china shipping industry

8/8/2019 China Shipping Industry

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See the last page for analyst cert ification and important disclosures, including investment banking relationships.

Market share expansion

Sailing at full speed. Chinas massive infrastructure investment over the next

few years shall continue to drive robust shipping demand on energy and key

materials. As China is increasingly reliant on coal and ore imports in its iron &steel production, and power generation, we like dry-bulk shipping given its

resilient growth prospects and still-favorable supply-demand outlook. We also

expect the oil tanker market to turnaround by 2009 and Chinas growing oil

imports shall benefit domestic oil shippers.

State policy to benefit shipping SOEs.China has predominantly relied on

foreign shippers to ship its energy imports but its increasing energy demand

has urged the government to protect its energy shipping security. State

government is working out relevant industry policy to encourage domestic

shippers to transport up to 50% of its key energy and materials imports by

2010. We believe the policy could potentially benefit leading shipping

companies in China, including China COSCO Holdings (1919 HK, CCH) and

China Shipping Development (1138 HK, CSD).

Industry consolidation to create shipping conglomerates. In a move to

integrate state-owned assets, China plans to cut the number of central

state-owned enterprises (CSOE) from current 150 to 80~100 by 2010.

Shipping is among the seven core sectors short-listed by the State and will be

a key restructuring focus over the next 2 years. Economies of scale and

market share are the keys to survive the shipping consolidation. We believe

the market leaders, COSCO Group and China Shipping Group are likely to

benefit from the consolidation and their listed subsidiaries may have more

M&A opportunities.

Overweight dry-bulk carrier and neutral on container. We recommend to

buy dry-bulk shippers, including CSD, CCH and Sinotrans Shipping Limited

(368 HK, SSL) given a solid dry-bulk demand outlook throughout 2009.Among the sector, CSD is our top-pick given its high exposure to Chinas rising

coastal coal shipping market and its more defensive shipping model. We are

neutral on China Shipping Container Lines (2866 HK, CSCL) which is most

vulnerable to a slowdown in Chinas exports.

Key risk factors to the sector include: (1) global recession to cut trade

demand and dampen global shipping market; (2) further tightening measure by

the State to curb fixed assets investment, which may slowdown its energy

demand and energy imports; (3) ultimate shipping consolidation plan is yet to

be finalized by the State and may not benefit the listed companies; (4) hiking

vessel prices to undermine the expansion plan by large shipping SOEs.

Peer valuationCode Company Price Mkt cap TP Rating PER (x) PBR (x) ROE (%) Yield (%)

(HK$) (HK$mn) (HK$) 07F 08F 09F 08F 08F 08F

1919 HK CCH 23.00 353,034 32.0 O 11.0 8.6 9.2 3.2 38.4 2.1

1138 HK CSD 24.75 113,663 31.0 O 15.9 12.5 9.9 3.2 28.9 2.6

2866 HK CSCL 3.47 92,628 3.68 N 11.1 10.0 8.6 1.0 9.9 2.5

368 HK SSL 5.06 20,240 6.35 O 14.0 8.0 7.7 1.2 16.9 3.1

2343 HK Pacific Basin 13.08 20,720 N/A NR 4.7 5.2 5.8 1.3 39.1 10.5

316 HK OOIL 48.70 30,476 N/A NR 1.5 4.5 1.2 0.9 12.8 3.8

Note: Closing price as of 3 March 2008Source: Bloomberg, CCB Intl Securities

China shipping

Industry overview

Sector view: overweight

Market data

HSI Index 23,584

HSCEI Index 13,439

HSCCI Index 5,282

Closing price as of 3 March 2008

Source: Bloomberg

HSCEI 1-year performance

Source: Bloomberg

Wang Ren

[email protected]

(852) 2532 6749

China and Hong Kong Equity Research

4 March 2008


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2

Table of contents

Industry overview .............................................................................................................................................. 3Emerging market remains resilient ............. ............ .............. ............. ............ .............. ............. .............. ............ .............. .3Strong China demand to sustain........................................................................................................................................3Robust dry-bulk shipping outlook.......................................................................................................................................5China relies on ore imports................................................................................................................................................6Rising coastal coal shipping market...................................................................................................................................7Oil shipping to turnaround by 2009....................................................................................................................................9Vulnerable container outlook ............. ............. ............ .............. ............. .............. ............ ............. .............. ............. ........ 10

State policy to benefit shipping SOEs........................................................................................................... 11Market share expansion .................................................................................................................................................. 11Industry restructuring underway ............ ............. .............. ............. ............ .............. ............. .............. ............ .............. ...12Emerging shipping SOEs.................................................................................................................................................13

Valuation and recommendation ..................................................................................................................... 14Peer comparison..............................................................................................................................................................14Recommendation.............................................................................................................................................................16 Risk factors......................................................................................................................................................................18

Company research .......................................................................................................................................... 19China COSCO Holdings (1919 HK): Evolving into a shipping conglomerate...................................................................19China Shipping Development (1138 HK): Solid growth prospects ............ ............ .............. ............. ............ .............. ...... 25China Shipping Container Lines (2866 HK): Vulnerable industry outlook ............ ............ ............. .............. ............. ........ 31Sinotrans Shipping Ltd (368 HK): Improving growth visibility...........................................................................................36

Appendix .......................................................................................................................................................... 40Organization chart of listed shipping companies..............................................................................................................40Fleet summary of listed shipping companies ............. ............. ............. ............. .............. ............. ............ .............. .......... 41

Disclaimer......................................................................................................................................................... 42


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3

Industry overview

Chinas rapid economic growth and its infrastructure boom over the 11th-5 period

(2006~2010) shall continue to boost strong shipping demand for iron ore, coal and

oil imports. However, Chinas shipping power is still relatively underdeveloped to

accommodate its growing shipping demand, mainly due to a lack of large-size

vessels for long-haulage transportation. We believe the rapid capacity expansionand favorable state policies shall underpin strong growth prospects for large

state-owned shipping enterprises (shipping SOEs).

Emerging market remains resilient

Relatively immune from global sub-prime crisis, emerging market shall remain as a

key engine of global economy for the next few years. Strong domestic demand from

China and other emerging countries shall be able to sustain their own growth

momentum.

We expect the shipping demand from US to remain sluggish over 2008~09 while

Europe market is likely to slowdown in 2008. We maintain positive on Asia-Pacific

shipping market, which is being led by robust regional economic growth and strong

energy imports. Out of three shipping segments, we like dry-bulk shipping for itsmore favorable demand-supply outlook for the next 2 years, given a bulk of 80%

new dry-bulk vessels will only be delivered in 2009 and beyond.

Global economic outlook

World US Europe Japan Emerging market China

IMF 08 GDP growth forecast (%)

Previous forecast 4.9 2.2 2.6 1.9 7.8 11.4

Latest in Jan 2008 4.0 1.5 1.6 1.5 6.9 10.0

World Bank GDP growth forecast (%)

2007 estimate 3.6 2.2 2.7 2.0 7.5 11.3

2008 forecast 3.3 1.9 2.1 1.8 7.4 9.6

Source: IMF, World Bank

Strong China demand to sustain

Chinas growing demand on energy and key materials has become a major driving

power of global shipping market. Chinas iron ore imports grew at 3-year CAGR of

23% to account for about 50% of global iron ore imports as in 2007. China has

nearly tripled its coal imports in 3 years and is expected to become a net coal

importer in 2008. Based on the research of International Energy Agency (IEA),

Chinas oil production is likely to peak during the next decade but its oil demand is

going up steadily until 2030. In fact, IEA forecasted China to overtake Japan and

become the worlds 2nd

largest oil importer soon after 2010.

China is entering into a period of unprecedented infrastructure expansion as

outlined by its 11th-5 development plan over 2006 to 2010. State government plansto construct infrastructure with a total budget of RMB3.8tn, about 73% higher than

its previous five-year plan. We believe Chinas massive infrastructure investment

over the next few years shall sustain a strong materials imports and overseas

shipping demand.

We forecast Chinas net coal import to grow at above 15% yoy for the next 2~3

years while iron ore import to grow at 8~10% yoy over 2008~2009. We expect

Chinas crude oil import to maintain a steady growth at 10~12% yoy by 2010.

Favorable state policies to encouragethe development of China shippinggiants

China is now the key driving power ofglobal shipping market

Emerging market likely to maintain itsgrowth momentum despite US andEurope slowdown


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4

Chinas ore imports

Source: CEIC, CCB Intl Securities

Chinas coal imports


Chinas iron ore and coal imports remainresilient

148

208

275

326

384

0%

10%

20%

30%

40%

50%

2003 2004 2005 2006 2007

0

100

200

300

400

500

Ore impor ts (mn tons) Crude s teel produci ton growth (yoy) Iron ore import growth (yoy)

1.1

1.9

2.6

5.1

3.8

-40%

-20%

0%

20%

40%

60%

80%

2003 2004 2005 2006 2007

0.0

1.0

2.0

3.0

4.0

5.0

6.0

C oal im ports (m n tons ) C oal ex port grow th (y oy ) C oal im port grow th (y oy )


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5

Robust dry-bulk shipping outlook

As of Oct 2007, new capacity of dry-bulk vessel on order reached 48.4% of current

capacity, as compared to new delivery ratio of 40.4% and 60.7% in oil tankers and

containerships market respectively. Of the new dry-bulk capacity, 80% will only be

delivered in 2009 and beyond. Global economic slowdown remains the key concern

to containership while oil shipping market is expected to turnaround during late 2008to 2009 given 27% of single-hulled tankers will be phased out of the market by 2010.

Global vessel supply outlook

Source: SSL Prospectus, CCB Intl Securities

Driven by strong Asian dry-bulk demand, BDI index continued to breach record high

during 2H07 with a year-round average at 7,070. Reducing coal exports from China

has spurred Japan and Korea to import their coal needs from further sources, such

as Australia. The lengthening ocean voyage and severe congestion at Australian

ports also contributed to the hiking freight rate. We expect such factors to persist

during the next 2 years and strong China demand to support 2008 average BDI

index at 7,500.

BDI performance since 2004

Source: Bloomberg, CCB Intl Securities

0

2,000

4,000

6,000

8,000

10,000

12,000

Jan04

Apr04

Jul04

Oct04

Jan05

Apr05

Jul05

Oct05

Jan06

Apr06

Jul06

Oct06

Jan07

Apr07

Jul07

Oct07

Jan08

BDI Index

12.2% 9.7%19.7%

28.2% 38.7%

41.0%

0 %

20%

40%

60%

80%

100%

Tan ke rs B ulke rs C on ta ine rs hi ps

D e li v e re d du r in g 0 7 to 0 8 D e li v e re d in 2 0 09 a n d be y o n d

Strong China demand to lengthen industrycycle

Modest supply growth in dry-bulk fleet in2008

2007 average at 7,070




BDI found support at 6,000


6/42

6

China relies on ore imports

Chinas infrastructure boom over 2006~2010 is expected to drive a 10~15% yoy

growth in Chinas iron ore demand, which is in line with its steel production capacity

expansion for the next few years.

