Asia Pacific/China Equity Research Industrial Machinery (Transportation) Research Analysts Ingrid Wei 86 21 3856 379 ingrid.wei@credit-suisse.com Sam Lee 852 211 7186 sam.lee@credit-suisse.com Container Manufacturing Sector COMMENT Strong 1H11 earnings, but time to take profit Figure 1: We expect soft box sales and selling price in 2H11 TEU USD per TEU 2, 1,75 1,5 1,25 1, 75 5 25 1H9 2H9 1H1 2H1 1H11E 2H11E 3, 2,5 2, 1,5 1, 5 Box sa le s vo l Selling price Soft demand in high season, indicating a weaker 2H11: Momentum of new box orders has slowed down since mid-june, and there are still no signs of a demand pickup as we enter the high season. Further, an estimated 65, 75, TEU box inventory sitting at manufacturers backyards and waiting for customers to pick up implies that box sales will be weak in 3Q11, in our view. Shipping liners may continue to suffer losses in 2Q11, which should also depress box demand. Therefore, we lower our 211 and 212 box sales forecasts by 11.9% and 8.4%, respectively. Peak margin and earnings in 1H11: We expect Singamas and CIMC to report very strong 1H11 earnings on robust box sales, high selling prices and margin expansion. Margin improvement may even beat our forecast as pricing power weighed on manufacturers due to favourable demand-supply in 1H11. However, we expect such margin and earnings to be unsustainable in 2H11 as box sales and selling prices are softening. Downgrade Singamas and CIMC B to NEUTRAL, and CIMC A to UNDERPERFORM: To reflect the likely better-than-expected margin expansion in 1H11, we raise our 211-13 earnings forecast for Singamas and CIMC. Although strong 1H11 results could be positive to share price performance in the near term, we believe a weaker box demand and earnings outlook for 2H11 will cap share price performance in 2H11. We suggest investors take profit on the strong 1H11 results and downgrade Singamas and CIMC B to NEUTRAL, and CIMC A to UNDERPERFORM. We set our new target price at HK$3.15 for Singamas, at HK$13.6 for CIMC B and at Rmb15.2 for CIMC A, which imply below historical average P/E multiples. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Focus table and charts Figure 2: Summary of earnings, rating and target price change Reporting 211E 212E 213E Stock rating TP Cur. Old New Old New Old New Old New Old New CIMC A Rmb mn 3,823 4,79 4,7 4,128 4,253 4,29 Neutral UNDERPERFORM Rmb27.3 Rmb15.2 CIMC B Rmb mn 3,823 4,79 4,7 4,128 4,253 4,29 Outperform NEUTRAL HK$21.9 HK$13.6 Singamas US$ mn 126 158 136 158 135 153 Outperform NEUTRAL HK$4. HK$3.15 Figure 3: High correlation between shipping liners profitability and box sales, 22-21 Figure 4: EPS revision for NOL indicates poor outlook for shipping industry profit 5, 4, 3, 2, 1, USD mn ' TEU 4, 3, 2, 1,.25.2.15.1-1, -2, -3, -4, 22 23 24 25 26 27 28 29 21-1, -2, -3, -4,.5. Dec-9 Feb-1 Apr-1 Jun-1 Aug-1 Oct-1 Dec-1 Feb-11 Apr-11 Jun-11 Box sales (RH) Liners' net profit (LH) EPS 211 EPS 212 Source: Company data, CI Source: Company data, Bloomberg Figure 5: We believe dry box price peaked in 2Q11 USD per 2-foot new dry box 3, 2,8 2,6 2,4 2,2 2, 1,8 1,6 1,4 1,2 1, 8 6 2 21 22 23 24 25 26 27 28 29 21 1Q11E 2Q11E 3Q11E 4Q11E Figure 6: We expect industry capacity utilisation to come down as effective capacity is increased, demand softens 6, 5, 4, 3, 2, 1, ' TEU 24 25 26 27 28 29 21 211E Box demand Effective capacity Utilisation 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Source: CI, Credit Suisse estimates Source: CI, Company data, Credit Suisse estimates Container Manufacturing Sector 2
