China’s Shipping and Ports: Navigating Global Trade Challenges and Opportunities
UOB Kay Hian, October 4, 2024
The global trade environment is showing signs of weakening, particularly with manufacturing PMIs in China and around the world dipping below the 50-point mark. This decline points to contraction in manufacturing activities and a slump in new export orders. In addition to these economic headwinds, shipping rates have recently rebounded amid geopolitical tensions in the Middle East, along with the US East Coast port strike presenting potential upside risks to freight rates. In light of these factors, we maintain a “Market Weight” rating for China’s shipping and ports sector.
Economic Indicators Signal a Downturn in Global Trade
Recent economic indicators suggest a challenging outlook for global trade. Both China and global manufacturing PMIs remain below 50, indicating contraction in manufacturing activities. In September 2024, the global manufacturing PMI slipped to 48.8 from 49.6 in August. Similarly, China’s official manufacturing PMI stood at 49.8, with the new export order sub-index sinking to 47.5, highlighting the weakening export demand.
Despite these concerns, consumer sentiment in the US picked up slightly, aided by benign inflation expectations. Conversely, retail confidence in Europe continues to slump, with retailers reporting adequate inventories, which suggests subdued new order placement in the near future.
Ocean Freight Rates and the Middle East Conflict
While ocean freight rates have been normalizing in recent months, tensions in the Middle East have sparked a rebound. The escalating conflict between Israel and Hamas has disrupted the Red Sea route, absorbing global shipping capacity and pushing freight rates higher. This impact is reflected in the futures market, where Shanghai-Europe freight rate futures contracts, set to expire between February and August 2025, have surged by 13-43% over the past month.
Moreover, the US East Coast port strike adds further uncertainty, with 36 key ports along the East and Gulf coasts shut down since October 1, 2024. As these ports handle roughly 50% of containerized cargo entering the US, the strike is likely to create congestion in other global ports, potentially leading to a spike in ocean freight rates due to supply chain bottlenecks. The extent and duration of this impact, however, remain uncertain, dependent on how swiftly a resolution is achieved.
Earnings Forecasts Revised for Major Players
Given the changing dynamics in freight rates, we have revised our earnings forecasts for key companies in the shipping sector. The forecasts have been adjusted based on the anticipated increase in ocean freight rates:
- COSCO SHIPPING Holdings (CSH): 2025 earnings forecast has been raised by 36%.
- Orient Overseas International (OOIL): 2025 earnings forecast has been increased by 36%.
- China Merchants Port (CMP): A minor upward revision of 1% for 2025 due to indirect exposure to container shipping investments through its associate, Shanghai International Port Group (SIPG).
COSCO SHIPPING Holdings (CSH): Navigating Market Challenges
COSCO SHIPPING Holdings (CSH) has been downgraded to “HOLD” following a recent rebound in its share price. Despite the improved outlook for freight rates amid the Middle East tensions and the US port strike, the company faces challenges, including potential oversupply concerns once geopolitical tensions stabilize. The new target price for CSH is set at HK$13.28, based on a 2025 price-to-book (P/B) ratio of 0.84x, which is 1 standard deviation below its historical mean.
Given the potential for higher average freight rates in 2025 and CSH’s high operating leverage, investors may consider holding CSH for its projected 11.7% dividend yield in 2024, assuming a 50% payout ratio.
Orient Overseas International (OOIL): Positioned for Profitability
OOIL remains our preferred pick in the container shipping segment. The company currently trades at a more attractive valuation of 0.76x 2025 P/B, compared to CSH’s 0.83x. OOIL also has a proven track record of rewarding shareholders during profitable years, with a projected 12.6% yield in 2024, based on a 50% payout ratio. This opens up the possibility of special dividends, making OOIL an appealing investment choice amid the current market conditions. We maintain our “BUY” rating for OOIL, setting a target price of HK$130.00.
China Merchants Port (CMP) and COSCO SHIPPING Ports (CSP): Steady Growth Amid Uncertainties
Despite rising global trade uncertainties, China’s port sector recorded healthy container throughput growth of 8.2% year-on-year (YoY) in the first eight months of 2024. Within our coverage, both COSCO SHIPPING Ports (CSP) and China Merchants Port (CMP) achieved high single-digit throughput growth of 7.6% YoY and 7.9% YoY, respectively. The two port operators are on track to meet their guidance of mid-to-high single-digit throughput growth for the full year of 2024.
We maintain our “BUY” ratings for both CSP and CMP, with target prices of HK$6.44 and HK$15.34, respectively. Port operators continue to offer stable cash flow and sustainable dividend yields, even in the face of market uncertainties. CSP is expected to offer a 5.3% dividend yield based on a 40% payout ratio, while CMP is projected to provide a 6.9% dividend yield with a 50% payout ratio. These yields make the two companies attractive investment options, especially in the context of a potential rate cut cycle by the Federal Reserve.
Sector Outlook: Key Uncertainties and Potential Upside
The key risks in the sector stem from ongoing geopolitical tensions, potential supply chain disruptions due to port strikes, and a global economic slowdown. However, the present upside risk to ocean freight rates—driven by the Middle East conflict and the US East Coast port strike—may offer near-to-medium-term support to shipping companies.
The sector’s “Market Weight” rating reflects the balance of these risks and opportunities. OOIL emerges as the preferred pick for its favorable valuation and potential for rewarding shareholders through dividends. CSH, while currently rated “HOLD,” could still offer investors a decent dividend yield as the company navigates market challenges.
Overall, China’s shipping and ports sector is poised at a pivotal point. With the combined effects of global economic conditions, geopolitical tensions, and strategic company movements, the sector presents both challenges and opportunities for investors.
