Source: Zhitong Finance

With a rise of more than 35% in the past 20 trading days, the Hong Kong stock shipping sector seems to have sounded the “king of cycles” again.

On May 13, the shipping sector strongly boosted by nearly 5 points, leading the upward sector. The next day, the shipping sector strengthened again, rising 0.7%. Looking at the long-term timeline, since April 19, in just 19 trading days, the shipping sector has accumulated a cumulative increase of more than 35%, which once ignited enthusiasm for investment in the secondary market. Among them,$COSCO SHIP HOLD (01919.HK)$Furthermore, through the rise over the past few days, the market value once again broke through the “mark” of 200 billion dollars.

Market Source: Futu

However, just as everything has “two sides”, the continuous rise in shipping conditions this time also has “two sides” that cannot be ignored.

The shipping sector is “positive”: valuation is rising, and the freight rate center is increasing

As a typical cyclical industry, the shipping industry was once regarded by the outside world as the “king of cycles”. Behind its fluctuations, various factors such as the freight market, the ship trading market, the shipbuilding market, and the shipbreaking market are compounded. However, the shipping industry is starting to rise this time, and it is also inseparable from the resonance of many markets.

First, the protracted conflict in the Red Sea has strained the supply chain.

Since mid-December 2023, most shipping companies have suspended traffic to the Red Sea and the Suez Canal to bypass the Cape of Good Hope. After the detour, the flight time became longer, effective capacity was passively reduced, and European and American freight rates rose sharply. However, the protracted conflict in the Red Sea has undoubtedly further strained the supply chain. On the one hand, ship detours have led to an increase in transportation distance, effectively increasing the demand for shipping capacity and absorbing existing capacity; on the other hand, the decline in ship turnover efficiency has led to tight container turnover in ports, further exacerbating supply chain tension.

According to Clarksons data, if you avoid the Red Sea and choose a detour, the route distance and number of sailing days will be greatly increased. Take the Far East to Europe as an example. The number of days to sail around the Cape of Good Hope is about 36 days, which is an increase of about 8 days compared to the route through the Suez Canal, and the flight distance will increase by about 29%.

Second, the margins on the demand side are improving, compounded by demand for stocking during peak seasons.

Specifically, marginal improvement on the demand side of shipping is also a major factor driving the rise in freight rates. The positive demand side of shipping is mainly reflected in two aspects. First, there is a marginal improvement in macroeconomic data from Europe and the US. According to the Eurozone ZEW Economic Sentiment Index for April, which was previously announced, it reached a new high of nearly 26 months; second, due to the lengthening of transit times due to detours, compounded expectations of rising freight rates during the peak season, cargo owners prepared goods ahead of schedule. According to Tianfeng Securities estimates, detours on routes from the Far East to Europe will drive a 5.27% increase in global demand for box-nautical mile transportation.

Meanwhile, along with the recovery in demand for overseas inventory replenishment, domestic export volumes are also showing strong performance. 1Q24's container traffic increased 10.5% year on year. Among them, cargo volume on US lines/European routes/Asian routes showed a year-on-year performance of +9.7%/-9.2%/+14.4%. Since March of this year, the weekly container throughput of Chinese ports has been the highest in nearly 3 years.

In addition to this, since the US line has entered a critical period of signing the Changxie contract, shipping companies are motivated to increase prices.

According to reports, recently several liner companies have successively adjusted surcharges for peak season routes between Asia and Africa. Furthermore, moving forward along the timeline, several shipping companies have announced price increases since May. At the beginning of the month, Dafei and Hapag-Lloyd adjusted freight rates for routes such as Asia - Northern Europe, Asia - the Mediterranean, and North Africa. Taking Dafei as an example, the new FAK standards for the Asian-Nordic route are 2,700 US dollars/TEU and 5,000 US dollars/FEU. The new standard increases are 500 US dollars/TEU and 1,000 US dollars/FEU.

From the above, it can be seen that it is the multiple factors above that support the continuous rise in freight rates, which in turn ignite the enthusiasm of the secondary market to invest in shipping stocks.

The “opposite” of the shipping sector: profit under pressure, reversal or continuation?

Compared to the strong performance of rising valuations, the “opposite” of the shipping sector seems to be: performance is declining, and profits are under pressure.

The Zhitong Finance App observed that most of the 2023 shipping industry performance showed a decline in net revenue and profit. Of the 12 Hong Kong shipping stocks counted, only 5 shipping companies achieved a double increase in performance in 2023. The remaining several shipping companies all showed a downward trend in their performance, including leading shipping stocks such as China Transport Maritime Control and China Merchants Port, which have large revenue scales.

