3Q23 results in line with our expectations

COSCO Shipping Holdings (CSH) announced its 1-3Q23 results: Revenue fell 57.5% YoY to Rmb134.56bn; attributable net profit was Rmb22.07bn, implying EPS of Rmb1.36 (-77.3% YoY). In 3Q23, revenue fell 59.6% YoY and 4.0% QoQ to Rmb42.71bn, and net profit attributable to shareholders fell 83.0% YoY and 41.6% QoQ to Rmb5.51bn, in line with our expectations. We attribute the QoQ drop in 3Q23 results to a further QoQ decline in freight rates (the China Containerized Freight Index fell 6.7% QoQ in 3Q23), a high base in 2Q23 (driven by FX gains from US dollar appreciation), and cost pressure due to high oil prices in 3Q23 (costs fell 46.8% QoQ).

Container shipping volume maintained QoQ growth in 3Q23, and the port segment contributed solid earnings. In 3Q23, net profit of the container and shipping business fell 48% QoQ to Rmb4.78bn. Container shipping volume grew steadily in 3Q23, with the firm's foreign trade and container shipping volume up 1.5% and 2.0% QoQ. By region, container shipping volume of intra- Asia routes (including Australia) grew rapidly and rose 8.2% QoQ in 3Q23; per-container revenue of foreign trade routes fell 7.2% QoQ to US$979/TEU. Port business contributed stable earnings. In 3Q23, COSCO Shipping Ports' earnings grew 14.5% QoQ to US$78mn, and total container throughput at terminals controlled by the firm rose 3.9% QoQ.

Trends to watch

We think freight rates will remain soft in the next two years due to large pressure from delivery of new vessels in 2024. Data from Alphaliner shows that container ship order book accounted for 27.9% of shipping capacity as of October. Meanwhile, demand has remained weak. According to iFinD, the Eurozone manufacturing PMI maintained its downward trend in October. Clarksons estimates that industry supply will grow faster than demand by 7.6ppt and 2.7ppt in 2023 and 2024. We believe freight rates will be under pressure in the next two years.

Container shipping companies have ample cash and offer investment value, but we suggest watching industry developments. On the supply side, we think that the key to sustained profitability and long-term value in the shipping industry is whether major shipping companies can offset the pressure from vessel delivery in 2023 and 2024 through scrapping, lowering sailing speeds, and idling capacity. We suggest watching the bottoming of freight rates, and the quantity and pace of ship scrapping. As of 3Q23, the firm had Rmb199bn in cash. If the firm maintains a 50% dividend payout ratio for the full year, we expect the firm's A-share dividend yield to be 8.4% and 3.8% in　2023 and 2024, and its H-share dividend yield to remain attractive at 11.4% and 5.3%.

Financials and valuation

As freight rates in 4Q23 until now slightly missed expectations, we cut our 2023 and 2024 net profit forecasts 9.1% and 10.3% to Rmb26.4bn and Rmb14.8bn. A-shares are trading at 6.0x 2023e and 10.6x 2024e P/E, and H- shares at 4.4x 2023e and 7.5x 2024e P/E. We maintain OUTPERFORM ratings.

We cut our A-share target price 7.5% to Rmb11.8, implying 7.2x 2023e and 12.9x 2024e P/E, offering 21.4% upside. We cut our H-share target price 7.4% to HK$10, implying 5.5x 2023e and 9.4x 2024e P/E with 25.6% upside.

Risks

Global economic slowdown; rapid delivery of new vessels; ship scrapping disappoints.