capacity; 3) cost pressure led by high oil price.

World’s largest container shipping company AP Moeller-Maersk will start to share vessels with its major competitors to cut cost with effect from April and peer Orient Overseas’ (316) first time qoq drop in shipping volume in 4Q07 led by the 10% drop in Trans-Pacific route are signs of a potential industry downturn.

The counter is trading at 1x 2008 P/B ratio that we think is fair. Maintain SELL with target price of $3.0