Mixed Fortunes for Taiwanese Liner Companies

Drewry Maritime Equity Research initiates coverage on the three Taiwanese container shipping companies, Evergreen Marine Corp Ltd (EMC), Yang Ming Marine Transport Corp. (YMM) and Wan Hai Lines Ltd. (WHL).

By MarEx 2013-09-30 13:42:00

Taiwanese container shipping companies have experienced mixed fortunes in recent years with varied profitability.  Intra-Asia specialist Wan Hai has seen steady returns and resilient growth whereas long-haul players Evergreen Marine and Yang Ming Marine continue to suffer losses mirroring the wider industry downtrend. Financial health varies markedly for the three companies with Wan Hai and Evergreen Marine on a stronger balance sheet footing than Yang Ming Marine which has a stretched balance sheet.

Rahul Kapoor, senior analyst at Drewry Maritime Equity Research stated, “Taiwanese container companies will continue to see mixed profitability as we expect long-haul carriers Evergreen and Yang Ming to see full year losses in 2013 with Wan Hai the only exception. We expect earnings for Wan Hai to be resilient and insulated from volatility in the long haul trades but at the same time any economic recovery in the West is unlikely to reward Wan Hai, corroborating our Neutral outlook on the Company. We are much more positive on Evergreen Marine. We positively view Evergreen’s exceptional timing in judging the investment cycles with cash preservation and strong balance sheet at the core of its strategy. We see Evergreen’s fleet expansion to start bearing fruit in next 6-18 months as unit costs become much more competitive and profitability returns. We are Negative on Yang Ming as we don’t believe the worst is behind them in terms of continued losses and are concerned with its stretched balance sheet. Even as we see positives from bigger vessels joining the fleet in 2015-16, we see the delivery timing a little too late as unit costs stay elevated near term with full year profitability returning only in 2015.”

DMER is Positive on Evergreen, Negative on Yang Ming and Neutral on Wan Hai

Below you will find a snap-shot of reports from Drewry’s senior analyst Rahul Kapoor.

EMC is our preferred pick for the next 12 months amongst the Taiwanese carriers.  EMC has embarked on a large fleet expansion backed by a strong balance sheet. We believe the aggressive fleet expansion by Evergreen will lead to a strong volume growth in the next 6-18 months and unit cost advantage will come to the fore aiding profitability. We are positive on EMC’s balance sheet as we see EMC’s gearing at very comfortable levels. We strongly believe the company’s valuation deserves a marginal premium to its long-term trading multiples, given our estimates of strong earnings rebound in FY14-15. EMC scores a green light and an orange light respectively on Drewry’s bespoke value and risk ranking, indicating Attractive valuation and Medium Risk. 

Yang Ming will continue to be loss making with full year profitability unlikely in FY13-14 as weak fundamentals and high interest costs weigh. We expect long-haul freight rates to remain under pressure, which, in addition to YMM’s high-cost base, would lead to continued losses for the company. In the medium term we see unit costs to stay elevated until larger chartered in 14,000 teu vessels join the fleet. We believe these vessels are a much needed fleet expansion for YMM to lower its unit costs and stay competitive. However, we argue that the timing of the vessel deliveries could see YMM face continued cost pressures and struggle to break even in the next 12-18 months. We find valuations expensive as return to profitability is delayed. YMM scores a red light and an orange light respectively on Drewry’s bespoke value and risk ranking, indicating Unattractive valuation and Medium Risk.

Wan Hai has seen its revenues resilient and profitability steady given its high exposure to Intra-Asia trade. However, we see increasing risks from continued cascading and growing threat of competition. The current trade mix gives the company a defensive and stable revenue stream, as freight rates remain less volatile and volumes less cyclical in Intra-Asia trades. However, WHL’s limited exposure to long haul trades could prove counterproductive as it leads to moderation in its earnings momentum during wider industry upticks. A recovery on major long haul trades will significantly improve the earnings and profitability of WHL’s peers but it will have only limited benefits for WHL. Even as WHL has shown steady profitability in the past, and we are positive on the company’s growth, we are concerned about the supply situation in Intra-Asia trade due to increasing competitive pressures. We see current valuations reaching fair territory. WHL scores an orange light both on Drewry’s bespoke value and risk rankings, indicating a Neutral valuation and Medium Risk.

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