Shipping. Neutral. Sector Note. Reorganization around Maersk and allies

Transcription

1 Sector Note June 27, 2013 Shipping Neutral Reorganization around Maersk and allies Nutcracker situation intensifying Booz Allen and Hamilton Consulting used the term nutcracker to describe Korea in 1997 during the currency crisis. Specifically, Korea is like a walnut squeezed by a nutcracker of China (low cost advantage) and Japan (high efficiency advantage). And, Korea s shipping industry appears to have fallen into a nutcracker again, similar to 2005 when Maersk took over P&O Nedlloyd, the world s third largest container line at the time. Currently, Korea is being squeezed by the world s top three carriers and the growth of Chinese lines, which are being bolstered by aggressive exports. Of note, Maersk announced plans to form an alliance with the second and third largest carriers. Top three container lines form On Jun 18, the world s three largest shipping lines Maersk (Denmark), MSC (Swiss) and CMA-CGM (France) announced plans to form the by Apr The alliance will establish a joint vessel operating center (JCOC) at the headquarters in London and branches in Singapore. The independent entity will control 255 vessels (2.6 Mteu) under joint operations, equivalent to 8.7x Hanjin Shipping s owned fleet. Unlike current alliances, such as (Hanjin Shipping is a member) and G6 (Hyundai Merchant Marine), which are focused mainly on slot sharing, the network plans to offer independent marketing and freight rate systems, so the companies can rely on their individual strengths. The combined market share of the three companies would be 45% for Asia-Europe, 22% for Asia-North America and 41% for Europe-North America (Figure 1). As market share rises, the alliance must be approved by the EU and US based on anti-monopoly laws, but we do not believe this will be a major hurdle. Reorganization to continue centered on large container lines Alphaliner, a major French container shipping research organization, anticipates the following effects from the establishment of the. Impact on market competition - Should not reduce the level of competition on Asia-US routes - To compete against, other carriers should make efforts to expand or reinforce current alliances Heedo Yun heedo@truefriend.com Changwon Lee cw.lee@truefriend.com Impact on service levels - will reduce the total number of services operating, but should expand coverage (areas where shipping is possible) due to wider slot sharing agreement - For instance, the three carriers currently offer nine Asia-Europe weekly services that will be cut to eight weekly strings, but total slot capacity will be retained through the use of larger ships across the board.

2 Impact on freight rates - In the past, creation of new carrier alliances provided a short term boost to freight rates - However, if market competition is not reduced afterwards, the impact on freight rate was negligible in the mid and long term. - Formation of the second and third largest carriers along with G6 cooperation in end-2011 resulted in an initial surge in freight rates, but the same carrier groupings failed to prevent the subsequent slide in rates in Rates unlikely to rise in near term Container freight rates typically peak around this time due to peak seasonal factors. In 2010, the Shanghai Container Freight Index (SCFI) increased 11% from May (start of peak season) to Aug (end of peak season) and 2% in However, the SCFI plunged 13% in This year, rates are currently 12% lower than Apr (Figure 2). As such, rates have plunged for two straight years during peak season. Specifically, carriers have attempted to lift rates on seasonal expectations, but rates eventually declined on weak demand. Maersk has been generating profits from Africa, the Middle East and Latin America, to more than offset losses on Asia- Europe and Asia-US routes. As such, Maersk should not be as determined as in (severe market slump) to lift rates (Table 1). Unless Maersk leads the efforts, rate upside appears limited. Given falling rates even during peak season, rates appear unlikely to climb in Aug-Sep, the start of off-season. As the SCFI is currently at p, close to the historical low of p, further downside appears limited, but a rapid rebound also appears unlikely. Recommend conservative approach until liquidity issues resolve We recommend a conservative approach until the bleak industry conditions improve. Clarkson Research (UK institute) forecasts world container demand will grow 5.4% YoY and supply 5.8% YoY. However, Asia-EU demand fell 1.9% in 2012 and 1.2% in 1Q13 (Alphaliner data). As such, we expect Clarkson to revise down its forecast. Korean lines are highly dependent on Asia-US and Asia-EU routes. And, Korean carriers have grown shipping volume on aggressive efforts, but profits appear unlikely as freight rates remain soft amid the weak market conditions. 2