However, domestic ore supply is unlikely to catch up with increasing demand, given

a modest mining capacity expansion and a nation-wide environment concern. We

expect China to source up to 50~55% of its annual ore demand from imports during

2008~2009 and ore import growth to maintain strong at above 10% yoy for the next

2 years.

Modest mining FAI to cap supply growth


Further, the low grade of Chinas crude oil reserve also contributed to its rising

reliance on ore imports. Chinese Academy of Geological Science (CAGS) reported

in 2007 that China has identified 59.4 billion metric tons of iron ore reservescontaining only 30~35% of iron ore contents, compared to an average ore grade of

over 60% for major ore exporters in the world.

Estimated breakdown of Global ore reserve base Low ore grade of Chinas reserve compared to global ore exporters

Source: US Geological Survey (Mineral Commodity Summaries, Jan 2006), CCB Intl Securities

Chinas ore demand to outpace miningcapacity

67.2%64.1% 63.3% 62.5%

55.4%

48.6%

32.6%29.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Brazil Canada India Australia Russia Worldw ide China Ukraine

(ore grade)

Domestic supply is low due to low gradeof Chinas crude ore reserve

Others, 26.8%

Australia, 10.8%

China, 12.4%Russia, 15.1%

Brazil, 16.5%

Ukraine, 18.4%

-20%

0%

20%

40%

60%

80%

100%

120%

Jan 06 Apr 06 Jul 06 Oc t 06 Jan 07 Apr 07 Jul 07 Oct 07

F AI o n o re min in g (y o y ) F AI o n o re pro du ctio n (y o y ) F AI o n m eta l p ro du ctio n ( y oy )

Investment gap likely to sustain


7/42

7

Rising coastal coal shipping market

Over 90% of Chinas coal mines are based in inland provinces in Western and

Midwest China, while the largest demand arises from coastal China. Costal urban

areas, including Shanghai and Guangdong, primarily rely on waterway for coal

transportation, i.e. 80% of Guangdongs coal trading is seaborne.

Strong industrial growth in China continues to drive robust electricity consumption

and coal demand. China targets to upgrade its power capacity during the 11th-5

period to meet rising electricity demand. Annual power capacity is expected to

upgrade from 713mn KW in 2007 to 900~950mn KW by 2010, representing a steady

increase of 8~10% p.a. for the next 3 years.

China relies on a number of major coal-rails, including Daqin Railway (601006 CH)

and Shuohuang Railway (owned by Shenhua, 1088 HK) to transport coal from coal

mines in Western China to key waterway terminals in the east. We expect major

railroads and port terminals to see capacity expansion at 10~15% yoy through 2010

and drives strong volume expansion in coastal coal shipping market.

We forecast total coastal coal shipment in China to increase by 10~12% yoy and

coal shipping rate to grow by 30~15% yoy by 2010, driven by robust coastal coal

demand and strong railroad and port throughput upgrade during 2008~2010. Market

leader, CSD is expected to increase its market share from 30% in FY07 to 35% by

FY09 given its large contract base and strong capacity delivery in 2009. CSD has

signed a strategic agreement with Guangdong in Nov 2007 to become its major coal

shipper from 2008 to 2010.

Market comparison

Key coastal coal shippers

Company CSD Ningbo Marine Shipping CS Haisheng

Stock code 1138 HK 600798 CH 600896 CH

FY07 COA volume (tons) 89.4mn 5.0mn 3.2mn

2008 COA contracts (by company announcement)

Volume (yoy growth) 6.9% 20% 23%

Rate (yoy growth) 40% 60% 79%

Coastal coal capacity expansion (by CCBI forecast)

FY08 (yoy growth) 2% 17% 13%

FY09 (yoy growth) 12.5% 15% 20%

Source: Company data, CCB Intl Securities

Strong power upgrade to meet growing electricity consumption


Railroad upgrade to drive volumeexpansion

Rising costal coal demand to fuel shippingrate

Coastal area is the largest coal user andrelies on waterway to transport coal

0

20 0

40 0

60 0

80 0

1999 2000 2001 2002 2003 2004 2005 2006 2007

(mn KW)

0%

4%

8%

12 %

16 %

20 %

A nn ua l p ow e r ca pa city E le c tr ic ity c o ns u mp ti on gr ow t h ( y oy % )

Electricity consumption steadily

grows since 2003

Rising coastal coal shipping market tobenefit CSD


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8

Estimated breakdown of Chinas coal reserve Coal is vital in power generation

Source: CEIC, China Mining Association, CCB Intl Securities

Railway expansion to match output growth by 2010

Source: Shenhua Group, CCB Intl Securities

New capacity over 2005~2010

204

326

395

100

Total: 304

0

0

100

200

300

400

Nation-w ide Coal producing area Key coal-rails

(mn tons)

0% 20% 40% 60% 80% 100%

Shanxi, 25.7%

Inner Mongolia,

22.4%

Shaanxi, 16.1%

Xinjiang, 9.5%Other inland area,

19.6%

Coastal area,

6.6%

Electricity

generation

Coal

consumption

China burns 50% of its coal togenerate 80% of its electricity

Coal- ired, 82.9%

Hydro power, 14.9%

Nuclear power, 1.9%

Electricity generation, 50.3%

Petroleum processing, 9.5%Iron & steel making, 8.9%

Chemical production 4.9%

Residential uses, 3.5%

Other industrial uses, 23.0%

Others, 0.3%

Shuohuang Railway

Daqin Railway

Coal producing area

Coal self-supply area

Coal consumin area

Shenhuas key coal mines

Daqin Railway

Shuohuan Railwa Huan hua Port

Qinhuan dao Port

Guangzhou

Nin bo & Shan hai

CSD has signed strategic agreementwith Guangdong to become its major

coal shipper from 2008 to 2010


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9

Oil shipping to turnaround by 2009

Oil shipping market continued to see freight rate under pressure over the past 2 to 3

years due to tanker oversupply. Based on the order book as of Oct 2007, tanker

market will see new supply of as much as 40.4% of current capacity for the next few

years. However, about 27% of existing tanker fleet are single-hulled and will be

phased out or rebuilt into double-hulls by 2010 to meet revised IMO regulations. Weexpect the oversupply to ease during 2009~2010 and tanker rate to turnaround by

2009.

Based on the forecast by IEA, China oil production will peak during the next decade

and its net oil imports will nearly quadruple from 3.5mn bbl/day in 2006 to 13.1mn

bbl/day by 2030 to account for 80% of its total oil consumption. We believe strong oil

demand from China shall benefit domestic shippers, including CSD and CCH, both

of which are well positioned to ride on China governments strategy to boost

domestic tankers.

Chinas net oil imports forecast by IEA

Source: IEA; CCB Intl Securities

Tanker market performance since 2004


3.5

5.1

7.1

13.1

0

3

6

9

12

15

2006 2010F 2015F 2030F

China's net oil imports (mn bbl/day )

Around 27% of existing tankers are to bephased out during 2009~ 2010

Chinas net oil imports to quadruple by2030

0

50

100

150

200

250

300

350

Jan04

Apr04

Jul04

Oct04

Jan05

Apr05

Jul05

Oct05

Jan06

Apr06

Jul06

Oct06

Jan07

Apr07

Jul07

Oct07

Jan08

(WS)

Dirty VLCC rate (Arabian Gulf to Japan)

Tanker rate largely traded below WS100 over 2005 to 2007

Strong rebound seen in late 2007

9.9% p.a.

6.8% p.a.

4.2% p.a.


10/42

10

Vulnerable container outlook

Container market performance was mixed for 2007. Asia/Europe market saw strong

freight rate recovery with good TEU growth while transpacific market continued to

underperform due to the weak US demand and overcapacity. Looking forward into

2008, increasing capacity reallocation from transpacific route to A/E route could

dampen current freight rate recovery while transpacific line is expected to remainsluggish given the worsening US economic outlook. Regional liners, mainly TSA

(Transatlantic Stabilization Agreement) are introducing new bunker surcharge

program to raise transpacific rate but we question the weak demand could actually

affect load factor. Overall speaking, container outlook remains vulnerable for 2008.

Key Chinese liners, including CSCL and COSCON, have large exposure to

US/Europe market and they are highly leveraged to Chinas export performance.

Over the last few months, China saw a weakening export growth and shrinking trade

surplus. Chinas export to US and EU slowed from 20.5% and 37.4% yoy in 1Q07 to

10.7% and 30.0% yoy in 4Q07, respectively.

Key national liners

Company CCH (COSCON) CSCL

Stock code 1919 HK 2866 HKTEU capacity as of 2007 439,677 446,418

Capacity expansion over 2007~2009 14.9% p.a. 12.2% p.a.

Domestic market share 40% 45%

Estimated market exposure as of FY07

Transpacific route 36.7% 37.4%

Asia/Europe route 35.8% 32.8%

China domestic 6.1% 11.5%


Chinas recent trade performance


Global economic slowdown and supplyglut are the key concerns

0%

10%

20%

30%

40%

50%

60%

01/07 02/07 03/07 04/07 05/07 06/07 07/07 08/07 09/07 10/07 11/07 12/07 01/08

0

5,000

10,000

15,000

20,000

25,000

30,000

Trade surplus (U S$mn) Ex port grow th (y oy ) Import grow th (y oy )

Trade surplus started to slide


11/42

11

State policy to benefit shipping SOEs

China has predominately relied on foreign shippers to transport most of its energy

imports but its mounting energy demand has urged the government to protect its

energy shipping security. The State is working out relevant industry policy, which

aims to encourage domestic shippers to transport up to 50% of its energy and key

materials imports by 2010. Meanwhile, State government attempts to consolidate itskey state-owned assets in shipping and six other sectors to cultivate worldwide

industry leaders.

Implementation of such policies are the key rerating catalysts to China shipping

sector. We believe two shipping CSOEs (Central State-owned Enterprise), COSCO

and China Shipping Group are likely to strengthen their market position in the

shipping competition given their strong shipping power to control the market and

mixed business model to create massive synergy.

Summary of key shipping policies

National energy security plan

Energy shipping

security

State government aims to lift domestic shippers market share in shipping energy and

other key materials imports to about 50% by 2010 and to 80% by 2015.

National state-owned assets reform planCSOE restructuring The plan aims to consolidate key state-owned assets and reduce the number of CSOEs

rom currently over 150 to 80~100 by 2010. Among which, there are five CSOEs

operating shipping or shipping-related business.

National security State government has short-listed seven core sectors, of which it shall maintain absolute

control and cultivate leading international enterprises. The seven pillar industries include

armaments, power genera ion and distribution, oil and petrochemicals,

telecommunications, coal, aviation and shipping.