Figure 7: CIMC s half-year box sales volume Figure 8: Singamas half-year box sales volume TEU 1,2 1, 1,21 1,79 1,43 961 984 TEU 5 42 4 397 35 381 4 35 8 6 4 519 483 666 3 2 217 231 2 55 79 1 18 72 1H7 2H7 1H8 2H8 1H9 2H9 1H1 2H1 1H11E 2H11E 1H7 2H7 1H8 2H8 1H9 2H9 1H1 2H1 1H11E 2H11E Figure 9: CIMC s half-year net profit RMB mn 3, 2,71 2,5 2,51 2,89 2, 1,842 1,528 1,435 1,5 1,386 1,323 1,378 1, 934 1,26 751 826 913 5 381 133 1H4 2H4 1H5 2H5 1H6 2H6 1H7 2H7 1H8 2H8 1H9 2H9 1H1 2H1 1H11 2H11 Figure 1: Singamas half-year net profit USD mn 12 1.4 1 82.3 8 57.6 6 4 29.2 28.1 16.3 16.8 17.7 2 1.5 7.2 13.6 1.9 1.2-2 -9.1-27.4-24.5-4 1H4 2H4 1H5 2H5 1H6 2H6 1H7 2H7 1H8 2H8 1H9 2H9 1H1 2H1 1H11 2H11 Figure 11: Valuation comparables Mkt Up/ EPS Div cap downside P/E (x) EV/EBITDA (x) P/B (x) growth (%) yield (%) ROE Company Ticker Cur Price US$ bn Rating TP (%) 1 11E 12E 1 11E 12E 1 11E 12E 1 11E 12E 11E 11E CIMC A 39.SZ Rmb 22.77 6.82 U/P 15.2-33.2 2.2 14.9 14.7 1.4 7.1 6.8 3.7 3.2 2.8 213 35.9 1.2 2.1 23.1 CIMC B 239.SZ HK$ 13.47 6.82 N 13.6 1. 9.9 7.3 7.2 7.5 5.1 4.9 1.8 1.6 1.4 213 35.9 1.2 4.5 23.1 Singamas 716 HK HK$ 3.21.99 N 3.15-1.9 1.7 6.3 6.3 7.5 4.6 4. 2.2 1.7 1.5 na 7.4.2 4.8 3.7 Container Manufacturing Sector 3
Soft box sales in high season Strong 1H11 box sales may not sustain in 2H11 Box demand and sales were strong in 1H11. We estimate 1H11 box sales of the two largest box makers, CIMC and Singamas, to grow by 13.8% YoY and 73.4% YoY to 984, TEU and 4, TEU, respectively. We attribute the strong 1H11 sales partly to customers concern on box shortage, which was severe in 21 and drove up box prices, triggering some earlier orders. Strong 1H11 box sales partly because of customers earlier orders on box shortage worries Box sales should have entered into a traditional high season (July to September). However, we haven t seen demand picking up, and a few signs indicate 3Q11 box sales could be weaker than normal seasonality and even lower QoQ. New orderflows are decelerating: In our latest discussion with management, both companies mentioned that the pace of new order inflows started to decelerate from mid-june. CIMC s new orders now are only backed up to early August, while those for Singamas are for delivery in late-aug, representing less than one month to one-and-ahalf months lead time, slowing from at least two months lead time in 2H1 and 5M11. We believe the shorter lead time implies customers lower confidence on demand. High box inventory sitting at backyards: CIMC has 4, 5, TEU boxes sitting at its backyards, which are sold but haven t been picked up by customers. This amount of inventory equals to CIMC s 2-3 months of sales volume. Singamas has approximately 1, TEU such inventory, equivalent to roughly 1.5 months of its sales volume. We estimate the industry as a whole has around 65, 75, TEU of such inventory. The normal level of such inventory usually accounts for less than one month of sales volume. To us, this indicates weak box sales in the next few months, as customers need to take these boxes first. Shipping liners