Shipping

Shipping
BDI rallies continuously, benefiting dry bulk shipping
Baltic Dry Index (BDI), which represents a dry bulk freight rate (PSL, TTA), rebounded
from the bottom of 996 pts on 12 August to 1,740 pts on 17 September, signaling
reviving dry bulk shipping industry. A key driving factor is the Chinese economic
recovery, as reflected in China’s export volume in August 2013 that increased 7.2%yoy
(beating the market’s projection of 5.5%yoy) and August manufacturing PMI that shifted
10.4%yoy, the highest growth in 17 months. Coal inventory at Chinese power
generation plants also declined to 19 days, the lowest since February 2013, so China, a
major customer of dry bulk carriers, has had to increase dry bulk goods transportation.
Howe Robinson Container Index (HRCI), which represents a container freight rate (RCL),
improved slightly by 4.2% from the bottom of 487.8 pts on 29 May to 508.5 pts on 11
September, mainly because container carriers are used in transportation of general
goods, mostly finished goods including luxury goods, so the recovery has been slower
than dry bulk shipping’s.
- PSL and TTA’s freight rate shows lower recovery than BDI
BDI includes separate indices that measure freight rates of three different sizes of
vessels: 1) Capsize or extra large, measured by BCI; 2) Panamax or large, measured by
BPI; and 3) Supramax (PSL and TTA’s ships), measured by BSI. While demands for
other dry bulk vessels are decelerating, Supramax vessels are still of higher demand for
their advantages of fuel and crew cost saving; so the recovery of freight rate of
Supramax vessels (BSI) is substantially slower than those of other sizes of vessels.
Consequently, although BDI rallied as much as 33%mom in 3Q13, BSI rose only 4%. As
a result, normalized earnings of PSL and TTA would fall into a loss in 3Q13 and 4Q13. As
December until the Chinese New Year of the following year is a low season for the dry
bulk business (long holidays during Christmas and Chinese New Year), BDI would
weaken before recovering again on a high season and the world economic rebound. BSI
is projected to show a more solid recovery since mid-2014, allowing PSL and TTA to
generate a normalized profit from the business again.
- Maintain NEUTRAL. TTA([email protected]) is top pick
As normalized earnings of the shipping industry tend to face continuously lower loss in
2013 before starting to generate profits in 2014, we maintain NEUTAL for the sector. We
favor TTA([email protected]) as its 2013 PBV is only 0.78x. In addition, normalized earnings of
the company would revert to profits since 4Q13 (ended September 2013), which is
earlier than other shipping companies, thanking to its subsidiary Mermaid that has
recovered on seasonal effect, long-term forward contract, and full recognition of income
from MTR-2 drilling rig in 4Q13 since the service resumption in June 2013 after the
maintenance. At the same time, we recommend HOLD for PSL([email protected]). Although
the company’s normalized earnings would still face loss this year, PSL would book
extraordinary profit from selling of vessel building contract, which would boost the profit
continuously this year and allow PSL to pay dividend every quarter. Moreover, the
company would be able to maximize a benefit from its 40 vessels during the business
uptrend.