Source: National shipping security plan refers to Nanjing Waterway 2006 Annual Report (600087 CH); SASAC;CCB Intl Securities

Market share expansion

Currently, domestic players have accounted for an estimated 30% and 15% of iron

ore and oil import shipping market, respectively. The market share expansion targetcould at least accommodate new domestic capacity of 110~115mn DWTs of iron ore

and 80~85mn DWTs of crude oil by 2010, or at least 65 Capesize or VLOCs (Very

Large Ore Carrier, estimated as 250,000 DWT) and 60 VLCCs (Very Large Crude

Carrier, estimated as 300,000 DWT).

Capacity expansion

Note: Other SOEs include Changjiang Shipping Group, Sinotrans Group and China Merchant GroupSource: Company data; CCB Intl Securities

Market share expansion to support capacity

growth

Favorable state policies are the key reratingcatalysts to the sector

(No of v essel for 2008~2010)

19

6

12

8

12

6065

Total: 26Total: 31

0

20

40

60

80

Capesize/VLOC on

orders

VLOC needed VLCC on orders VLCC needed

C OS CO Gr ou p C hi na Sh ip pi ng Gr ou p O th er SO Es


12/42

12

Industry restructuring underway

In a move to strengthen major state-owned assets and enhance Chinas national

competitiveness in the world, seven core sectors were named by state government,

of which it will retain absolute control and cultivate worldwide industry leaders.

Shipping is among the seven pillar sectors and will be a key restructuring focus for

the next 2 years. We believe leading shipping conglomerates, with strongeconomies of scale and solid market power, are likely to benefit from the

consolidation trend. We expect to see a two-phase restructuring roadmap:

Phase 1 Parent of large SOEs shall accelerate assets injection into listed arms,

including unlisted shipping business, terminals and other shipping-related business.

Out of Hong Kong listed shipping counters, CCH and CSCL are likely to be the key

beneficiaries. CCH is likely to undergo further assets restructuring with COSCO

Group and may acquire its oil tanker business while CSCL targets to acquire all

container-related assets from its parent after its A-share IPO in late 2007.

Key unlisted assets

CSOEs China Shipping Group COSCO Group Sinotrans Group

Listed arms CSCL CSD CCH SSL

Listed assets Container shipping Dry-bulk shipping

Oil tanker

Dry-bulk shipping

Container shipping

Container terminals

Container Leasing

Container manufacturing

Dry-bulk shipping

Container shipping

Oil tanker

Unlisted assets Container terminals

Container leasing

LNG shipping Oil tanker Dry-bulk shipping

(Sinochart)

Container manufacturing


Phase 2. Leading SOEs are expected to take major roles in the coming industry

restructuring and shall have more M&A opportunities. We believe five shipping

CSOEs may potentially consolidate into 2~3 shipping conglomerates over the next 2

to 3 years, which is in line with the national plan to consolidate its 150 CSOEs into80~100 by 2010. Out of five CSOEs, COSCO Group and China Shipping Group are

already two world competitive shipping enterprises, which together control an

estimated 40% of Chinas total shipping power.

Estimate breakdown of current shipping power controlled by CSOEs


China shipping sector is currently at phase 1of the consolidation trend

COSCO , 59.8%

China Shipping ,

22.0%

CSC , 7.3%

Sinotrans , 6.1%

China Merchant ,

4.7%


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13

Emerging shipping SOEs

Economies of scale and market share are the key competition focuses in shipping

sector. Currently, COSCO and China Shipping Group are two leading shipping

conglomerates with solid market power in each of three shipping segments. Their

strong capacity base shall achieve better economies of scale and their

comprehensive business mix, particularly terminal-shipping operating models, likelycreate massive synergy in the competition. We believe the two shipping giants shall

strengthen their market position for the years to come and may potentially benefit

from the industry consolidation. Five shipping CSOEs are divided into three

categories as follows.

Shipping conglomerate

COSCO Group is the largest shipping force in China, occupying 38% of domestic

shipping capacity. The group is the largest dry-bulk carriers in the world and has

listed most of its shipping assets in CCH. Oil tanker is expected to be injected into

CCH the soonest by 2008.

China Shipping Groupmainly operates CSCL, the worlds fourth largest container

line and CSD, the largest coastal shipping force in China. China Shipping Group

plans to inject container terminals and other container-related assets into CSCL overthe next 1~2 years.

Inland river carrier

Changjiang Shipping Group (CSC) is the largest inland-river shipping company in

China, accounting for an estimated 10% of Chinas inland-river capacity. CSC Group

has listed most of its shipping business in A-share market, including its oil tanker

Nanjing Waterway (600087 CH) and dry-bulk carrier CSC Phoenix (000520 CH).

Multi-functional shipper

Sinotrans Group is the largest logistics group in China, mainly engaged in agency

and freight forwarding services. Sinotrans Group has recently listed its shipping

subsidiary, SSL in Hong Kong stock market.

China Merchant Group is a diversified conglomerate covering various industries,

including infrastructure, finance, real estate, logistics and energy shipping. Major

shipping business includes its Shanghai-listed subsidiary, Merchant Energy

Shipping (601872 CH).

Shipping CSOE comparison

Note: market share in terms of central state-owned capacity as of Dec 2007Source: Company data, CCB Intl Securities

Economies of scale and market share arecrucial in shipping competition

1.8%

2.8%

12.0%

76.9%

20.2%

7.8%

28.5%

25.8%

6.5%

40.2%

45.3%

0.0%

14.2%

0.3%17.7%

0% 20% 40% 60% 80% 100% 120% 140% 160%

China Merchant Group

Sinotrans Group

CSC Group

China Shipping Group

COSCO Group

Dry-bulk shipping market share Container market share Oil tanker market share


14/42

14

Valuation and recommendation

Peer comparison

We mainly benchmark with our global and regional peer group to value Chinese

shipping stocks. We used both PBR and PER to set our valuation range and derive

the valuation base for individual company. Our valuation range is set as follows

based on our peer group valuation.

Valuation target

Container Dry-bulk carriers

Peer group Global Asian Global Asian

08F PBR 1.4x 1.1x 1.9x 1.7x

08F PER 15.3x 14.1x 8.1x 8.4x

Target multiples

08F PBR 1.1x 2.2x

08F PER 14.1x 11.0x

Source: Bloomberg; CCB Intl Securities

We value Chinese container lines in line with Asian peers. Our global liner peer

group is currently trading at an average 08F PER of 15.3x and PBR of 1.4x while

key Asian liners are trading lower at 1.0~1.3x 08F PBR. We used 1.1x 08F PBR and

14.1x 08F PER to value Chinese container liners, which is in line with current

valuation of Asian peers.

We give premium valuation to Chinese dry-bulk carriers, supported by

favorable state policy. Global bulk carriers are currently trading at average 08F

PER of 8.1x and 08F PBR of 1.9x while key Asian bulkers are trading at about 8.4x

08F PER and 1.7x 08F PBR. We believe the results of recent price talks between

Chinas steel makers and global iron ore exporters are favorable to Asian bulkers

and BDI sentiment shall continue to improve throughout 1H08. We value Chinese

dry-bulk carriers at 11.0x 08F PER and 2.2x 08F PBR, representing 30% premium

to global peers supported by Chinas strategy to boost domestic players.

High BDI drives high valuation

Source: Bloomberg

0.0

5.0

10.0

15.0

20.0

25.0

1/1/06

3/1/06

5/1/06

7/1/06

9/1/06

11/1/06

1/1/07

3/1/07

5/1/07

7/1/07

9/1/07

11/1/07

1/1/08

(Peer group forward PER)

0

2,000

4,000

6,000

8,000

10,000

12,000(BDI)

Highest valuation at 19.1x PER

BDI peaked at 11,039


15/42

15

Global shipping peer group

Code Name Price Mkt cap PER (x) PBR (X) ROE (%) Yield (%)

(Local) (Localmn) 07F 08F 09F 07F 08F 09F 07F 08F 09F 07F 08F 09F

1919 HK CCH 23.00 353,034 11.0 8.6 9.2 4.8 3.1 2.3 48.9 38.4 26.0 1.4 2.1 2.3

1138 HK CSD 24.75 113,663 15.9 12.5 9.9 4.1 3.2 2.5 30.8 28.9 28.5 2.0 2.6 3.5

2866 HK CSCL 3.47 92,628 11.1 10.0 8.6 1.4 1.0 0.9 13.0 9.9 10.3 11.6 2.6 3.2368 HK SSL 5.06 20,240 14.0 8.0 7.7 1.0 1.2 1.2 11.8 16.9 15.8 1.4 3.1 3.2

Global dry-bulk carriers

005880 KS Korea Line 200,000 2,304,827 6.0 9.1 14.2 2.5 1.7 N/A 41.5 19.1 N/A 1.3 0.6 0.6

DSX US Diana shipping 28.50 2,120 13.5 9.9 11.0 2.7 2.6 2.6 19.6 26.3 23.9 5.3 10.2 9.8

DRYS US Dryships Inc 75.30 2,762 5.7 4.1 6.0 2.7 1.6 1.3 47.7 39.3 21.6 1.1 1.1 1.1

SCI IN Shp Corp India 211 59,693 10.1 12.0 N/A 1.2 1.2 N/A 12.4 10.2 N/A 3.7 3.5 3.5

QMAR US Quintana Mari 23.03 1,341 9.7 9.0 10.7 2.5 2.6 2.8 25.9 29.3 25.8 6.2 7.2 6.0

STX SP STX Pan Ocean 2.89 5,949 7.9 8.2 15.8 2.4 1.8 2.2 30.4 22.6 13.7 2.7 2.4 3.0

2343 HK Pacific Basin 13.08 20,720 4.7 5.2 5.8 1.8 1.3 N/A 39.1 25.8 N/A 11.5 10.5 N/A

2606 TT U-Mine Marine 85.00 72,931 8.1 7.6 8.0 2.9 2.4 2.1 36.3 32.0 26.9 8.0 9.7 8.6

Average 8.2 8.1 10.2 2.3 1.9 2.2 31.6 25.6 22.4 5.0 5.7 4.7

Global containers

2603 TT Evergreen 25.85 78,033 9.9 16.4 10.5 1.1 1.1 1.0 11.3 6.8 10.0 5.0 3.9 5.4

2609 TT Yang Ming 20.60 47,807 10.9 11.1 9.9 1.0 1.0 1.0 9.4 8.9 9.7 4.9 5.1 4.2

NOL SP NOL 3.03 4,452 9.6 8.7 7.1 1.5 1.3 1.1 15.4 14.9 15.5 2.8 2.8 4.6

DAC US Danaos Corp 26.41 1,441 12.2 12.9 13.0 2.2 2.1 2.0 17.9 16.2 15.5 0.0 6.8 7.1