poor profitability will limit box capex: Most container shipping companies made losses in 1Q11, and operating environment still remains tough for them. Based on Bloomberg consensus earnings estimates on eight major shipping liners, the average earnings of liners will drop by 64% YoY in 211. According to both CIMC and Singamas, box leasing companies are the key purchasers of new boxes this year, accounting for roughly 6 7% of YTD new purchases. We believe the worsening financial capability will be a constraint to new box purchase and could even slow old box disposal. Ground inventory equivalent to above two months of box sales, indicating weaker 3Q11 box sales Figure 12: High correlation between shipping liners profitability and box sales, 22-21 Figure 13: EPS revision for NOL indicates poor outlook for shipping industry profit 5, 4, 3, 2, 1, -1, -2, -3, -4, US D mn 22 23 24 25 26 27 28 ' TEU 4, 3, 2, 1, -1, -2, -3, -4, 29 21.25.2.15.1.5. Dec-9 Feb-1 Apr-1 Jun-1 Aug-1 Oct-1 Dec-1 Feb-11 Apr-11 Jun-11 Box sales (RH) Liners' net profit (LH) EPS 211 EPS 212 Source: Containerisation Int l, Company data, Source: Bloomberg consensus Container Manufacturing Sector 4
We lower our 211-12 box sales forecast We lower our FY11 industry box sales forecast by 11.9% from the original 3,454 TEU to 3,43 TEU to reflect the likely weaker-than-expected box demand in 2H11. As global trade volume growth is still on track, with our forecast of 7.8%, we believe the weakness will mainly come from replacement demand. It makes sense that liners are slowing old box disposal when they are making losses and cash flows are becoming tight. We expect a weaker 2H11 box sales than 1H11 We estimate CIMC sold roughly 984, TEU boxes in 1H11 and should sell 666, TEU in 2H11, representing a 32% HoH fall, while we forecast Singamas sales volume to reach 35, TEU in 2H11, 12.5% lower than the estimated 4, TEU in 1H11 (Figure 15). As industry sales are mainly driven by global container trade growth and replacement demand, we believe visibility for 212 is currently low, given the uncertainties of global economies and shipping industry. To be conservative, we also lower our 212 sales volume forecast, but still expect volume to grow slightly YoY in 212. Figure 14: CIMC s half-year box sales volume Figure 15: Singamas half-year box sales volume TEU TEU 1,2 1, 1,21 1,79 1,43 961 984 5 4 42 397 35 381 4 35 8 666 3 6 4 519 483 2 217 231 2 55 79 1 18 72 1H7 2H7 1H8 2H8 1H9 2H9 1H1 2H1 1H11E 2H11E 1H7 2H7 1H8 2H8 1H9 2H9 1H1 2H1 1H11E 2H11E Figure 16: Our box demand forecast model 2 21 22 23 24 25 26 27 28 29 21 211E 212E 213E Global container trade (mn TEU) 239 251 28 318 366 44 45 52 522 473 52 561 6 642 YoY growth (%) 12.2 5.1 11.7 13.6 14.9 1.6 11.2 11.5 4.1-9.4 1. 7.8 7. 7. Box fleet, year beginning (' TEU) 13,47 14,875 15,53 16,56 18,85 19,965 21,415 23,335 26,235 27,985 26,845 28,56 3,534 32,473 Total box sales 1,93 1,28 1,74 2,4 2,96 2,6 3,1 4,25 3,2 35 2,8 3,43 3,343 3,731 YoY growth (%) 25.3-33.7 35.9 37.9 23.3-12.2 19.2 37.1-24.7-89.1 7. 8.7 9.9 11.6 Replacement demand Disposal (' TEU) 525 625 71 875 1,8 1,15 1,18 1,35 1,45 1,49 859 1,15 1,45 1,786 % of fleet 3.9 4.2 4.6 5.3 6. 5.8 5.5 5.8 5.5 5.3 3.2 3.6 4.6 5.5 Additional new demand Net change in box fleet (' TEU) 1,45 655 1,3 1,525 1,88 1,45 1,92 2,9 1,75 (1,14) 1,941 2,28 1,939 1,945 Box fleet, year end (' TEU) 14,875 15,53 16,56 18,85 19,965 21,415 23,335 26,235 27,985 26,845 28,786 3,534 32,473 34,418 Box turnover ratio (x) 16.8 16.5 17.5 18.4 19.2 19.5 2.1 2.2 19.3 17.3 18.8 19. 19.1 19.2 Source: CI, Credit Suisse estimates Container Manufacturing Sector 5
