Singamas Containers ( 勝獅貨櫃 )

. Singamas Containers ( 勝獅貨櫃 ) Price: HK$1.62 HKEx Code: 716 Thu, 15 Jul 21 The Lion is Back Equity Research Shipping/ China Company Visit Note Key Data Close price (HK$) 1.62 12 Months High (HK$) 1.73 12 Month Low (HK$).82 3M Avg Dail Vol. (mn) 1.7 Issue Share (mn) 2,48.95 Market Cap (HK$mn) 3,92.5 Free Float % 59.14 Net cash/share (HK$).5 Net debt/ equity (%) 3.31 Fiscal Year 12/29 Major shareholder (s) Chang Yun Chung (44.8%) Source: Company data, Bloomberg, OP Research Closing price are as of 14/7/21 All figures are subject to rounding Price Chart Jul-9 Sep-9 716 HK MSCI CHINA 1 % 9 8 7 6 5 4 3 2 1 Nov-9 Jan-1 Mar-1 May-1 Jul-1 Key points: Containers are in acute shortage. Thanks to the comeback of demand from trades & container replacements, we see that container prices are rising to record-high, with order queue lengthened. The need for replacements also sets in to ensure solid demand in 21 & 211. Rising containership freight rate, despite recent setback in the bulk shipping index. Containership freight rates are hiking, as shown by HARPEX and China Containerized Freight Index. No signs of decline like that for Baltic Dry Index (BDI). We think containership demand could depict different pattern from bulk shipping. Falling and much lower steel cost than in FY8, implying a higher gross margin in 21. The business earns low gross margin, i.e. 8.6% in FY8. That also means its earnings are very sensitive to steel cost (half of COGS). We believe gross margin in FY1 should be higher than in FY8. Undemanding valuation, we expect industry upgrades to reflect improved conditions. Our estimate on FY1 PE is only12x, or 1.1x Dec 1 PB. We think that most forecasts on the street are lagging behind the industry s sharp rebound especially in 2Q1. We expect the company to record much higher core earnings than in FY8 and will depict a strong turnaround from huge losses in FY9. Company Background The principal activities of the Group are engaged in the container manufacturing, container depot and mid-stream operations. Antony Cheng Oriental Patron Securities Ltd +852 2135 26 antony.cheng@oriental-patron.com.hk Exhibit 1: Investment Summary Year end Dec (US$) FY5 FY6 FY7 FY8 FY9 Revenue (mn) 842.9 924. 1,546. 1,385.3 274.6 Growth (%) 9.6 67.3-1.4-8.2 Net Income (mn) 44.9 18.1 34. 4.5-51.9 Growth (%) -59.7 87.9-86.7-1,249.8 Gross margin (%) 11.5 8.2 7.7 8.6 3.9 Profit margin (%) 5.3 2. 2.2.3-18.9 ROE (%) 22.7 8.2 12.8 1.5-15.4 ROA (%) 8.5 2.5 3.3.5-6.3 EPS.6.2.4. -.3 P/E (x) 11.15 27.66 14.72 11.87-9.64 P/B (x) 1.96 1.86 1.41 1.37 1.24 Source: Bloomberg, OP Research