Data source: choice

According to reports, the overall poor performance of the shipping sector in 2023 is mainly due to international conflicts interfering with shipping prices and shipping demand, and the fact that the situation in the Middle East in 2024 is still sharp and adds uncertainty to the industry. Take COSCO Marine Holdings as an example. The decline in the company's overseas market revenue during the period was the main reason for the decline in overall performance.

Specifically, COSCO Maritime Control has two major businesses, namely container shipping business and terminal business. The former accounts for 95.8% of revenue, while the latter accounts for 4.2%. The container shipping business market covers China, America, Europe and the Asia-Pacific region. Among them, Europe and America are the main markets, but revenue declined by 64.1% and 65% respectively in 2023, leading to a 56.2% decline in overall business revenue.

In view of this, COSCO Maritime Control has also begun to actively adjust its market strategy, focusing on emerging markets. During this period, it received a total of 6 24,000 TEU environmentally friendly container ships and 1 14,000 TEU Latin American extreme container ship, with a total capacity of nearly 160,000 TEUs, which were invested in the Asia-Europe route and the emerging market route respectively. In addition, the company has also successively developed Europe-South America Eastern routes and multiple routes to RCEP member countries to diversify international risks.

Looking back at the shipping port market in 2023, there was a conflict between industry segment demand and capacity. Global shipping trade volume increased by 3% and remained at a low level. For example, in the container sector, according to statistics from consulting agency Drewry, global container transportation demand increased by 0.4%, but global container capacity increased 8% year over year, and the market faced high supply-side pressure, which also confirmed the sharp decline in COSCO Maritime Control's performance. On the price side, due to multiple factors such as geographical conflicts, inventory, and demand, the prices of different types of transportation routes are nonlinear and fluctuate greatly, which also has a significant impact on performance.

However, it should be noted that since entering 2024, the Red Sea bypass problem has continued to ferment and push the shipping market into an upward cycle, and the continued rise in freight rates has obviously also had a certain positive effect on the performance of shipping stocks.

The Red Sea detour has led to an increase in demand for shipping containers. On the other hand, in the context of high concentration, the industry is more willing to raise prices. Second, the main ship type on the European route is 17,000 TEU+, which accounts for about 6.0% of the capacity delivered in 2024, and the supply of additional capacity is limited. Shipping prices rose sharply in 2024. Year-to-date, the CCFI index averaged +20% year-on-year, and the SCFI index averaged +100% year-on-year.

In this context, there was also a marked improvement in the performance of shipping stocks in the first quarter of 2024.

In the first quarter of this year, global container ship capacity increased 9.6% year on year. Among them, European line capacity increased 8.6% year on year, and US line capacity increased 2.4% year on year. In the face of a significant increase in new supply, freight rates still recorded a significant year-on-year increase. The performance of this industry apparently also had an obvious positive feedback effect on the performance of shipping stocks.

According to statistics from Huachuang Securities, A-share listed companies in the shipping industry achieved a total net profit of 10.15 billion yuan in 2024Q1, an increase of 8.8% over the previous year. Among these, the vast majority of shipping stocks showed an improvement in performance. Of the 17 listed companies in the statistics, only 4 shipping stocks experienced a decline in net profit. From this, it can be seen that with the help of continuously rising freight rates, the profit pressure on shipping stocks has eased somewhat.

Regarding the above industry performance, the Shanghai International Shipping Research Center pointed out that overall, the operating conditions of China's shipping industry improved in the first quarter, and the confidence of shipping entrepreneurs in market operations increased dramatically. It is expected that the shipping market will continue to recover upward in the second quarter.

Looking back, Shen Wan Hongyuan believes that the continuation of the Red Sea detour has exceeded expectations, compounded by the recent recovery in exports, leading the South American route, and the sharp rise in European and American routes. European futures reflect the linkage of futures stocks in the global shipping sector. Although there are sufficient orders for large container ships and new ships. If the Red Sea detour is completed, there is a lot of downward pressure on freight rates, but this is already partly reflected in the valuation. Considering that shipping prices have recently exceeded expectations, judging from subsequent cargo volumes, the agency believes that the traditional peak season in July-September has not yet begun, and it is highly certain that prices will continue to rise in May-August based on current levels.

However, Zhitong Finance has observed that a large number of newly built container ships will be delivered in 2024, with a large number of deliveries in the first half of the year. The increase in container ship capacity may reduce capacity due to circumvention. Meanwhile, in an environment of high US dollar interest rates, the global economy

Growth is likely to continue at a low rate, or even decline in growth rate, thereby dragging down the growth of shipping demand. The above factors may put some pressure on freight rates at that time, so investors cannot blindly chase up the market. It is recommended to focus on sector leaders and stable targets with high dividend payout rates.