SSW US Seaspan Corp 28.57 1,644 NM 24.7 20.5 1.9 1.9 1.9 (1.3) 7.9 9.1 6.2 6.7 7.1

011200 KS Hyundai Marine 38,400 5,110,012 42.5 30.2 44.7 2.6 N/A N/A 6.0 N/A N/A 1.3 1.3 1.3

000700 KS Hanjin Shipping 34,800 2,770,531 4.9 13.9 17.6 0.9 N/A 0.7 19.4 N/A 3.8 2.9 2.8 2.8

316 HK OOIL 48.70 30,476 1.5 4.5 1.2 0.9 0.9 0.4 40.9 12.8 14.5 18.5 3.8 4.2

Average 13.1 15.3 15.5 1.5 1.4 1.2 14.9 11.2 11.2 5.2 4.1 4.6

Global tankers

1192 HK Tijan Petroleum 0.46 2,946 13.4 7.2 4.9 0.9 0.8 0.8 6.8 10.5 15.3 0.0 0.0 0.0

GESCO IN Great Eastern 408 62,196 6.2 8.1 5.8 1.5 1.3 1.2 24.8 16.7 20.7 2.8 2.7 2.8

NAT US Nordic American 28.34 850 18.2 13.1 21.0 1.3 1.3 1.6 7.0 9.6 6.3 13.4 13.4 10.6

FRO US Frontline Ltd 45.14 3,378 N/A 14.9 9.9 6.5 6.6 6.1 N/A 44.0 66.7 N/A 16.4 11.9

9112 JP IINO Kaiun 937 104,078 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Average 12.6 10.8 10.4 2.6 2.5 2.4 12.9 20.2 27.3 5.4 8.1 6.3

Diversified shipping conglomerates

MAERSKB MAERSK 49,800 218,461 11.9 9.7 7.8 1.4 1.3 1.1 12.1 13.3 14.4 1.2 1.4 1.5

9101 JP NYK Line 962 1,183,441 9.9 9.7 9.5 1.6 1.4 1.3 16.0 14.4 13.4 2.5 2.5 2.6

9104 JP MOL 1,325 1,598,209 8.4 8.6 8.3 2.2 1.8 1.5 25.8 21.0 18.3 2.3 2.3 2.3

9107 JP K Line 1,042 665,593 7.9 7.9 7.7 1.6 1.3 1.2 20.0 17.0 15.2 2.4 2.5 2.6

HRZ US Horizon Lines 20.17 603 9.8 7.7 5.9 2.6 1.9 1.2 26.6 25.1 21.3 2.3 2.5 3.0

MISC MK MISC Berhad 8.75 32,548 13.7 12.8 11.5 1.6 1.5 1.4 11.9 12.0 12.2 4.0 4.1 4.3

Average 13.3 10.3 9.3 2.2 1.8 1.5 17.2 17.5 16.4 17.2 17.5 16.4

Note: Closing price as of 3 March 2008Source: Bloomberg


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16

Recommendation

Favorable industry outlook, strong government support and ongoing consolidation

focus are the key rerating catalysts. We recommend to overweight China shipping

sector and buy dry-bulk carriers CSD, CCH and SSL, given their resilient growth

prospects. We are neutral on container liner CSCL, given the vulnerable container

outlook. Our stock picks derive from our competitive analysis as follows.

Competitive analysis

Competitive factors Scores Comments

Growth prospects

CCH 2 Earnings may slowdown in FY09 due to BDI retrenchment. Potential acquisition

of oil tanker shall bode well for its earnings stability.

CSD 4 Maintain good growth over FY08~FY09 with strong costal freight rate outlook

and capacity expansion.

CSCL 1 Modest growth over FY08~09, driven by new vessel deliveries

SSL 3 Stable TCE improvement to drive visible growth in FY08

Industry outlook

CCH 2 Evolving into a shipping conglomerate and shall further comprehend its

shipping business mix for the next few years.

CSD 4 Ride on rising coastal coal shipping market and Chinas strategy to boost

domestic players in energy overseas shipping.

CSCL 1 Container freight rate vulnerable to global economic slowdown

SSL 3 Leverage to dry-bulk shipping boom and shall renew its contacts on high BDI.

Profit margins

CCH 2 Sustainable margins with synergies among different shipping segments.

CSD 3 Market leadership to sustain pricing power and strong freight rate improvement

to boost margins over FY08~09.

CSCL 1 Generate lowest margins among peers with high leverage to spot market

SSL 4 Leveraged to dry-bulk chartering and yields highest margins among peers.

Capacity expansion

CCH 3 Stable delivery over 2008~2009 but is expected to build more large-size dry

bulk carriers for iron ore imports shipping.

CSD 4 Strong delivery in FY09 to support its market share expansion in both coastalcoal shipping and iron ore imports shipping market.

CSCL 2 Rapid capacity expansion in Asia/Europe and domestic route over FY08~09

SSL 1 Has the most aggressive expansion target among peers but surging vessel

price is likely to undermine its capacity expansion plan.

Risk factors

CCH 2 Has the most sensitivity to BDI volatility among peers but we have already

factored in a 25% BDI decline in its earnings forecast model.

CSD 4 High exposure to coastal coal shipping market, which is the bes shelter from

worldwide shipping cyclicity.

CSCL 1 Highest sensitivity to freight rate, freight volume, bunker costs and RMB

appreciation.

SSL 3 Improving growth visibility with good TCE improvement but surging vessel

prices may dampen its fleet expansion target.

Recommendation

CCH 11 Key beneficiary of favorable industry trend and buy recommended.

CSD 19 Our most preferred shipping play with visible earnings growth. Buy.

CSCL 6 Neutral. The counter is fairly valued at current price level and key upside risk

may come from Chinas strong export performance towards Europe.

SSL 14 Discounted price vs. good growth. Buy.

Source: CCB Intl Securities

We recommend to overweight Chinashipping sectors, and buy CSD, CCH andSSL


17/42

17

China shipping comparison

Valuation and ratings

Company valuation Target PBR (x) Target PER (x)

Rating TP (HK$) Upside (%) 07F 08F 09F 07F 08F 09F

CCH O 32.00 39.1 6.4 4.1 3.1 14.2 11.1 11.8

CSD O 31.00 25.3 5.0 3.8 3.1 19.1 15.0 11.9CSCL N 3.68 6.1 1.5 1.0 0.9 11.2 10.1 8.7

SSL O 6.35 25.5 1.3 1.5 1.5 17.4 10.0 9.6

Growth prospects

(%) Revenue growth (yoy) Net profit growth (yoy) EPS growth (yoy) CAGR over 06A to 09F

07F 08F 09F 07F 08F 09F 07F 08F 09F Revenue Net profit EPS

CCH 91.4 22.3 2.3 885.6 29.0 (6.5) 495.5 28.6 (6.5) 33.8 128.2 92.8

CSD 32.2 30.3 26.6 72.5 27.7 25.3 71.4 27.7 25.3 29.7 40.2 40.0

CSCL 27.9 11.9 16.9 291.5 10.8 16.4 142.4 10.8 16.4 18.7 71.6 46.3

SSL 2.8 97.0 16.0 11.0 159.6 4.0 2.2 74.1 4.0 33.0 44.2 22.8

Profit margins

(%) GPM OPM EBIT margin NPM

07F 08F 09F 07F 08F 09F 07F 08F 09F 07F 08F 09F

CCH 32.4 34.5 31.3 26.2 28.1 25.1 27.8 29.6 26.7 21.6 22.9 20.7

CSD 43.8 46.2 47.2 45.5 45.7 46.3 45.5 45.7 46.3 37.5 36.8 36.4

CSCL 12.9 12.3 12.6 11.4 10.8 11.0 11.4 10.8 11.0 8.7 8.6 8.6

SSL 52.5 62.0 62.2 51.1 60.7 60.8 53.3 62.0 62.1 51.9 68.4 61.3

Financial performance

(%) Net gearing ROE Depreciation/operation cost Bunker /operation cost

07F 08F 09F 07F 08F 09F 07F 08F 09F 07F 08F 09F

CCH Net cash Net cash Net cash 48.9 38.4 26.0 6.9 6.7 7.2 14.0 14.5 16.2

CSD 15.5 10.8 5.3 30.8 28.9 28.5 14.0 12.6 11.7 41.9 41.9 42.2

CSCL Net cash Net cash Net cash 13.0 9.9 10.3 4.0 4.0 3.7 23.4 25.9 24.5

SSL Net cash Net cash Net cash 11.8 16.9 15.8 23.1 22.0 25.7 15.7 11.3 9.3

Capacity expansion

(%) Dry-bulk capacity (yoy) Tanker capacity (yoy) Container capacity (yoy)

07F 08F 09F 07F 08F 09F 07F 08F 09F

CCH - 4.6 7.7 - - - 11.9 14.2 15.5CSD 45.5 3.6 12.5 8.6 1.1 51.9 - - -

CSCL - - - - - - 12.2 15.6 8.8

SSL 2.5 38.0 20.5 0.0 28.6 36.8 0.0 38.0 10.5



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18

Risk factors

Freight rate and operating performance of shipping companies are sensitive to a

number of factors, including global/regional economic outlook, change in demand or

supply, bunker costs and other seasonal factors. Key risk factors of China shipping

sector is summarized as follows.

Economic risks

US and Europe recession are the key risks to CSCL, given its high exposure to US

and Europe market. Further, a significant economic slowdown in China will weaken

its overall material demand and undermine the growth prospects of dry-bulk carriers.

Policy risks

Macro tightening by state government to curb overheated economy may cut national

infrastructure investment budget and is likely to reduce Chinas material imports.

Further, the ultimate consolidation plan of shipping SOEs is yet to finalized by state

government, and may not benefit the listed companies.

Operational risks

Hiking vessel prices could potentially hamper SOEs fleet expansion plan. Further

high-than-expected bunker prices and runway operating costs could significantly cut

profit margin.

Other risks

China will renew its iron ore contracts with global ore exporters from year to year.

Significant change of current contract prices and conditions may adversely affect

shipping volume of iron ore.

Sensitivity summary

Key assumptions Freight rate Freight volume Operating costs

(-5% change) Bulk Container Tanker Bulk Container Tanker Bunker costs

Change in FY08 EPS

CCH -4.4% -1.6% - -4.2% -1.8% - +3.2%

CSD -3.0% - -0.6% -0.9% - -0.6% +3.8%

CSCL - -14.6% - - -15.8% - +10.3%

SSL -4.0% -0.5% -0.2% -3.7% -1.1% -0.5% +0.3%

Change in FY09 EPS

CCH -3.8% -2.0% - -3.6% -2.1% - +3.5%

CSD -2.9% - -0.8% -0.8% - -0.8% +3.0%

CSCL - -17.0% - - -17.0% - +11.8%

SSL -4.2% -0.5% -0.2% -4.1% -1.3% -0.6% +0.3%

Change in valuation

CCH -3.5% -0.6% - -3.3% -0.7% - +1.8%

CSD -3.0% - -0.6% -0.9% - -0.6% +3.8%

CSCL - -11.2% - - -13.8% - +8.2%

SSL -4.0% -0.5% -0.2% -3.7% -1.1% -0.5% +0.3%


CSCL is the most vulnerable to freight ratevolatility and mounting bunker costs.