Comeback of demand from trade & replacement Singamas is the world s second largest producer for shipping containers, having approximately 25% market share, only behind CIMC s (39.CH) global share of 5%. Strong demand for containerships, underpinned by the recovery of global trade. Global trade has undergone a V-turn in 1Q9. Global trade volumes in May 21 have risen to a record-high since mid-28. This has led to a strong demand for containerships. According to Alphaliner, a global consultant for shipping industry, the idle fleet at 5 July 21 represented only 2.5% of the total fleet, or 34, TEU, the lowest idling percentage recorded since December 28. The drop in the idle fleet comes amidst a record number of new vessel deliveries made in 2Q1, when 88 new vessels with a total capacity of 44, TEU were delivered. This is the highest level of quarterly deliveries ever recorded. Rising containership freight rates, amidst recent setback in the bulk shipping index Containership freight rates have been rising persistently year-to-date. As shown by HARPEX, which is a global containership freight rate index, already doubled from the trough in 4Q9. As such, both volume and price of containership have been on uptrend, which is consistent with the record-breaking trade figures. Exhibit 2: BDI (bulk index) vs HARPEX (container index) Exhibit 3: China Containerized Freight Index 1, 9, 8, 7, 6, 5, 4, 3, 2, 1, 1,3 1,2 1,1 1, 9 8 7 6 5 4 3 Jul-8 Nov-8 Mar-9 Jul-9 Nov-9 Mar-1 Jul-1 BDI Series1 (LHS) HARPEX (RHS) Source: Bloomberg, Harper Petersen & Co, OP research 1,4 1,2 1, 8 6 4 2 Jul-8 Nov-8 Mar-9 Jul-9 Nov-9 Mar-1 Source: Wind, OP research On the other hand, BDI, which reflects the current freight rates on bulk shipping, has been plunging in the recent weeks. This has largely contributed by the hold-up of materials demand, e.g. steel and cement, as China has put a brake to the property market. Also, PRC s export of commodities has been dampened by the cancellation of export rebates. However, we would argue that there is no direct causal relationship between bulk and container shipping demand, although they are both affected by the underpinning economic growth. Demand for containers is particularly strong. According to CIMC and Singamas (together accounts for three-quarter of world s market share), demand for containers are currently very strong. For instant, CIMC s containers production increased by 3 times yoy in 1Q1. Apart from trade-related factors depicted above, other reasons include: 15 July 21 Page 2 of 9

1) Most of container manufacturers have cut staff and capacities during 29, and certain container makers have closed down during the Financial Tsunami in 28-29, according to management. 2) Containerships have been adopting slow steaming strategy since 28 to save fuel cost by reducing speed. For example, Maersk has recently signed contract to install slow steaming kits for its 34 vessels. Slow steaming naturally means higher demand for containers, given same volume of trade. 3) Replacementsdemand was suspended during the financial crisis. Annual replacementsdemand amounts to around 5% of total outstanding containers In 29, there were very few containers ordered to replace existing ones. This part of demand is to be released in 21 and 211. Currently there are 28mn containers in use, 5% replacementsdemand for 2 years means 2.8mn TEU, which is entire demand in a normal year. Exhibit 4: Containers demand was hard-hit in 29 45 4 35 3 TEU 25 2 15 1 5 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 Source: Containerisation International, OP Research Still, there are some risks of decline in container shipping According to Alphaliner, China s Top 1 container ports liftings fell by 1.9% in June compared to May. Although June s port volumes are still the second highest on record, throughput showed signs of weakening. Guangzhou and Shanghai reported the sharpest month-on-month declines and lost 7.1% and 5.1% respectively. We would need to closely monitor the container throughput figure coming forward. 15 July 21 Page 3 of 9

Exhibit 5: Record-breaking container port throughput, but there are risks of peaking Source: Alphaliner, OP Research 15 July 21 Page 4 of 9

The Lion is Back Orders are queuing up As industry practice, containers are ordered only one month ahead of delivery. That is also the reason why it is sensitive to economic conditions (especially trade flow and freight demand). According to CIMC and Singamas, order pipelines are already queuing till end-september, which is unseen in recent years. Those order-on-hand plus those already produced this year amounted at 44, TEU. Management forecasted that total production in FY1 should be around 55, TEU, slightly below FY8 s level of 567,4. The shortfall, relative to FY8, is because of the week demand in 1Q9. The company is already running at full capacity. Exhibit 6: Containers sales volume 9, 816,955 8, TEUs 7, 6, 5, 56,36 569,823 61,184 236,937 55, 4, 3, 2, 1, 364,247 9,282 66,669 23,613 25 26 27 28 29 21F * 1H Total * Production volume for 21. Sales is likely to be higher, according to management Source: Company, OP Research and prices are hiking Container prices are also rising sharply: From below US$2,/TEU in the beginning of the year to US$27/TEU for recently signed orders. Note that this is already higher than the peak in 28 which the company has sold containers for as high as US$25/TEU. Exhibit 7: ASP of Singamas containers (2 ft. dry freight) 2,7 2,5 2,3 US$ 2,1 1,9 1,7 1,5 24 25 26 27 28 29 21F Source: Company, OP research 15 July 21 Page 5 of 9

