To some, 'defensive' can be a bad word. But we care moreabout absolute performance than abstracts. We have been 'equalweight shipping'from  the time we put out the  first reportsin this series in  mid-2011 because thereare so many subsectors, and many listed companies remain compromised. Our #1choice is to buy underlying vessel assets for certain vessel types, and not somuch to encourage investors to buy shipping shares without considering legacyissues such over-priced vessel purchases, poor timing on business scale-up orlegacy debt financing still unresolved. Certain tankers may be good investmentsat the bottom, but BLT may not have been the best investment choice. Havingsaid this, individually, certain well-managed container, tanker or bulkshipping companies may be worth looking at more closely now (which is why wewere not negative either in mid-2011).

When we started our shipping sector updates in September2011, we highlighted a penchant for ports and our general interest there. Whatwe found to begin with was that HPH, though initially over-priced during itsIPO,  presented some value in 2H11, whichJason Saw flagged in his BUY reports in 4Q11. More recently, on 13 March 2012,Stenning Ho made an investment case for COSCO Pacific shares.

1) Ports can be seen in a portfolio perspective made upmostly of med-cap names, with small caps in smaller proportion

2) The larger cap ports have been making good money sincethe 4Q11 lows, generally 30+% up to about 50%

3) Dividend yields annualized on these choices are 5+ % fromtime of investment.

1) What are forward drivers of global growth?

2) What is Asia's and China's role in the global growthpicture?

3) What multiple expansion/contractions lie ahead? (will themarket break out further?)

4) What equity premium/discount should ports get in afalling/rising market?

5) What are new growth avenues for key players?

We can answer or have views on global growth drivers andcompany specific issues, but we can't call the market, with the generalexception that directionality has been that we have been in an upward re-ratingphase, benefitting from stimulative growth policies and over-priced bonds andcash with low/no yield. So at a minimum, our no-brainer strategy last year wasthat although 'defensive' might not offer high risk, high upside for a recovery(which no one really wanted to call in Aug-Sept, though they got around tobecoming more bullish by Dec 2011, and then again head-on bullish in 1Q11), atleast we had a low risk path to decent returns in ports.

1) Global growth remains subdued in terms of containerizeddemand. The US is better while Europe is a little more mixed. No real change toprevious view. 2012  growth could be4-7%. Initial post Chinese New Year data if using only Jan-Feb is distorted. Chinaexports were weaker than expected while imports were  stronger than expected (especially in weak dollar/highcommodity price terms). Since China exports is what we care about forcontainers, our 4-7% view still stands. BUT we also expect China's March 2012data to be a little better than Jan-Feb. Shanghai at about +3.5% Jan-Feb saysvirtually nothing. If March is not better, then we will be more worried. ChinaPorts continue see softer growth on an aggregated level. The big ports are notgrowing as fast, and the fast growing ports such as Lianyungang are not bigenough to pull up the average that much. In 2011, China's core ports grew about9% and the China total was about +12%. Global port TEUs (still an estimate), onthe other hand, grew closer to 8-9%, while the Top 25 ports grew +8.6% in 2011.China's premium was 3-4ppt. In 2012, this spread could be a little closer to 2ppts. Investors have realized this for a little while, especially given that weare now in Year 3 of writing about: i) higher wages for factory workers, ii)migration inland and iii) general disaffection of the Chinese workforce, asseen through protests and refusals to return post CNY holidays. Growth hasslowed.  Container terminal export growthdrivers have come down to global growth levels at a time when China makes up28% of global container trade (Greater China 34% of global container trade).

2) We can't predict the future, but we can see that some ofthe larger port companies  are  competing with conglomerates and property ingeneral  for investors' attention. Butsince the message is China property is not looking as good, some have looked toports again. If there were to be a re-rating of property with an overall marketrally, then this could hurt some ports on a relative basis at the time'

3) 'Plastics' was the famous line in the 1967 film, 'TheGraduate''. For us it is Logistics. But to be more specific, we have been onfor some time about inland logistics in China. Port players have an opportunityto growth inland. They know it and are working on it. Long term returns onlogistics, given the lower asset bases, can be higher than those from the assetintensive businesses. But what is key is probably a mix and core investments innetworks, which can be intangible. With about 18% of China's GDP coming fromlogistics, there is room i) for China to shrink the overall cost of transportas a percent of the cost to get China moving, and  ii) for first movers to add value byincreasing efficiency and reducing inland transport costs. Given that China's18% spend on logistics is some 2x higher than Japan, Europe and the US, Chinashould be handing out prizes to companies which come up with the best transportsolutions (let's set aside the recent setbacks in Chongqing as a blip in  one of the inland success stories). Leadingports need to provide new growth stories to bring new trading levels, absentglobal growth going to 10%.

Source: OSK188