Peak margin and earnings in 1H11 We expect both CIMC and Singamas to report very strong 1H11 earnings, mainly on robust box sales, high box price and margin expansion. We estimate average selling price of a 2-foot box to reach US$2,6 per TEU in 1Q11 and further improve to US$2,8 in 2Q11, from US$2,4 per TEU in 21. Box price hit a record high of just slightly below US$3, in late March.. Strong 1H11 earnings on robust box sales, high box price and margin expansion 1H11 results preview: Margin expansion, likely better-than-expected In our latest discussion with management of both companies, we note that average cortern steel cost moved up slower than box prices in 1H11, as box demand surged and capacity were well controlled. Therefore, we estimate the companies 1H11 gross margins to further expand from the high levels in 2H1, likely beating our expectation. Singamas: 1H11E earnings to grow 885% YoY to US$1 mn Box sales of 4, TEU in 1H11, +73.4% YoY, from 23,666 TEU in 1H1. ASP improved by 2.7% YoY to US$2,555 per TEU in 1H11 from US$2,117 per TEU in 1H1. Gross margin expanded by 8.6 p.p. YoY to 17% in 1H11. Figure 17: Singamas: 1H11 results preview 1H1 1H11E YoY (%) Key operating data Box volume (TEU) 23,666 4, 73.4 ASP (USD per TEU) 2,117 2,555 2.7 Key financial data (USD mn) Turnover 488 1,22 19.3 COGS (447) (848) 89.6 Gross Profit 41 174 324.4 SG&A (21) (5) 138.6 EBIT 2 123 522.6 Net profit 1 1 885. Gross margin (%) 8.4 17. 8.6ppt EBIT margin (%) 4.1 12.1 8.ppt Net margin (%) 2.1 9.8 7.7ppt CIMC: 1H11E earnings to grow 195.9% YoY to Rmb2,71 mn Box sales grew by 13.8% YoY to 983,9 TEU in 1H11 (558,9 in 1Q11 and 425, in 2Q11) from 482,8 TEU in 1H1. Transport vehicle sales fell by 1.7% YoY to 74,1 units (39,1 in 1Q11 and 35, in 2Q11), compared to 83, units in 1H1. Gross margin expanded 6.3 p.p. YoY to 2.3% in 1H11, fuelled by the growth of box price, which was up 13.7% YoY. Offshore marine business still made losses in 2Q11, after a loss of Rmb6 mn in 1Q11. We estimate net loss of roughly Rmb2 mn from its offshore marine business in full-year 211. Container Manufacturing Sector 6
Figure 18: CIMC: 1H11 results preview Operating and financial data 1Q11 2Q11 1H1 1H11E YoY% Key operating data Sales volume of container box 558,9 425, 482,8 983,9 13.8 Sales volume of transport vehicle 39,1 35, 83, 74,1-1.7 2 FT dry box price 2,6 2,8 2,375 2,7 13.7 Key financial data (Rmb mn) Revenue 17,57 15,55 21,238 32,67 53.5 COGS (13,738) (12,21) (18,247) (25,947) 42.2 Gross profit 3,29 3,34 2,972 6,63 123.1 SG&A (1,321) (1,233) (1,591) (2,561) 61. EBIT 1,969 1,97 1,352 3,876 186.7 Net profit 1,358 1,342 913 2,71 195.9 Gross margin (%) 19.3 21.5 14. 2.3 6.3ppt Container box segment (%) 2. 23. n.a. 21.3 n.a. Transport vehicle segment (%) 14.5 14. n.a. 14.3 n.a. EBIT margin (%) 11.5 12.3 6.4 11.9 5.5ppt Profit margin (%) 8. 