19/42

19

Companyresearch

China COSCO Holdings (1919 HK): Evolving into a shipping

conglomerate

Restructuring underway. Financed by its A-share IPO fund, CCH has

acquired the dry-bulk fleets from its parent, COSCO Group and became the

worlds largest dry-bulk shipping company. We believe CCH is likely toundergo further asset restructuring with its parent and may acquire its oil

shipping business during the next 1~2 years. CCHs strategy to diversify

into other shipping segments shall bode well for its earnings stability.

Acquisition to boost strong FY07 results. We expect a 496% yoy

earnings growth for CCH in FY07 to be boosted by full-year profit

contribution from its dry-bulk shipping business which is estimated to

account for a bulk 74% of FY07 EBIT. EBIT from container shipping is

expected to jump by 56.6% yoy during 2007 driven by the strong recovery in

Asia/Europe rate while EBIT from terminals to rise 32.4% yoy, thanks to the

tariff improvement and robust throughput growth. Our earnings forecast for

FY07 is largely in line with CCHs latest profit guidance at not less than

RMB18bn.

Earnings may peak during 2008. We forecast earnings to grow by 28.6%

yoy in FY08 but to peak off by 6.5% yoy in FY09. Our earnings forecast has

factored in: (1) strong dry-bulk EBIT growth at 42.0% yoy for FY08 but to

decline by 19% yoy in FY09, assuming average BDI to peak at 7,500 in

2008 and drop by 25% in 2009 on rising new supply; (2) capacity expansion

to drive container EBIT growth at CAGR of 35% over 2006 to 2009. We

forecast CCHs Asia/Europe and transpacific freight rate to decline by 2.5%

and 5% yoy in FY08 respectively due to the weak US and Europe trade

outlook.

Undemanding valuation. We used sum-of-the-part model and valued CCH

at HK$32.0 per share or 11.1x 08F PER, which represents about 10%

premium compared to global shipping conglomerates. The premium is well

supported by CCHs potential assets restructuring with its parent. Further

catalysts include stronger than expected results and BDI performance.

Key risk factors to CCH include: (1) a sharp correction in BDI led by global

recession; (2) macro tightening by the State to restrict its material demand;

(3) lack of an efficient management over multiple shipping businesses could

lead to decreasing economies of scale.

Financial Summary

FYE Dec (RMB mn) FY06 FY07F FY08F FY09F

Turnover 50,994 112,771 134,902 137,210

EBIT 4,806 27,158 35,305 32,538

Net profit 3,168 21,098 27,379 25,311

EPS (RMB) 0.330 1.964 2.527 2.364

y-o-y chg (%) (69.7) 495.5 28.6 (6.5)

PER (x) 65.8 11.0 8.6 9.2

Yield (%) 1.1 1.4 2.1 2.3

ROAE (%) 7.5 48.9 38.4 26.0

BVPS (RMB) 3.076 4.392 6.737 9.022

Source: Historical data from the company, others are CCB Intl Securities es timates

China Shipping

Outperform (initiate)

Target price: HK$32.0Upside: 39.1%

Share data

Bloomberg code 1919.HK

Share price (HK$)* 23.00

Total issued shares (mn) 2,580

Market cap. (HK$ mn) 353,034

52-wk hi/lo 39.45/5.26

Average turnover (mn share) 37.8

Major shareholders %

COSCO Group 53.6

JP Morgan# 8.0

Morgan Stanley# 7.7

UBS# 7.4

# H-share only

* Closing price as of 3 March 2008

Source: Bloomberg

Market data

HSI Index 23,584

HSCEI Index 13,439

HSCCI Index 5,282

2008F 2009F

BVPS consensus (RMB) 7.900 9.736

EPS consensus (RMB) 2.193 2.283

Source: Bloomberg

Stock price performance

Source: Bloomberg

Wang Ren

[email protected]

(852) 2532 6749


20/42

20

A diversified shipping conglomerate

Funded by its A-share IPO, CCH has acquired the entire dry-bulk shipping business

from its parent, COSCO Group during 2H07, and become the worlds largest

dry-bulk shipping company. CCH targets to develop itself into diversified shipping

conglomerate and we believe CCH may acquire the oil tanker business from its

parent to comprehend its business portfolio for the years to come.

Strong FY08 vs. flat FY09. We forecast FY07 earnings to grow at 496% yoy, in line

with companys recently revised profit guidance. The robust growth is attributed to

full-year profit contribution from the newly-acquired dry-bulk shipping business,

which is estimated to account for 74% of CCHs FY07 EBIT. We forecast FY08

earnings to grow by 28.6% yoy and a modest FY09 earnings decline by 6.5% yoy,

based on the following projections.

Solid dry-bulk shipping performance. Dry-bulk segment shall continue to be the

key driver for CCH in FY08, and segment EBIT is expected to grow at 42.0% yoy in

FY08 but to decline by 19% yoy in FY09, assuming about 65~70% of its dry-bulk

capacity is chartered-in and annual average BDI to peak off in 2009. We have

already factored in a 25% yoy decline in 2009 average BDI in our earnings forecast.

Capacity expansion to boost container growth. We forecast 13~18% yoy growth

for CCHs liner revenue over 2008 to 2009 to be driven by strong capacity expansion.

CCHs annual shipping capacity is expected to increase by about 50% to reach

580mn TEUs by 2009. We expect transpacific and Asia/Europe rate to drop by 5%

and 2.5% yoy due to the weakening US and Europe trade volume.

Healthy container leasing growth. EBIT from container leasing is expected to

grow at 16~18% yoy over FY08~FY09 in line with CCHs overall container volume

growth. Currently, COSCON the container shipping arm of CCH, occupies about

65% of CCHs leasing capacity.

Stable container terminal growth. EBIT from container terminals shall maintain

stable growth at CAGR of 22.1% over FY06~FY09, mainly driven by strong

container throughput growth in Bohai Rim. Container terminals shall account for

about 3.7~4.6% of CCHs total EBIT during FY08~ FY09. CCHs strategy to gain

controlling stake through equity investments could fuel earnings of the segment.

Revenue breakdown as in FY08F EBIT breakdown as in FY08F


Container shipping,

39.6%

Dry-bulk shipping,

48.1%Container leasing,

2.0%

Container

terminals, 0.3%

Logistics & others,

10.0%

Logistics & others,

4.1%

Container

terminals, 3.7%

Container leasing,

5.2%

Dry-bulk shipping,

80.8%Container

shipping, 6.2%

Potential breakthrough in assetsrestructuring with its parent


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21

Key segment statistics

Dry-bulk shipping 2006 2007F 2008F 2009F 2007F 2008F 2009F

(Yoy %) (Yoy %) (Yoy %)

Revenue from dry-bulk segment (RMBmn) 20,226 51,195 64,859 55,601 153.1 26.7 (14.3)

- self-owned vessels 7,787 20,019 25,473 23,789 157.1 27.2 (6.6)

- chartered-in vessels 12,439 31,176 39,387 31,812 150.6 26.3 (19.2)

GPM at dry-bulk shipping 35.3% 46.3% 50.2% 47.7% 11.0 3.9 (2.5)

OPM at dry-bulk shipping 36.7% 39.2% 44.0% 41.6% 2.5 4.8 (2.4)

Container shipping

Container shipping volume (1,000 TEUs) 5,111 5,699 6,591 7,566 11.5 15.7 14.8

- transpacific 1,303 1,525 1,753 2,034 17.0 15.0 16.0

- Asia/Europe (incl. Mediterranean) 1,209 1,360 1,604 1,885 12.5 18.0 17.5

- Intra-Asia (incl. Australia) 1,501 1,426 1,497 1,609 (5.0) 5.0 7.5

- domestic market 257 251 258 264 (2.0) 2.5 2.5

- others 842 1,137 1,478 1,774 35.0 30.0 20.0

Average container rate (RMB/TEU) 6,487 6,846 6,699 6,910 5.5 (2.1) 3.1

- transpacific 10,264 9,391 8,922 9,145 (8.5) (5.0) 2.5

- Asia/Europe (incl. Mediterranean) 8,062 10,279 10,022 10,373 27.5 (2.5) 3.5- Intra-Asia (incl. Australia) 3,970 4,268 4,481 4,593 7.5 5.0 2.5

- domestic market 9,777 9,044 8,817 9,038 (7.5) (2.5) 2.5

- others 1,870 2,076 2,335 2,452 11.0 12.5 5.0

GPM at container shipping 10.7% 11.1% 10.0% 12.1% 0.5 (1.2) 2.1

OPM at container shipping 3.9% 5.3% 4.1% 6.2% 1.4 (1.2) 2.1

Container terminals

Total container thought put (1,000 TEUs) 32,792 40,550 48,442 56,003 23.7 19.5 15.6

- Bohai Rim 13,431 18,106 21,813 25,161 34.8 20.5 15.4

- Yangtze River Delta 7,732 8,175 9,807 11,505 5.7 20.0 17.3

- Pear River Delta 10,401 12,491 14,121 15,912 20.1 13.1 12.7

- Overseas 1,227 1,778 2,701 3,425 44.9 51.9 26.8

Revenue from container terminals (RMBmn) 232 373 463 558 60.5 24.0 20.5Profit from associates/JCEs (RMBmn) 609 774 909 1,021 27.2 17.4 12.3

Investment returns (RMBmn) 162 187 211 239 15.2 12.9 13.3

Container leasing

Total container leasing volume (1,000 TEUs) 1,233 1,504 1,719 1,913 21.9 14.3 11.3

- COSCON 457 566 689 796 23.9 21.7 15.5

- Intl long-term leasing 120 239 285 313 100.0 19.0 10.0

- Intl master leasing 27 37 34 22 37.3 (8.3) (34.2)

- managed container fleet 630 661 711 782 5.0 7.5 10.0

Total container fleet (1,000 TEUs) 1,251 1,588 1,813 1,998 27.0 14.2 10.2

Container utilization rate 98.6% 94.7% 94.8% 95.8% (3.9) 0.1 1.0

Logistic operation

Total services income (RMBmn) 10,167 11,784 13,546 15,411 15.9 15.0 13.8- third-party logistics 2,234 2,793 3,351 3,854 25.0 20.0 15.0

- shipping agency services 3,312 4,024 4,855 5,817 21.5 20.7 19.8

- Others 4,621 4,967 5,340 5,740 7.5 7.5 7.5

Source: Historical data from the company, others are CCB Intl Securities estimates


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22

Key growth catalyst asset restructuring

To diversify its business mix, we expect CCH may undergo further assets

restructuring with its parent, COSCO Group and may acquire the oil tanker business

from its parent.

