Their Shares Are Shipshape
Big Chinese Container Makers
Have Room for Continued Growth
By MARY KISSEL
Staff Reporter of THE WALL STREET JOURNAL
February 1, 2005; Page C16
HONG KONG -- There is still time to load up on shares of the two biggest makers of shipping containers, analysts say.
Since the beginning of 2003, China International Marine Containers (Group) and Singamas Container Holdings have given investors an enjoyable ride. Shares of CIMC, as the company with about 50% of the world market is known, have rocketed 320%. Shares of Singamas, which has about 30% of the market, have surged 197%.
Analysts consider the Chinese companies a duopoly in the business of making 20-foot equivalent units, also known as TEUs, the most common box type of container. They say the companies, benefiting from industry consolidation and growing world trade, should do well again this year.
While it is unlikely the shares can repeat their recent gains, analysts say they could rise between 10% to 20% for 2005, compared with predictions of single-digit returns in global stock markets.
"In this industry you've only got two players, they have pricing ability," and despite competitive pressures, they have managed to pass steel price increases on, says Louisa Lo, a fund manager at Schroder Asset Management in Hong Kong. "They benefit from the economy of scale."
The Chinese duopoly was quick to capitalize on buying opportunities in the wake of the 1997-98 Asian financial crisis. As container makers in once-dominant South Korea fell into bad financial straits, the two snapped them up. The Chinese companies diversified their product range and gained powerful market positions.
While the container industry was consolidating, trade links between China and the U.S., the current engines of world trade, were strengthening. Beijing's entry into the World Trade Organization in 2001 encouraged more companies to set up shop in China, assemble goods and transport them to U.S. consumers. The cycle remains strong, as does China's growth: Beijing announced last week that China's economy grew 9.5% year to year in the fourth quarter. That was significantly higher than many economists estimated, though few expect China's growth to continue at that pace.
Last week CIMC, based in Shenzhen, said its 2004 net profit likely would be 31/2 times the 2003 figure, thanks to better sales volume and higher container prices. CIMC shares trade in U.S. and Hong Kong dollars on the Shenzhen Stock Exchange. Singamas, which is based and listed in Hong Kong and trades in Hong Kong dollars, will release its annual results the week of March 21.
"It's been one of the best shipping cycles in 20 years," says Christopher Lee, an associate director at Standard & Poor's Asian-Pacific Equity Research in Hong Kong.
The heady run hasn't been without hiccups. Container makers rely heavily on steel to produce their products, and the metal accounts for a big chunk of a box's final selling price. So a jump in global steel prices early last year tested CIMC and Singamas.
CIMC, because of its potent market share, managed to pass through price increases to its customers, but Singamas struggled to do the same and saw its profit margins narrow. Mr. Lee expects Singamas's operating margins -- which average about 6% to 7%, compared with CIMC's 16% -- to improve as the smaller company digests recent acquisitions and raises productivity.
In the longer term, some analysts fear that a slowdown in global economic growth could damp container orders. But the container makers have a hidden source of demand: a backlog of purchases from shipping lines. It can take a year and a half to deliver a small ship to a customer, and most companies order their containers at least three to six months in advance. Thus, even if economic growth rates trend down, analysts predict the increase in container demand will remain steady at about 11% a year over the next three years, compared with a historical average of 8%, based on the ship-construction pipeline.
"The container ship and box are like a car and its tire," says Michael Chan of investment bank BOC International in Hong Kong. "You can't have a car ready with no tires." Mr. Chan, who has an "outperform" rating on both stocks, expects CIMC to rise about 30% this year while Singamas gains about 25%.
Shipping-container companies also have benefited from a rise in the price of their product, which has mirrored the increases in steel, jumping to US$2,200 a container from about $1,400 in 2004, according to Smith Barney. Even if prices moderate this year, analysts don't expect a large decline in profit for CIMC and Singamas because they operate on a cost-plus basis, adding a commission after they buy steel at the market price. The companies can do this, market observers say, because of their duopoly.
CIMC and Singamas shares look inexpensive when compared with broader stock markets. According to S&P's calculations, CIMC and Singamas are trading at about nine and eight times, respectively, their projected 2005 earnings, compared with an average of about 16 to 18 times for the broader Hang Seng index.
"Before the China growth story, nobody paid too much attention to Singamas," says Winson Fong, deputy chief investment officer for Asia Pacific ex-Japan at SG Asset Management, a unit of Societe Generale SA of France. Mr. Fong bought Singamas shares in 2003 at about 1.50 Hong Kong dollars (19 U.S. cents) each; they closed yesterday in Hong Kong at HK$4.75. "We're comfortable to stay long Singamas," he says.
Write to Mary Kissel at mary.kissel@wsj.com
online.wsj.com
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This trend should benefit crns as well.
DKG |