8.6 4.3 8.3 4.ppt Margin and earnings may weaken in 2H11 With demand softening, box price tapered off to US$2,7/TEU recently from an average of US$2,8 in 2Q11. Supply shortage has also eased since 2H1 when box manufacturers re-opened most of their plants and hired and trained new workers. According to our discussion with industry players, most of their plants are running 1 to 1.5 worker shifts, except those in Shanghai that are running 2 shifts. In our view, this means there is room to increase effective capacity. We estimate industry capacity utilisation will largely ease from 86% in 21 to 71% in 211. Box price is softening We expect average box price to reach around US$2,588 per TEU in 2H11, lower than US$2,7 per TEU in 1H11, on soft box demand. Nevertheless, we don t expect box price to collapse, as the industry is highly concentrated, with over 75% market share owned by CIMC and Singamas, and they are disciplined on capacity expansion and pricing. We also estimate margin will decline HoH in 2H11 on lower sales volume and box prices. Figure 19: We believe dry box price peaked in 2Q11 Figure 2: We expect industry capacity utilisation to come down 3, 2,8 2,6 2,4 2,2 2, 1,8 1,6 1,4 1,2 1, 8 6 USD per 2-foot new dry box 6, 5, 4, 3, 2, 1, ' TEU 24 25 26 27 28 29 21 211E 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 2 21 22 23 24 25 26 27 28 29 21 1Q11E 2Q11E 3Q11E 4Q11E Box demand Effective capacity Utilisation Source: CI, Credit Suisse estimates Source: CI, Company data, Credit Suisse estimates Container Manufacturing Sector 7
Figure 21: We estimate CIMC s gross margin peaked in 1H11 25% Figure 22: We expect Singamas gross margin peaked in 1H11 25% 2% 15% 2.3% 18.4% 16.8% 17.2% 15.4% 15.9% 13.6% 14.% 14.% 2% 15% 16.9% 17.% 14.9% 16.% 15.% 1% 1.3% 1% 9.8% 7.1% 8.% 8.4% 5% 5% 1.6% % % 1H8 2H8 1H9 2H9 1H1 2H1 1H11E 2H11E 211E 212E 1H8 2H8 1H9 2H9 1H1 2H1 1H11E 2H11E 211E 212E Figure 23: CIMC s half-year net profit RMB mn 3, 2,71 2,5 2,51 2,89 2, 1,842 1,528 1,435 1,5 1,386 1,323 1,378 1, 934 1,26 751 826 913 5 381 133 1H4 2H4 1H5 2H5 1H6 2H6 1H7 2H7 1H8 2H8 1H9 2H9 1H1 2H1 1H11 2H11 Figure 24: Singamas half-year net profit USD mn 12 1.4 1 82.3 8 57.6 6 4 29.2 28.1 16.3 16.8 17.7 2 1.5 7.2 13.6 1.9 1.2-2 -9.1-27.4-24.5-4 1H4 2H4 1H5 2H5 1H6 2H6 1H7 2H7 1H8 2H8 1H9 2H9 1H1 2H1 1H11 2H11 211-13E earnings revision Singamas: We raise our 211-13E earnings on higher margin expansion We revise up our 211, 212 and 213 net profit forecast for Singamas by 25.2%, 16.6% and 13.7%, respectively, mainly due to likely better-than-expected margin expansion, despite our lower box sales volumes and price forecast (Figure 25). We highlight the key changes in our main assumption. We lower our 211-12E sales volume by 4.3% and 4.7% to reflect the likely weakerthan-expected box demand. We also lower our average box price slightly in 2H11 on softening box demand. We raise our gross margin forecast as we note that average cortern steel cost moved up slower than box prices in 1H11. Disciplined capacity expansion also supported a more firming box price in 1H11. Container Manufacturing Sector 8
