Under geopolitical conflicts, shipping: performance declines, valuation rises

Geopolitical conflicts have been disrupting the development of the shipping industry. The Red Sea incident broke out in the fourth quarter of last year, causing significant fluctuations in shipping prices. This year, the conflict between Israel and Iran has escalated the situation in the Middle East once again, with European futures hitting a historical high. Under multiple event-driven factors, the shipping sector in the Hong Kong stock market has seen four consecutive quarters of gains.

However, the capital market's sensitivity to events mainly lies in the linear reaction of price fluctuations. In terms of performance, there is a deviation between volume and price, and performance tends to be the opposite. Zhitong Finance and Economics App observed that in 2023, the performance of the shipping industry is mostly on a downward trend. Among the 10 shipping companies surveyed, the total revenue amounted to 371.966 billion RMB, a year-on-year decrease of 40%, with a net profit attributable to shareholders of 42.584 billion RMB, a year-on-year decrease of 69.9%.

In terms of scale, there are two companies with revenues exceeding one hundred billion RMB, namely COSCO Shipping Holdings (01919) and China Merchants Shipping (00598), which together account for over 70% of the performance share in the Hong Kong shipping sector. Leading company COSCO Shipping Holdings recorded revenues of 175.448 billion RMB in 2023, a year-on-year decrease of 55.14%, with a net profit attributable to shareholders of 23.86 billion RMB, a year-on-year decrease of 78.3%. China Merchants Shipping, due to its market concentration in China, has shown stronger resilience in performance with smaller fluctuations. Of course, there are also a few targets that have achieved growth, such as COSCO Shipping Energy, with revenue and net profit increasing by 18.02% and 129.23% respectively.

Two companies that are significantly impacted by international situations and are among the top in scale are COSCO Shipping Holdings and China Merchants Shipping. COSCO Shipping Holdings has two main businesses, namely container shipping and terminal operations, with the former accounting for 95.8% of revenue and the latter for 4.2%. The container shipping business covers markets in China, the Americas, Europe, and the Asia-Pacific region, with Europe and the Americas being the main markets. However, in 2023, revenues from these regions decreased by as much as 64.1% and 65%, leading to an overall business revenue decline of 56.2%.

COSCO Shipping Holdings is actively adjusting its market strategy, focusing on emerging markets. During this period, the company received a total of 6 environmentally friendly container ships with a capacity of 24,000 standard containers each, as well as 1 Latin American extreme container ship with a capacity of 14,000 standard containers, totaling a capacity of nearly 160,000 standard containers. These vessels were deployed on the Asia-Europe route and new market routes. In addition, the company has also opened the Europe-South America East route and multiple routes in RCEP member countries to diversify international risks.

China Merchants Shipping has oil and gas transportation and dry bulk transportation as its dual core businesses, with fleets including cruise ships, dry bulk carriers, roll-on/roll-off ships, container ships, and LNG carriers. In terms of cargo volume, the oil tanker fleet has seen growth for three consecutive years, while dry bulk transportation has had some fluctuations, with a 7% growth in 2023. The performance of these two fleets contributes to over 60% of the total, ensuring relatively resilient performance. In 2023, its oil tanker transportation and dry bulk transportation revenues accounted for 37.37% and 27.47% respectively, totaling 64.84% The company actively explores overseas markets and in 2023, it adjusted 5 domestic ships to foreign trade routes, achieving a breakthrough in self-operated foreign trade business. In addition, the company signed long-term contracts for foreign trade roll-on/roll-off transportation with major domestic engine manufacturers, opening up international roll-on/roll-off routes from China to the Persian Gulf, Southeast Asia, and the Red Sea, exploring various business models such as voyage leasing and charter transportation, and establishing a roll-on/roll-off logistics network covering rivers, seas, and oceans.

Other shipping targets have been more or less affected by the international situation and trade environment, with smaller foreign trade shipping companies being most impacted, such as Oriental Overseas International, which saw a 57.9% decrease in revenue and an 86.27% decrease in net profit attributable to shareholders. Overall, shipping companies performed poorly in 2023, with international conflicts affecting shipping prices and demand. The Middle East situation remains tense in 2024, with uncertainties in the industry's development trend.

Global seaborne trade volume grew by 3% in 2023, remaining at a low level. Contradictions between specific industry demands and capacity emerged. For example, in the container sector, according to consulting firm Drewry's statistics, global container shipping demand increased by 0.4%, while global container capacity increased by 8% year-on-year. The market faced significant supply-side pressure, confirming the significant decline in performance of China COSCO Shipping. On the pricing side, due to multiple factors such as geopolitical conflicts, inventory, and demand, prices of different types of shipping routes were non-linear and highly volatile, significantly impacting performance.

It is worth noting that despite the decline in performance, the shipping sector's dividend payout remains very robust. In terms of dividend payout ratio, in 2023, China COSCO Shipping had a ratio of 15.53%, China Shipping Group 24.84%, China COSCO Shipping Energy Transportation 49.83%, and Pacific Shipping 34.73%, with an average dividend payout ratio exceeding 30%. Looking at cumulative dividend performance, the sector's average dividend payout ratio was 36.5%, with Pacific Shipping and Sinotrans Shipping International having the highest ratios at 47.14% and 45.73% respectively.

In an uncertain industry environment, some investment banks still hold optimistic views. For example, Industrial Securities believes that the Middle East situation is expected to continue to extend the industry's voyage, current freight rates have also bottomed out, the tanker market is improving, dividends and buybacks are rewarding shareholders, and Guosen Securities believes that the container shipping market has begun to recover, the Red Sea issue is expected to absorb excess capacity, and is optimistic about the leading company in the sector, China COSCO Shipping, benefiting significantly from the substantial increase in freight rates. However, there are also pessimistic views, with both Morgan Stanley and Goldman Sachs not optimistic about China COSCO Shipping, with Goldman Sachs giving it a "sell" rating.

Valuations of the Hong Kong stock shipping sector are very low, with a PB ratio of 0.68 times and a PE (TTM) ratio of 6.8 times. Among them, the leading companies China COSCO Shipping and China Shipping Group have PB ratios of 0.66 times and 0.7 times, and PE ratios of 5.4 times and 6.3 times respectively. The valuation gaps are not significant. Pacific Shipping and Sinotrans Shipping International may have higher valuations due to their higher dividend payout ratios, with PE ratios of 2.8 times and 10 times respectively Far above the industry average.

The performance of the shipping sector in 2023 was poor, but the low valuation has already fully priced in the industry's performance. If there is an improvement trend in the future, it will become the core logic driving the continuous rise of the sector. Investors can focus on the sector leader and targets with high dividend yields