3 Figure 1. Post market share once is formed <Eurpe-North America> <Far East-North America> <Asia-Europe> 23% 9% 24% 3% 41% 17% 21% 15% 22% 25% 8% 11% 19% 17% 45% <Fleet capacity for each alliance> - (Maersk/MSC/CMA CGM): 2.75 Mteu, 302 ships - (Hapag-Lloyd, NYK, OOCL): 0.92Mteu, 132 ships - (APL/NOL. MOL. 현대상선 ): 0.9Mteu, 129 ships and formed G6 in For G6 service, the six shippling lines provide 128 ships (1.04 Mteu) - (Cosco, K-Line, Yang Ming, Hanjin Shipping): 1.38Mteu, 201 ships * Above capacity includes owned fleet only (i.e. excludes charterd fleet) Source: Alphaliner Figure 2. SCFI Rates fall even during peak season in 2012 and ,800 (point) 1,600 1,400 1,200 1, peak season up 11% 2011 peak season up 2% 2012 peak season down 13% 2013 peak season currently down 12% /12/16 854p 0 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Note: SCFI (Shanghai Containerized Freight Index): Index published by Shanghai Shipping Exchange based on spot container freight rates of15 major routes. To calculate the index, 15 liner container shipping companies, and 18 consignors, and freight forwarders provide rates to the exchange. Source: Shanghai Shipping Exchange Table1. Maersk s profitability on major routs Route Operating balance North America negative Europe negative Australia BEP+ Intra Asia (5%+) Middle East Latin America Intra Europe Africa (10%+) Source: Industry data 3

4 Figure 3. Hanjin and Hyundai s fleet capacity compared to the largest container line M/S falling (%) 47 (0.09 Mteu) 30 (0.25 Mteu) (0.06 Mteu) (0.1 Mteu) (0.32 Mteu) Hanjin Shipping Hy undai Merchant Marine (0.15 Mteu) (0.35 Mteu) (0.17 Mteu) (0.43 Mteu) (0.28 Mteu) (0.43 Mteu) (0.32 Mteu) Note: 1. Fleet capacity is as of begging of each year (collected by Korea Maritime Institute) Note: 2. Hanjin Shipping s end-1q13 capacity is 0.62 Mteu (chartered fleet: 0.34 Mteu, owned fleet:0.28 Mteu) Source: Alphaliner, Korea Maritime Institute Glossary TEU (Twenty-foot equivalent unit): a small container with six meters length Chartered fleet: Borrowed fleet by paying regular charterage Owned fleet: Bought vessels by shipping companies 4

5 Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share price performance BUY: Expected to give a return of +15% or more Hold: Expected to give a return between -15% and 15% Underweight: Expected to give a return of +15% or less Korea Investment & Securities does not offer target prices for stocks with Hold or Underweight ratings. Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months Overweight: Recommend increasing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Neutral: Recommend maintaining the sector s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization. Underweight: Recommend reducing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Analyst Certification I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. Important Disclosures As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent month if the publication date is less than 10 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does not own 1% or more of any class of common equity securities of Hanjin Shipping. There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication of the research report or at the time of the public appearance. Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for Hanjin Shipping in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from Hanjin Shipping in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intends to seek compensation for investment banking services from Hanjin Shipping in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in Hanjin Shipping s securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. owns over 1% of Hanjin Shipping shares as of April 10, Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analysts covering these companies nor their associates own any shares of as of April 10, Prepared by: Heedo Yun, Changwon Lee This report was written by Korea Investment & Securities Co., Ltd. to help its clients invest in securities. This material is copyrighted and may not be copied, redistributed, forwarded or altered in any way without the consent of Korea Investment & Securities Co., Ltd. This report has been prepared by Korea Investment & Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. We make no representation as to its accuracy or completeness and it should not be relied upon as such. The company accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. The final investment decision is based on the client s judgment, and this report cannot be used as evidence in any legal dispute related to investment decisions. 5