Figure 25: Earnings revision for Singamas, 211-13E Previous forecast New forecast Chg (%) Key assumption 211E 212E 213E 211E 212E 213E 211E 212E 213E Box sales volume ( TEU) 794 912 912 76 869 933-4.3-4.7 2.3 2 FT dry box price, USD/TEU 2,737 2,656 2,513 2,7 2,7 2,619-1.4 1.7 2.5 ASP, USD/TEU 2,328 2,279 2,177 2,288 2,288 2,265-1.7.4 4. Raw material & labour cost per TEU (2,178) (2,129) (2,23) (2,84) (2,13) (2,99) -4.3-1.2 3.8 Gross margin 13.5% 13.4% 13.9% 16.% 15.% 14.2% 2.5 1.6.4 Key financials Turnover 2,22 2,269 2,169 1,98 2,177 2,31-5.6-4.1 6.5 COGS (1,749) (1,964) (1,868) (1,62) (1,85) (1,981) -8.4-5.8 6. Gross Profit 273 35 31 36 326 329 11.9 7.1 9.3 EBIT 177 196 194 215 223 217 21.1 13.4 11.7 Net profit 126 136 135 158 158 153 25.2 16.6 13.7 Source: Credit Suisse estimates CIMC: Raising 211-12E earnings on higher margin expansion, albeit volume cut We revise up our 211-12E earnings for CIMC by 6.7% and 1.4%, respectively, to reflect likely higher margin expansion, though we cut our sales volume forecast (Figure 26). We highlight the key changes in our main assumption. We lower our 211-12 sales volume forecast by 7.3% and 1.7% to reflect the likely weaker-than-expected box demand going forward. We also lower average box price in 2H11 slightly on softening box demand. We revise down our 211 dry box price forecast by 1.4%, while ASP of container box goes up by 5.1%, primarily because the product mix changes with higher portion of high-value specialised boxes. We raise our 211-12 gross margin forecast by 1.5% and.7% as we note that average cortern steel cost moved up slower than box prices in 1H11. Disciplined capacity expansion also supports a more firm box price. Figure 26: CIMC earnings revision from 211-13E Previous forecast New forecast Chg % Key assumption 211E 212E 213E 211E 212E 213E 211E 212E 213E Box sales volume ( TEU) 1,781 1,881 1,874 1,65 1,849 1,884-7.3% -1.7%.6% Vehicle sales volume ( units) 174 29 24 143 172 198-17.7% -17.7% -17.7% 2 FT dry box price, USD/TEU 2,737 2,656 2,513 2,7 2,7 2,619-1.4% 1.7% 2.5% ASP of container box, USD/TEU 2,771 2,891 2,72 2,911 2,911 2,812 5.1%.7% 3.4% Gross Margin 16.9% 16.5% 16.6% 18.4% 17.2% 16.4% 1.5%.7% -.2% Key financial data Turnover 64,647 72,951 76,329 57,98 66,688 73,585-1.3% -8.6% -3.6% COGS (53,713) (6,96) (63,652) (47,39) (55,186) (61,526) -11.9% -9.4% -3.3% Gross profit 1,934 12,45 12,677 1,671 11,52 12,59-2.4% -4.5% -4.9% EBIT 5,69 6,64 6,429 5,873 6,16 6,29 4.7% -.8% -6.2% Net profit 3,823 4,7 4,253 4,79 4,128 4,29 6.7% 1.4% -1.% Container Manufacturing Sector 9
Stock performance, valuation and rating Sector performance YTD, Singamas share price has been up 31.7% and outperformed the MSCI China index by 33.8%, while CIMC A and CIMC B have declined YTD and underperformed the MSCI China by -1% and -25%, respectively. We attribute the large underperformance of CIMC B partly to investors concern on the future of China s B share market. Figure 27: YTD stock performance vs MSCI China 11 1 9 8 7 6 5 4 1-Jan 8-Jan 15-Jan 22-Jan 29-Jan 5-Feb 12-Feb 19-Feb 26-Feb 5-Mar 12-Mar 19-Mar 26-Mar 2-Apr 9-Apr 16-Apr 23-Apr 3-Apr 7-May 14-May 21-May 28-May 4-Jun 11-Jun 18-Jun 25-Jun 2-Jul 9-Jul 16-Jul MSCI China CIMC A Rebased CIMC B Rebased Singamas Rebased Source: DataStream, Credit Suisse estimates Figure 28:Absolute stock performance, CIMC A & B % 1 85.3 8 6 4 22.3 15.1 2-8.9 (4.5) (1.2) (2) (9.9) (27.6) (25.9) (24.1) (4) YTD 1M 3M 6M 12M CIMC A Share CIMC B Share Source: DataStream Figure 29:Absolute stock performance, Singamas 1 % 18.9 8 6 4 31.7 2.6 2 17.1 - (2) (13.5) YTD 1M 3M 6M 12M Source: DataStream Container Manufacturing Sector 1