Sensitive to steel cost, which is heading down Container manufacturing business indeed earns a low gross margin only 8.6% in FY8, such that it is very sensitive to steel cost. Steel cost, in terms of steel plate, has started falling since April 21. Steel inventory level is at historical peak, such that we think the falling trend of steel price will persist through the end of 21. Nevertheless, the average steel cost for FY1 should be below FY8 (especially 1H8 when most of the year s products were manufactured) Normally, the cost-plus pricing is adopted by the industry, meaning most of steel cost changes are passed through to customers. However, containers are currently in acute shortage, and containers are being sold at a larger margin than in 28. Exhibit 8: Price index for steel plate 26 24 22 2 18 16 14 12 Jan-7 Dec-7 Dec-8 Dec-9 Jun-1 Source: MySteel.net, OP research 15 July 21 Page 6 of 9

Strong earnings rebound understimated by the street FY1 forecasted to record higher core earnings than FY8 from huge losses in FY9 We anchor the company s FY1 financials on its FY8 performance, since in both years the industry experienced distinctive market sentiments between first-half and second-half of the year. The difference is that in 28 the good time came in the low-season of a normal year, while in 21 the boom market co-incidents with the high-season. Therefore we see a sharp rise in prices. We expect ASP in FY1 would be higher than in FY8, while steel cost would be notably lower. However, sales in terms of volume would be around 8% lower than in FY8, due to capacity reduction from 1.25mn TEU in 29 to.7mn now (the company sold few boxes in 1Q1 as the market was still stagnant then). As explained, average steel cost is notably lower than in FY8, such that gross margin is likely to reach 1%, highest in recent years. Exhibit 9: FY1 forecasted to record higher core earnings than FY8 FY9A FY8A FY1F FY1F vs FY8A US$' US$' US$' Revenue 274,647 1,385,269 1,412,974 Slight increase in revenue: Higher ASP offset by lower volume Cost of sales 263,84 1,266,597 1,271,677 Lower steel cost Gross Profit 1,843 118,672 141,297 1% FY1F GPM vs 8.6% in FY8A Allowance for write-down of inventory (18,13) - No inventory write-down as market ASP are rising Other income 1,945 1,74 1,74 Flat income from logistc services etc Selling and distribution expenses (8,79) (23,133) (26,63) 15% rise due to increased labor cost and inflation General and administrative expenses (38,916) (32,67) (37,571) 15% rise due to increased labor cost and inflation Exchange gain 2,587 8,296 Profit from operations (49,633) 72,869 78,828 Finance costs (1,27) (28,18) (11,243) Much debts are repaid during FY9 Investment income 971 2,46 Changes in fair value of derivatives 5,818 (3,457) One-off in FY8, will not recur in FY1 Share of results of associates 665 1,292 1,292 Share of results of jointly controlled entities (6,813) 532 532 PBT (59,19) 18,174 69,49 Tax (2,896) (6,9) (17,352) Effective tax normalized at 25% Net profit (61,915) 11,274 52,57 Attribute to: Owners of the Company (51,914) 4,515 41,645 8% split to the group (without derivatives loss in FY8) Minority Interests (1,1) 6,759 1,411 Number of average shares 1,75,514 888,87 2,48,95 Basic and diluted (HK$) (.231).4.135 We are 57% above the consensus Current share price (HK$) 1.62 21F PE (x) 12. Consensus 21PE: 19x Source: Company data, OP research Room for upward revision in earning Most estimates on the street were made in March 21 (when the company announced its FY9), before the current wave of boxes shortage. Estimates for the company s FY1 ASP have been around US$22/TEU, which seem to underestimate the current forward ASP of US$27/TEU to be delivered in 3Q/4Q. Note also that normally 6% of whole-year sales are occurred in the second half, meaning that the ASP of the company in FY1F would be very likely to be higher than earlier expected. 15 July 21 Page 7 of 9

Also, shipping companies expressed that they were still suffering losses in Jan-Feb 21, but the profit in March has totally offset previous losses. It was also sustained in the following two months. Despite there are some seasonal factors, it is obvious that the market has rapidly turned around in the recent months. We are expecting a clear sign for such turnaround in the company s 1H1 results. 15 July 21 Page 8 of 9

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Oriental Patron accepts no liability whatsoever for the actions of third parties in this respect. 27/F, Two Exchange Square, www.oriental-patron.com.hk Tel: (852) 2135 26 15 July 21 Page 9 of 9 8 Connaught Place, Central, Hong Kong antony.cheng@oriental-patron.com.hk Fax: (852) 2135 295