COSCO Group currently occupies oil tanker fleet with total capacity of about 3.5mn,

which is expected to grow by 85~100% by 2010, based on the Groups tanker

expansion plan. Following table summarizes the key unlisted shipping assets held

by COSCO Group:

Key shipping assets remaining at COSCO Group

Oil tankers No of vessels DWT (mts) Average fleet age

VLCC 9 2.41 3.4

Panamax 12 0.82 9.0

Handysize 5 0.22 13.6

LPG carrier 6 0.02 19.8

Sub-total 32 3.47 10.1

General cargo ships

Multi-purpose 58 1.12 18.2General cargo 34 0.47 25.8

Sub-total 92 1.59 21.0

Specialized vessels

Semi-submersible 3 0.05 14.0

Asphalt 11 0.06 12.8

Ro-Ro 7 0.06 25.8

Sub-total 21 0.18 17.2

Source: COSCO Group

Undemanding valuation

We applied sum-of-the-part method and valued CCH at HK$32.0 per share, which

translates into 08F PER of 11.1x. The valuation represents about 15% premium to

current valuation of global shipping conglomerates. Our SOTP valuation of CCH

mainly comprises the following:

(1) HK$26.0 for CCHs dry-bulk cargo shipping business valued at 11.0x 08F PER,

compared to Asian peer average of 8.4x 08F PER. 25% premium is given the

state governments policy to protect domestic players.

(2) HK$3.9 for container shipping valued at 1.1x 08F PBR, which is based on our

FY08 book value projection of CCHs container segment, or COSCON. Our

divisional valuation is comparable to Asian liner peers;

(3) HK$1.8 for CCHs 51.3% stake of COSCO Pacific (1199 HK) valued by currentmarket price with a holding company discount of 15%. COSCO Pacific operates

CCHs container leasing, container terminals, container manufacturing business

and holds 49% of COSCO Logistics.

(4) HK$0.4 for CCHs remaining 51% stake of CCHs logistic operation, or COSCO

Logistics at 9.0x 08F PER, which is largely in line with current valuation of key

China logistic operators.

Tanker capacity may double by 2010

SOTP valuation at HK$32.0


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SOTP valuation breakdown

Key assets Stake Valuation methodology

Valuation

(RMBmn) % of valuation

Dry-bulk shipping 100% 11.0x 08F PER 231,672 81.1%

Container shipping 100% 1.1x 08F PBR 34,825 12.2%

COSCO Pacific 51.3% Market value with 15%

holding company discount 15,911 5.6%

COSCO Logistics 51% 9.0x 08F PER 3,171 1.1%

NAV - - 285,579 -

NAV/share (RMB) - - 28.0 -

Exchange - - 1.14 -

Target price (HK$) - - 32.0 -


Key risk factors to our valuation include: (1) a sharp correction in BDI index led by

global recession; (2) stringent macro tightening by state government to cut its

infrastructure budget and overall materials demand; and (3) higher-than-expected

bunker costs and operation costs to undermine fleet returns.

Valuation comparison

Code Name Price Mkt cap PER (x) PBR (X) ROE (%) Yield (%)

(Local) (Localmn) 07F 08F 09F 07F 08F 09F 07F 08F 09F 07F 08F 09F

1919 HK CCH 23.00 353,034 11.0 8.6 9.2 4.8 3.1 2.3 48.9 38.4 26.0 1.4 2.1 2.3

Shipping conglomerate

MAERSKB MAERSK 49,600 217,802 11.8 9.6 7.8 1.4 1.3 1.1 12.1 13.3 14.4 1.2 1.4 1.6

9107 JP K Line 1,042 665,593 7.9 7.9 7.7 1.6 1.3 1.2 20.0 17.0 15.2 2.4 2.5 2.6

9104 JP MOL 1,325 1,598,209 8.4 8.6 8.3 2.2 1.8 1.5 25.8 21.0 18.3 2.3 2.3 2.3

MISC MK MISC Berhad 8.75 32,548 13.7 12.8 11.5 1.6 1.5 1.4 11.9 12.0 12.2 4.0 4.1 4.3

Average 10.5 9.7 8.8 1.7 1.5 1.3 17.4 15.8 15.0 2.5 2.6 2.7

Global container2866 HK CSCL 3.47 92,629 9.9 10.1 8.8 1.4 1.3 1.1 14.1 12.7 12.1 3.7 2.7 3.0

2603 TT Evergreen 25.85 78,033 9.9 16.4 10.5 1.1 1.1 1.0 11.3 6.8 10.0 5.0 3.9 5.4

000700 KS Hanjin Shipping 34,800 2,770,531 4.9 13.9 17.6 0.9 N/A 0.7 19.4 N/A 3.8 2.9 2.8 2.8

316 HK OOIL 48.70 30,476 1.5 4.5 1.2 0.9 0.9 0.4 40.9 12.8 14.5 18.5 3.8 4.2

Average 6.5 11.2 9.5 1.1 1.1 0.8 21.5 10.7 10.1 7.5 3.3 3.9

Global bulker

005880 KS Korea Line 200,000 2,304,827 6.0 9.1 14.2 2.5 1.7 N/A 41.5 19.1 N/A 1.3 0.6 0.6

2343 HK Pacific Basin 13.08 20,720 4.7 5.2 5.8 1.8 1.3 N/A 39.1 25.8 N/A 11.5 10.5 N/A

2606 TT U-Mine Marine 85.00 72,931 8.1 7.6 8.0 2.9 2.4 2.1 36.3 32.0 26.9 8.0 9.7 8.6

STX SP STX Pan Ocean 2.89 5,949 7.9 8.2 15.8 2.4 1.8 2.2 30.4 22.6 13.7 2.7 2.4 3.0

Average 6.7 7.5 10.9 2.4 1.8 2.2 36.8 24.9 20.3 5.9 5.8 4.1

Chinas logistic operator

598 HK Sinotrans 2.42 10,283 11.7 9.3 8.3 1.2 1.1 1.0 10.1 11.6 12.0 3.1 3.6 4.4152 HK Shenzhen Intl 0.85 12,085 11.0 8.3 14.7 2.0 1.6 1.4 18.2 19.4 9.7 4.5 7.3 2.8

Average 11.4 8.8 11.5 1.6 1.3 1.2 14.2 15.5 10.8 3.8 5.4 3.6

Note: Closing price as of 3 March 2008Source: Bloomberg; CCB Intl Securities


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Financial SummaryIncome statement forecasts Balance sheet forecasts

FYE 31 Dec (RMBmn) 2006 2007F 2008F 2009F

Total revenue 50,994 112,771 134,902 137,210

- dry bulk shipping - 51,195 64,859 55,601

- container shipping 40,033 47,069 53,365 62,654

- container terminal 232 373 463 558

- container leasing 1,797 2,349 2,669 2,986

- logistic & others 10,167 11,784 13,546 15,411

Cost of services (46,020) (81,180) (93,729) (98,995)

Gross profit 4,974 31,591 41,174 38,215

Administrative expenses (2,910) (7,041) (7,888) (7,906)

Other income, net 1,732 879 300 346

Share reform (440) 120 0 0

Operating profit 3,356 25,548 33,586 30,654

Profit from JCEs/assos 1,450 1,610 1,719 1,884

EBIT 4,806 27,158 35,305 32,538Finance costs, net (714) (1,429) (1,294) (499)

Profit before tax 4,092 25,729 34,011 32,039

Income tax expense (924) (4,631) (6,632) (6,728)

Net profit 3,168 21,098 27,379 25,311

Minority interests (1,137) (1,080) (1,561) (1,164)

Net attributable profit 2,031 20,018 25,818 24,146

Dividends (1,489) (3,023) (4,647) (5,071)

EPS (RMB) 0.330 1.964 2.527 2.364

DPS (RMB) 0.242 0.297 0.455 0.496

BVPS (RMB) 3.076 4.392 6.737 9.022

FYE 31 Dec (RMBmn) 2006 2007F 2008F 2009F

PP&E 26,401 31,991 44,129 55,959

Intangible assets 129 242 268 295

Long-term investments 10,995 20,425 26,757 30,117

Other non-current assets 598 1,143 1,257 1,382

Total non-current assets 38,123 53,801 72,411 87,754

Inventories 602 736 920 1,030

Trade receivables 8,924 12,500 10,625 10,838

Other receivables 11 8 7 8

Derivative fin. instruments 5 1 1 1

Cash and cash equivalents 7,796 28,129 36,462 38,341

Current assets 17,338 41,373 48,014 50,217

Total assets 55,460 95,174 120,425 137,971

Trade and others payable 11,370 14,045 16,573 19,059

Short-term borrowings 6,159 10,136 7,651 4,740

Derivative fin. instruments 431 339 288 274Tax payable 235 278 300 322

Current liabilities 18,195 24,798 24,813 24,396

LT borrowings 8,947 15,025 14,225 7,025

Other LT liabilities 841 1,005 1,098 1,161

Non-current liabilities 9,788 16,030 15,323 8,186

Total liabilities 27,983 40,828 40,135 32,581

Net assets 27,477 54,346 80,290 105,390

Shareholders' equity 18,935 44,756 68,823 92,172

Minority interest 8,541 9,590 11,467 13,218

Net assets 27,477 54,346 80,290 105,390

Financial ratios Cash flow projections

FYE 31 Dec (%) 2006 2007F 2008F 2009FGross margin 9.8 28.0 30.5 27.9

Operating margin 6.6 22.7 24.9 22.3

EBIT margin 9.4 24.1 26.2 23.7

Pre-tax margin 8.0 22.8 25.2 23.4

Net margin 6.2 18.7 20.3 18.4

S&D/revenue 5.7 6.2 5.8 5.8

Effective tax rate 22.6 18.0 19.5 21.0

Dividend payout ratio 73.3 15.1 18.0 21.0

ROAE 7.5 48.9 38.4 26.0

ROAA 3.6 26.6 24.0 18.7

Current ratio (x) 1 1.7 1.9 2.1

Quick ratio (x) 0.4 1.1 1.5 1.6

Net debt/equity 26.6 Net cash Net cash Net cash

Inte rest coverage (x) 4.9 16.6 23.1 43.5Inventories days 4.8 3.3 3.6 3.8

Receivables days 63.9 46.7 32.5 32.4

Payable days 90.2 63.1 64.5 70.3

FYE 31 Dec (RMBmn) 2006 2007F 2008F 2009FPretax Profits 4,092 25,729 34,011 32,039 Adj: non-cash i tems (864) 118 6,454 4 ,373