Figure 3: Relative stock performance, CIMC A & B % 1 76.3 8 Figure 31:Relative stock performance, Singamas % 99.9 1 8 6 4 2 - (2) (4) 11.8 13.4 2.9 (2.4) 5.6 (2.3) (25.5) (18.3) (2.) YTD 1M 3M 6M 12M 6 4 2 - (2) 33.8 17.3 21.2 (5.8) YTD 1M 3M 6M 12M CI MC A Share CIMC B Share Source: DataStream Valuation and rating Source: DataStream, Although we believe strong 1H11 results could be positive to share price performance in the near term, we believe a weaker box demand and earnings outlook for 2H11 will cap share price performance in 2H11. We suggest investors take profit on 1H11 results and downgrade Singamas and CIMC B to NEUTRAL and CIMC A to UNDERPERFORM. Downgrade Singamas to NEUTRAL from Outperform When earnings cycle is peaking and visibility becomes low, we tend to apply assets-based valuation to reach our fair value estimates. We set our new target price at HK$3.15 for Singamas on a target P/B multiple of 1.7x, which is based on a cost of equity of 12.5%, an average ROE (28-12E) of 2.% and terminal growth rate of 2%. Our new target price implies 6.17x 211E P/E and 1.7x 211E P/B. Singamas trades at 6.28x forward P/E, lower than our adjusted historical average of 7.13x (we exclude two spikes of P/E rising above 3x, which happened in 1997 and 27/8, when liquidity surplus was another key driver), which looks fair to us given the weaker demand and earnings outlook. On P/B terms, Singamas trades at 1.55x 12-month forward P/B, a historical high range, which we think is justifiable given the historical high ROE in 211-12. Figure 32: Singamas trades slightly below the historical mean 12-month forward P/E (x) 4. Historical mean = 7.13x 35. 1 +STDV=13.85 x 3. 1-STDV=.42x Curr ent = 6.28x 25. 2. 15. 1. 5. Figure 33:Singamas 12-month forward P/B vs ROE 2.5 2. 1.5 1..5 (x) H istori cal mea n = 1.6 x Current = 1.55x 1+ STDV = 1.43x 1- STDV =.69x TP of HK D3.1 5 i mplie s a 211E1.7x P/B 4% 3% 2% 1% % -1 %. - -2 % Jan-97 Jan-98 Jan-99 Jan- Jan-1 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-4 Jul-4 Feb-5 Sep-5 Apr-6 Nov-6 Jun-7 Jan-8 Aug-8 Mar-9 Oct-9 Apr-1 Nov-1 Jun-11 Jan- 12 Aug-12 Container Manufacturing Sector 11
Downgrade CIMC B to NEUTRAL and CIMC A to UNDERPERFORM When earnings cycle is peaking and visibility becomes low, we tend to apply assets-based valuation to reach our fair value estimates. We reach our fair value estimate for CIMC at Rmb15.2 on a target P/B multiple of 2.x, which is based on a cost of equity of 11.8%, an average ROE (211-12E) of 21.2% and a terminal growth rate of 3.5%. We set our new target price for CIMC B at HK$13.6, at a 25% discount to the fair value estimate. We believe the discount is valid as the B shares usually trade at a discount to its A share peers due to the poor liquidity and outlook of China s B share market. CIMC B trades at 7.4x forward P/E, lower than the historical average of 8.14x. It also trades at 1.36x forward P/B, lower than the historical mean of 1.42x. The valuations look fair to us. We set our new target price for CIMC A at Rmb15.2, at par with the fair value estimate. CIMC A trades at 14.7x forward P/E, higher than the historical average of 12.95x, which looks expensive to us given the weaker demand and earnings outlook. It also trades well above the historical 12-month forward P/B, which we think also does not justify a normalised ROE of 2.2%.. Figure 34: CIMC B 12-month forward P/E Figure 35:CIMC B 12-month forward P/B 3. 