While NOL’s boost from the positive Chinese PMI data proved to be short-lived, recent data and developments within the industry remain supportive for the counter. According to the Shanghai Containerized Freight Index (SCFI), average rates are still up on a YoY basis despite continued weakness in the China-Europe and China-USA routes. In addition, average 4QCY12 bunker fuel prices have also fallen ~3.1% QoQ so far, a positive for operating margins. On the industry level, a few of the major container shipping lines have planned for rate increases, which could help alleviate the stress on profitability. This collective effort yields the most encouraging sign for NOL and we remain optimistic that the tacit agreement amongst liners follows through. Maintain BUY with an unchanged fair value estimate of S$1.38.
Boost from China PMI short-lived but investment case unchanged
China’s first manufacturing activity expansion in 13 months provided a short-lived boost for Neptune Orient Lines (NOL) last week, which saw its biggest gain in five weeks taper off subsequently. Nonetheless, recent data and developments remain encouraging and supportive for our BUY call on the counter.
Overall shipping rates holding up well despite weakness
According to the Shanghai Containerized Freight Index (SCFI), average overall 4QCY12 rates have fallen QoQ on the back of spot freight rate declines on the two regions most affected by the slump in global trade: China-Europe and China-USA (OIR estimated -21.5% and -7.8% QoQ respectively in terms of USD/TEU). While this is not unexpected given the seasonally weaker 4QCY12, rates on the other main routes – China-South America and Intra-Asia – have held up well on a QoQ basis and were mostly stable. In addition, rates across the board remained higher on a YoY basis. Average 4QCY12 bunker fuel prices have also fallen ~3.1% QoQ so far.
General rate increases in the works
Some wavering notwithstanding, a few of the major container shipping lines are planning general rate increases (GRI) to help soften the hurt from continued overcapacity issues ahead of the Lunar New Year period next year. For example, the Mediterranean Shipping Co. (MSC) plans to implement a US$600/TEU rate increase for the Asia-Mediterranean and Black Sea trade routes from 15 Dec. Similarly, the Transpacific Stabilization Agreement liners have also scheduled rate hikes on transpacific routes from 15 Dec.
Collective industry efforts encouraging
The collective effort by liners to coordinate rate increases sends a positive message that the industry is unwilling to tolerate further cuts to their profitability in order to maximize capacity utilization. While this is contingent on individual liners reining in market share ambitions, we remain optimistic for a tacit agreement and follow through. Maintain BUY on NOL with a fair value of S$1.38.
China’s first manufacturing activity expansion in 13 months provided a short-lived boost for Neptune Orient Lines (NOL) last week, which saw its biggest gain in five weeks taper off subsequently. Nonetheless, recent data and developments remain encouraging and supportive for our BUY call on the counter.
Overall shipping rates holding up well despite weakness
According to the Shanghai Containerized Freight Index (SCFI), average overall 4QCY12 rates have fallen QoQ on the back of spot freight rate declines on the two regions most affected by the slump in global trade: China-Europe and China-USA (OIR estimated -21.5% and -7.8% QoQ respectively in terms of USD/TEU). While this is not unexpected given the seasonally weaker 4QCY12, rates on the other main routes – China-South America and Intra-Asia – have held up well on a QoQ basis and were mostly stable. In addition, rates across the board remained higher on a YoY basis. Average 4QCY12 bunker fuel prices have also fallen ~3.1% QoQ so far.
General rate increases in the works
Some wavering notwithstanding, a few of the major container shipping lines are planning general rate increases (GRI) to help soften the hurt from continued overcapacity issues ahead of the Lunar New Year period next year. For example, the Mediterranean Shipping Co. (MSC) plans to implement a US$600/TEU rate increase for the Asia-Mediterranean and Black Sea trade routes from 15 Dec. Similarly, the Transpacific Stabilization Agreement liners have also scheduled rate hikes on transpacific routes from 15 Dec.
Collective industry efforts encouraging
The collective effort by liners to coordinate rate increases sends a positive message that the industry is unwilling to tolerate further cuts to their profitability in order to maximize capacity utilization. While this is contingent on individual liners reining in market share ambitions, we remain optimistic for a tacit agreement and follow through. Maintain BUY on NOL with a fair value of S$1.38.
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