Interest received 261 349 375 369

Tax paid (1,843) (4,527) (6,575) (6,657)

Net cash from operating 1,646 21,669 34,265 30,124

Capex & investment (5,859) (15,250) (18,731) (15,448)

Investment income & 7,890 1,995 177 349

Net Cash from Investing 2,031 (13,255) (18,554) (15,099)

Equity raised/ (repaid) 0 22,881 0 0

Change in borrowings (1,826) (8,915) (3,284) (10,111)

Interest expense (881) (1,325) (1,225) (599)

Dividends & d is tr ibutions (2,686) (2,740) (1,863) (1,220)

Others (383) (839) (931) (1,166)Net Cash from Financing (5,775) 9,063 (7,303) (13,096)

Net change in cash (2,098) 17,477 8,408 1,929



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China Shipping Development (1138 HK): Solid growth prospects

Better growth visibility. Relatively immune from US recession and global

trade slowdown, CSD is nearly 70% exposed to buoyant domestic shipping

market. CSD is better sheltered from the volatile shipping cycle than its

domestic shipping peers, given that: (1) CSD has locked-in over 80% of itscurrent capacity by COA contracts, mainly on a freight rate plus fuel charges

basis, which could potentially protect its profit margins and earnings. We

expect COA contracts to generate 90% of its total revenue by FY09; (2)

CSD has secured a 40% yoy rate improvement in its renewed 2008 coastal

coal contracts to contribute 65% of its FY08 revenue; (3) occupying 70%

and 30% of Chinas coastal oil and coal shipping market, CSD is likely to

sustain its leadership in domestic market and continues to enjoy a stronger

pricing power as compared to its peers.

Favorable industry outlook. Strong electricity consumption and easing

coal-rail bottleneck shall drive robust coastal coal shipping demand. We

expect costal coal shipment to remain strong throughout 2010 and overall

costal shipping rate to grow at 10~15% yoy during 2008 to 2009. Further,

the phasing-out of single-hulls during late 2008 to 2009 is likely to

accelerate, which may ease current tanker oversupply. We expect CSDs

VLCC rate to see a 5% yoy improvement in 2009.

Robust earnings CAGR of 40.0% over FY06 to FY09F. We forecast

earnings to grow by 71.4% yoy in FY07 to be boosted by acquisition of 42

bulkers and disposal gain from old tankers, and we forecast earnings to

maintain strong growth at 20~25% yoy over FY08 to FY09, on the back of:

(1) strong capacity expansion at 50% yoy for tanker and 10% yoy for

dry-bulk fleet in 2009, as 6 VLCCs and 1 VLOCs will be delivered; (2) strong

coal contract rate increment at 28.5% and 9.5% yoy during FY08 and FY09;

(3) Improving operating margins and fleet return, thanks to the rising freight

rate and efficient cost control. We expect CSDs market share in coastal

coal shipping market to improve from current 30% to 35% by FY09.

Target price at HK$31.0. Our valuation of CSD translates into a 15.0x 08F

PER, as compared to our valuation of Chinese bulk carriers at 11.0x 08F

PER. The 35% premium is justified by its defensive business mix and

buoyant industry outlook. Our target price is also well supported by our DCF

valuation of CSD at HK$37.66.

Key risks factors to CSD include state governments macro control to

slowdown energy demand, significant BDI correction and significant change

of current contract model.

Financial Summary


Turnover 9,575 12,658 16,490 20,883EBIT 3,431 5,763 7,538 9,659

Net profit 2,759 4,752 6,068 7,602

EPS (RMB) 0.829 1.420 1.814 2.272

y-o-y chg (%) 2.4 71.4 27.7 25.3

PER (x) 27.3 15.9 12.5 9.9

Yield (%) 1.3 2.0 2.6 3.5

ROAE (%) 23.5 30.8 28.9 28.5

BVPS (RMB) 3.787 5.468 7.076 8.867


China Shipping

Outperform (initiate)


Share data





52-wk hi/lo 27.20/9.63



China Shipping Group 47.5

Davis Selected Ad# 7.2

JP Morgan# 4.9

# H-share only


Source: Bloomberg

Market data

HSI Index 23,584

HSCEI Index 13,439

HSCCI Index 5,282

2008F 2009F



Source: Bloomberg


Source: Bloomberg

Wang Ren

[email protected]

(852) 2532 6749


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Strong organic growth

CSD, which has the highest exposure to domestic shipping market, is better

sheltered from global economic slowdown and the BDI cyclicity. Coastal shipping

continues to be a key driver of CSD, contributing 69.5% of CSDs estimated FY08

revenue. Driven by a strong costal coal demand, CSD has secured a 40% yoy

freight rate increment in its FY08 coastal coal contracts and we expect a further 10%rate improvement in its FY09 contracts. Further earnings upside may come from its

rapid expansion into ore import shipping and potential turnaround of global tanker

market during late 2008 to 2009.

Revenue breakdown by shipping business (FY08F)


Robust earnings momentum at CAGR of 40.0% between FY06 to FY09F

We forecast a 71.4% yoy earnings growth in FY07, thanks to full-year profit

contribution from its 42 bulkers acquired from its parent and disposal income from

old tankers. We expect earnings to maintain strong growth at 25~28% yoy over

FY08 and FY09 respectively, to be boosted by improving freight rate and aggressive

fleet expansion.

Optimistic industry outlook. We expect CSDs domestic coal shipment to rose

7.0~12.5% yoy with average contract rate up by 40~10% yoy between FY08 to

FY09, to be fueled by robust coastal coal demand and strong coal-rail expansion.

Further, the phasing-out of single-hulled tankers between late 2008 to 2009 is likely

to ease current oversupply. We expect CSDs VLCC rate to see a 5% yoy

improvement in 2009.

Key performance statistics for CSD

Growth (yoy %) FY06 FY07F FY08F FY09F

Business volume

Domestic coal 4.7 69.3 7.0 12.5

International coal 4.8 36.1 15.0 12.5

Domestic oil 0.2 (20.7) 6.3 4.6

International oil 19.1 16.5 5.0 28.0

Average contract rate

Domestic coal 9.0 11.4 40.0 10.0

International coal 8.9 16.0 15.0 5.0

Domestic oil 4.0 13.9 6.3 10.5

International oil 3.7 (24.0) (2.5) 5.0


Domestic

market, 69.5%

Int'l oil shipping,

17.0%

BDI-related int'l

bulk, 13.4%

13.4% exposed to BDI index

Strong VLCC delivery in 2009~2010 to rideon tanker market turnaround


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Market leadership to be strengthened. Currently, CSD occupies about 70% and

30% of China coastal oil and coastal coal shipping market respectively, in terms of

business volume. We expect CSD to maintain its coastal oil market share for the

next few years and strengthen its coastal coal market share to 35% by FY09, given

its rapid fleet growth, close business tie with customers and strong government

support as witnessed by its recent strategic agreement with Guangdong MunicipalGovernment. Under the agreement, CSD will become a key shipper to transport

coastal coal to major power plants based in Guangdong during 2008 to 2010.

Currently, 80% of Guangdongs coal trading are transported by sea.

Fleet expansion to sustain growth. Based on current fleet expansion plan, CSDs

tanker and bulk capacity is expected to grow at CAGR of 20% and 10% respectively

from 2007 to 2010, upon delivery of 8 VLCCs and 4 VLOCs during 2009 to 2010.

We estimate CSD to locked-in about 96% of its 2009 capacity by long-term contracts

with key oil and steel makers in China. We forecast a 25.3% yoy growth in FY09

earnings, to be driven by strong VLCC delivery in 2009 and the potential tanker rate

recovery.

Favorable contract terms to protect margins. CSDs signed COA contracts were

mainly based on a freight rate plus fuel charges. Under such contract terms, CSDshall protect itself from a significant freight rate and bunker volatility. We expect both

GPM and OPM to see good improvement over FY07 to FY09, on the back of rising

coal freight rate and efficient cost control, but ROE may decline slightly to 28.5% by

FY09 on rising capex. Net gearing is expected to maintain at low level of 5.3% as in

FY09, but we expect the company may gear up in FY10 and onwards, due to its

huge capex needs.

Key contracts to sustain growth

Key customer Segment Contract term Volume

Shougang (000959 CH) Intl iron ore 2H09~2019 37mn tons

Baosteel (600019 CH) Intl iron ore 2010~2020 37mn tons

Wuhan Steel (600005 CH) Intl iron ore 15~20 years 170mn tons

Sinopec (0386 HK) Intl oil 2H06~1H16 10~12mn tons by 2010

Shenhua (1088 HK) Coastal coal Set up a 50/50 JV 1mn tons by 2010

Guangdong provincial gov. Coastal coal 2008~2010 Volume not specified


CSDs capacity expansion Improving profitability


3.40 3.69 3.735.67 6.31

3.555.16 5.22

5.646.52

0

3

6

9

12

15

2006 2007F 2008F 2009F 2010F

(mn DWTs)

Tanker capacity Dry-bulk capacity

Total capacity to grow at 16.6% CAGR

over FY06 to FY10F

5.3%

10.8%

15.5%

21.7% 47.2%

36.4%

28.9% 28.5%

35.3%

43.8%46.2%

36.8%37.5%

28.8%

23.5%

30.8%

0%

5%

10%

15%

20%

25%

2006 2007F 2008F 2009F

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Net gearing GPM NPM ROE

Expanding market share in coastal coalshipping market

Key beneficiary of Chinas strategy to boostdomestic energy shippers


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Premium valuation warranted

We value China dry-bulk carriers at 12.0x 08F PER, which represents a 20%

premium to Asian dry-bulk carriers trading at an average10.0x 08F forward PER as

we believe domestic players have a huge room to expand their market share in

dry-bulk imports the industry policy. We believe CSD deserves a premium valuation

at HK$31.1, or 15x 08F forward PER, given its higher earnings visibility ascompared to peers.

We also used DCF model to underpin our valuation as we believe CSDs COA

contracts shall continue to provide stable cash flow, visible business growth and

relatively sustainable profit margins for the next few years. Our DCF model valued

CSD at HK$37.66 based on the following key assumptions: (1) company beta of

1.4x; (2) we expect the company to maintain debt-to-equity ratio at 25% going

forward; (3) terminal growth of 2.5%.

Key risk factors to our valuation includes: (1) unexpected slowdown in coastal coal

shipment to be triggered by macro tightening or reducing coastal power generation;

(2) a collapse in BDI index to hurt market sentiment; (3) sluggish global tanker

demand to weaken CSDs VLCC return; (4) rising bunker costs and inability of the

company to pass through bunker costs in new contracts.

