We reiterate our NEUTRAL call on the Shipping & Ports sector. The shipping sector saw the formation of a new shipping alliance, dubbed ‘THE Alliance’, which comes only weeks after the announcement of “OCEAN Alliance” as shipping liners pool together to manage cost and increase efficiencies. Beneficiaries of THE Alliance include smaller shipping lines, while ports globally may see lumpy volumes should the liners keep consolidating. Among stocks under our coverage, we believe WPRTS will be able to accommodate most shipping liners requirements (i.e. larger cranes, longer berths and deeper waters) and could benefit in the longer run if they speed up CAPEX plans to accommodate increased volume. BIPORT and MISC are not overly affected by any shifts in such shipping alliances as they service mostly energy-related businesses for specific clients. Due to the lack of stimulating catalyst, we maintain our NEUTRAL call on the sector. Our preferred pick for the sector is still MISC (OP; TP: RM9.64) due to its strong balance sheet and ability to acquire value accretive distressed assets.

The formation of a new alliance dubbed ‘THE Alliance’ was announced over the weekend and includes (i) Hapag-Lloyd, (ii) Nippon Yusen Kaisha (NYK), (iii) Kawasaki Kisen Kaisha ("K"-Line), (iv) Mitsui OSK Line (MOL), (v) Hanjin Shipping, and (vi) Yang Ming Marine Transport, claiming that it would control 18% of the worlds container shipping fleet and 3.5m TUE’s. This comes only weeks after CMA CGM and other members announced the formation of “OCEAN Alliance” (on 20th April 2016), which was set to be the second largest alliance after the 2M alliance. Similar to the OCEAN alliance, ‘THE Alliance’ will be operational in April-2017 and effective for a 5-year period post obtaining regulatory approvals. Additionally, Hapag-Lloyd is also in talks with UASC for a potential merger which may see UASC joining THE Alliance.

Rationale. The formation of new alliances this year comes at a time when the shipping industry is facing one of the worst downturns it has ever seen due to an oversupply of vessels in the market and low freight rates, coupled with a faltering global economy leading to weaker consumer demand. By teaming up via alliances, the shipping liners would be able to pool together on various routes via vessel sharing arrangement which could save on expenses and increase efficiency. Furthermore, being in an alliance mean liners with smaller vessels have access to bigger vessels, which would significantly reduce cost per unit.

Impact on shipping stocks? While we do not maintain coverage of regional shipping stocks, we believe the beneficiaries of ‘THE Alliance’ would be the smaller shipping lines that have recently been allowed to join to likes of the ‘big boys’. This will help the smaller liners improve operating cost and enhance global network and efficiency, considering that the sector, especially smaller liners, have been mired with higher operating cost and financial losses. The beneficiaries include companies such as (i) K-Line joining the THE Alliance, as it recently recorded losses and is reducing its fleet size to smaller and mid-size vessels due to poorer market conditions, (ii) Hanjin Shipping which has been unprofitable for years and is seeking debt restructuring assistance, (iii) Yang Ming Marine Transport that recently reversed to full-year losses, and (iv) OOCL joining the OCEAN Alliance. Additionally, shipping lines that have been left out or orphaned by the new alliances may continue to face market share declines as they may find it difficult to maximise vessel capacity. Hyundai Merchant appears to be the only liner left out at this juncture but the company is confident they may be able to join THE Alliance once its business normalises as it is undergoing creditor led restructuring and ongoing charter rate negotiations.

Source: Kenanga Research - 16 May 2016