Sensitivity analysis

Change in assumptions Change in EPS

Corresponding year FY08F FY09F

Freight volume

-5% in domestic coal -3.1% -3.0%

-5% in domestic oil -0.5% -0.5%

-5% in other bulks -0.8% -0.7%

Freight rate

-5% in intl tanker rate -0.6% -0.8%

-5% in annual average BDI -0.9% -0.8%

Operating costs

+5% in bunker costs -3.8% -3.0%


Premium valuation supported by DCF model


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DCF valuation - 2008


(R M B m n) FY 07 F F Y 08 F F Y0 9F F Y 10F FY 11 F FY 12F Term ina l va lue

E B IT 5,763 7,5 38 9 ,659 10 ,5 70 11 ,733 12 ,613

T ax ra te 14 .2% 17 .0% 1 9.0% 2 1.0 % 23 .0% 25 .0%

D ep recia tion 998 1,1 22 1 ,291 1 ,48 4 1,748 1,983

C ap ex 6,670 4,4 73 5 ,030 5 ,41 0 6,114 5,197

Increa se in ne t w orkin g cap ita l 520 97 5 1 ,088 707 460 391

F ree cash flow 10 ,098 8,6 32 10 ,474 11 ,569 12 ,940 12 ,282 11 5,288

P re se nt va lue N /A 8,6 32 9 ,235 8 ,99 3 8,869 7,422 69 ,667

D iscount facto r N /A 1.0 00 0 .882 0 .77 7 0.685 0.604 0 .604

T im e fac tor N /A 0.00 1 .00 2 .0 0 3 .00 4 .00 4 .00

Risk-free rate 5.0% Sensit ivity analysis on target price (HK$)

Beta 1 .4 LT g row th W A C C

Equity r isk premium 7.5% 12 .0% 1 3.0 % 13 .4% 14 .0% 1 5.0%

Cost of equi ty 15.5% 1.5% 39 .10 3 5.8 6 34 .71 33 .14 3 0.82

Cost o f debt 6.8% 2.0% 40 .48 3 6.9 8 35 .75 34 .06 3 1.58

Effect ive tax rate 25.0% 2.5% 42 .01 3 8.2 0 37.66 35 .06 3 2.41

After tax cost of de bt 5.1% 3.0% 43 .72 3 9.5 5 38 .11 36 .15 3 3.31

Capital structure 3.5% 45 .62 4 1.0 4 39 .47 37 .34 3 4.28

Debt % 20.0%

Equi ty % 80.0%

W A C C 13.4%

Long- term growth 2.5%

N P V 1 12 ,819

C ash at hand 1,64 3

T ota l deb t 4,20 0

C om pany va lua tion 110 ,2 61

N um ber o f sh ares 3,34 6

Fai r va lue (RMB ) 32.95

E xcha nge 1 .14

Fai r va lue (HK$) 37.66


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Financial SummaryIncome statement forecasts Balance sheet forecasts

FYE 31 Dec (RMBmn) 2006 2007F 2008F 2009F

Total revenue 9,575 12,658 16,490 20,883

- Oil shipping 5,280 4,713 5,034 6,346

- Coal shipping 3,415 6,317 9,352 11,526

- Other dry-bulk shipping 880 1,628 2,104 3,011

Operating costs (6,194) (7,111) (8,879) (11,028)

Gross profit 3,381 5,547 7,611 9,855

Other income, net 273 473 215 137

Administrative expenses (224) (257) (289) (333)

Operating profit 3,431 5,763 7,538 9,659

Profit from JCEs/assos 0 0 0 0

EBIT 3,431 5,763 7,538 9,659

Finance costs, net (129) (224) (226) (274)

Profit before tax 3,302 5,539 7,311 9,385

Income tax expense (543) (787) (1,243) (1,783)Net profit 2,759 4,752 6,068 7,602

Minority interests (3) 0 0 0

Net attributable profit 2,756 4,752 6,068 7,602

Dividends 998 1,521 1,942 2,661

EPS (RMB) 0.829 1.420 1.814 2.272

DPS (RMB) 0.300 0.455 0.580 0.795

BVPS (RMB) 3.787 5.468 7.076 8.867

FYE 31 Dec (RMBmn) 2006 2007F 2008F 2009F

PP&E 15,079 21,749 26,223 31,252

Intangible assets 20 7 5 5

Long-term investments 5 4 4 3

Other non-current assets 45 39 35 33

Total non-current assets 15,149 21 ,799 26,267 31,294

Bunker inventories 202 180 180 125

Trade receivables 428 566 737 934

Other receivables 620 270 200 150

ST investments 160 220 180 150

Cash and cash equivalents 664 1,514 1,643 2,792

Current assets 2,074 2,750 2,940 4,151

Total assets 17,224 24,549 29,207 35,445

Trade payables 227 318 365 435

Short-term borrowings 1,507 1,050 850 850

Other payables 869 1,387 750 788Tax payables 56 60 65 80

Current liabilities 2,658 2,815 2,030 2,153

LT borrowings 1,888 3,300 3,350 3,500

Other LT liabilities 80 138 150 125

Non-current liabilities 1,968 3,438 3,500 3,625

Total liabilities 4,627 6,253 5,530 5,778

Net assets 12,597 18,296 23,677 29,667

Shareholders' equity 12,597 18 ,296 23,677 29,667

Minority interest 0 0 0 0

Net assets 12,597 18,296 23,677 29,667

Financial ratios Cash flow projections

FYE 31 Dec (%) 2006 2007F 2008F 2009FGross margin 35.3 43.8 46.2 47.2

Operating margin 35.8 45.5 45.7 46.3

EBIT margin 35.8 45.5 45.7 46.3

Pre-tax margin 34.5 43.8 44.3 44.9

Net margin 28.8 37.5 36.8 36.4

Bunker/operating costs 41.8 41.9 41.9 42.2

S&D/revenue 2.3 2.0 1.8 1.6

Effec tive tax rate 16.4 14.2 17.0 19.0

Dividend payout ratio 36.2 32.0 32.0 35.0

ROAE 23.5 30.8 28.9 28.5

ROAA 18.0 22.8 22.6 23.5

Current ratio (x) 0.78 0.98 1.45 1.93

Quick ratio (x) 0.25 0.54 0.81 1.30

Net debt/equity 21.7 15.5 10.8 5.3Interest coverage (x) 26.7 25.7 33.3 35.3

Inventories days 11.9 9.2 7.4 4.1

Receivables days 16.3 16.3 16.3 16.3

Payable days 13.4 16.3 15.0 14.4

FYE 31 Dec (RMBmn) 2006 2007F 2008F 2009FPretax Profits 3,302 5,539 7,311 9,385

Adj: non-cash i tems 384 1,123 (44) 960

Interest received 129 224 226 274

Tax paid (448) (804) (1,249) (1,799)

Net cash from operating 3,367 6,082 6,244 8,820

Capex & investment (4,588) (6 ,719) (4,473) (5,029 )

Investment income 142 285 190 142

Net Cash from Investing (4,446) (6,434) (4,283) (4,887)

Equity raised/ (repaid) 0 0 506 0

Change in borrowings 1,719 2,955 (150) 150

Interest expense (185) (207) (232) (260)

Dividends & d is tr ibutions (998) (1,521) (1,942) (2,661)

Others 0 0 0 0Net Cash from Financing 537 1,228 (1,818) (2,770 )

Net change in cash (543) 876 143 1,163



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China Shipping Container Lines (2866 HK): Vulnerable industry outlook

Weak global demand. Container market outlook is likely to deteriorate

triggered by the weakening global trade demand. Transpacific line is

expected to remain flat over 2008 but is likely to see revival in 2009 while

increasing supply could shorten the freight rate recovery in Asia/Europeroute. We are cautious with CSCL given its high leverage to Chinas export

to US and Europe and increasing exposure to spot market, i.e. 90% of its

FY08 Asia/Europe capacity shall be on spot market.

Flat container rate. We forecast CSCLs overall container rate to remain

flat in FY08 and grow by 5% yoy in FY09, based on: (1) transpacific rate to

decline by 7.5% yoy in FY08 despite regional liners effort to introduce new

bunker surcharge program and raise transpacific rate. We question the

effectiveness of possible rate hike due to the potential declining load factor;

(2) A/E rate to drop by 2.5% in 2008 and pick up by 2.5% yoy in FY09.

strong A/E rate recovery during 2007 could be short-lived as increasing

capacity reallocation from transpacific route to A/E route may lead to

oversupply; (3) robust demand in domestic container market to drive

domestic container rate up by 12~10% yoy over FY08 to FY09. We expect

CSCL to maintain its leadership in domestic market with a share of

approximately 45%.

Vulnerable earnings outlook over FY08~09. We forecast FY07 earnings

to grow at 142% yoy on the back of strong A/E rate recovery and improving

margins, but we are cautious with its FY08~FY09 earnings prospects. We

expect FY08~09 earnings to grow at CAGR of 13.6%, mainly driven by new

vessel deliveries. Furthermore, increasing operating costs, mainly bunkers,

port and railroad charges, could further undermine its earnings outlook.

Fair valuation at HK$3.68. We valued CSCL at 1.0x 08F PBR, which

represents a 10% discount to Asian liners given its increasing exposure to

spot market. We believe CSCL is fairly valued at current price level andfurther upside may come from acquisition of container-related assets from

its parent.

Key risks to our valuation includes: (1) high volatility in container rate in

transpacific and A/E line; (2) compared to other Chinese shipping counters,

CSCL is the most sensitive to bunker costs which accounts for about 25% of

its total operating costs; (3) accelerating RMB appreciation to undermine

CSCLs earnings prospects as it has the largest currency mismatch

compared to domestic peers.

Financial Summary


Turnover 30,502 39,003 43,659 51,019

EBIT 1,677 4,447 4,702 5,600

Net profit 859 3,364 3,729 4,342

EPS (RMB) 0.119 0.288 0.319 0.372

y-o-y chg (%) (80.0) 142.4 10.8 16.4

PER (x) 27.0 11.1 10.0 8.6

Yield (%) 1.0 11.6 2.6 3.2

ROAE (%) 5.2 13.0 9.9 10.3

BVPS (RMB) 2.290 2.219 3.215 3.622


China Shipping

Neutral (initiate)


Share data





52-wk hi/lo 10.88/1.57



China Shipping Group 47.9

Baring Asset Mgmt# 4.8

Cheung Kong (0001 HK)# 4.1

# H-share only


Source: Bloomberg

Market data

HSI Index 23,584

HSCEI Index 13,439

HSCCI Index 5,282

2008F 2009F



Source: Bloomberg


Source: Bloomberg

Wang Ren

[email protected]

(852) 2532 6749


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Vulnerable earnings outlook over FY08~09

Global container rate continued to rebound since 2H06, largely triggered by a

lower-than-expected supply. Particularly in Asia/Europe route, CSCL enjoyed a

37.7% yoy rate hike during FY07 in its Asia/Europe route, while incre

china shipping industry

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