25. 2. (x) Current = 7.5x Historical mean = 8.14x 1+STDV = 12.75x 1-STDV = 3.44x 4. 3.5 3. 2.5 (x) Historical me an = 1.42 x Peak = 3.47x Trough =.39x Current = 1.36x 4 % 35 % 3 % 15. 2. 25 % 1. 5. 1.5 1..5 2 % 15 %. - 1 % Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar- Mar-1 Mar-2 Mar-3 Mar- 4 Mar-5 Mar-6 Mar-7 Mar-8 Mar-9 Mar-1 Mar-11 Mar -94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar- Mar-1 Mar- 2 Mar-3 Mar-4 Mar-5 Mar-6 Mar-7 Mar-8 Mar -9 Mar-1 Mar-11 Mar-12 Figure 36:CIMC A 12-month forward P/E 35. 3. 25. 2. 15. 1. 5. (x) Current = 14.72x Historical mean = 12.95x 1+STDV = 18.85x 1-STDV = 7.5x Figure 37:CIMC A : 12-month forward P/B 7. 6. 5. 4. 3. 2. 1. (x) Historical mean = 2.6x Peak = 6.42x Trough = 1.1x Current = 2.75x 4 % 35 % 3 % 25 % 2 % 15 % 1 % - Apr -94 Apr-96 Apr-98 Apr- Apr-2 Apr-4 Apr-6 Apr-8 Apr-1. Apr-94 Apr-95 Apr-96 Apr-97 Apr-98 Apr-99 Apr- Apr-1 Apr-2 Apr-3 Apr-4 Apr- 5 Apr-6 Apr-7 Apr-8 Apr- 9 Apr-1 Apr-11 Apr-12 5% Container Manufacturing Sector 12
Figure 38: Valuation comparables Price Price Rating* Target Price Year EPS EPS FY1E EPS FY2E EPS FY3E Company ccy 21 Jul 11 Prev. Cur. Prev. Cur. End Ccy Prev. Cur. Prev. Cur. Prev. Cur. CIMC (39.SZ) Rmb 22.77 N U 27.3 15.2 Dec 1 Rmb 1.44 1.53 1.53 1.55 1.6 1.58 CIMC (239.SZ) HK$ 13.47 O N 21.9 13.6 Dec 1 Rmb 1.44 1.53 1.53 1.55 1.6 1.58 Singamas Container Holdings Limited (716.HK) HK$ 3.21 O N 4. 3.15 Dec 1 US$.5.7.5.7.5.6 *O Outperform, N Neutral, U Underperform, R Restricted [V] = Stock considered volatile (see Disclosure Appendix).. Container Manufacturing Sector 13
Companies Mentioned (Price as of 21 Jul 11) CIMC 'A' (39.SZ, Rmb22.77, UNDERPERFORM, TP Rmb15.2) CIMC 'B' (239.SZ, HK$13.47, NEUTRAL, TP HK$13.6) Singamas Container Holdings Limited (716.HK, HK$3.21, NEUTRAL [V], TP HK$3.15) Disclosure Appendix Important Global Disclosures I, Ingrid Wei, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for 39.SZ 39.SZ Closing Target Price Price Initiation/ Date (Rmb) (Rmb) Rating Assumption 26 2-Mar-11 27 27.9 N X 24-Mar-11 25.48 27.3 21 Rmb 16 11 6 21-Jul-8 21-Sep-8 21- Nov-8 3-Year Price, Target Price and Rating Change History Chart for 239.SZ 239.SZ Closing Target Price Price Initiation/ Date (HK$) (HK$) Rating Assumption 2-Mar-11 13.839 22.4 O X 24-Mar-11 17.74 21.9 HK$ 23 18 13 8 3 21-Jul-8 21-Sep-8 21- Nov-8 21-Jan-9 21-Mar-9 21-May-9 21-Jul-9 21-Sep-9 21-Nov-9 21-Jan-1 21-Mar-1 21-May-1 21-Jul-1 21-Sep-1 21-Nov -1 2-Mar-11 21-Jan-11 28 27 N 21-Mar-11 21- May- 11 Clos ing Pric e Target Price Initiation/Assumption Rating O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered 22 22 2-Mar-11 21-Jan-9 21-Mar-9 21-May-9 21-Jul-9 21-Sep-9 21-Nov-9 21-Jan-1 21-Mar-1 21-May-1 21-Jul-1 21-Sep-1 21-Nov -1 21-Jan-11 O 21-Mar-11 21- May- 11 Clos ing Pric e Target Price Initiation/Assumption Rating O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered Container Manufacturing Sector 14
3-Year Price, Target Price and Rating Change History Chart for 716.HK 716.HK Closing Target Price Price Initiation/ Date (HK$) (HK$) Rating Assumption 2-Mar-11 2.75 3.26 O X 1-Mar-11 3.58 4 HK$ 4 3.5 3 2.5 2 1.5 1.5 21-Jul-8 21-Sep-8 21- Nov-8 21-Jan-9 21-Mar-9 21-May-9 21-Jul-9 21-Sep-9 21-Nov-9 21-Jan-1 21-Mar-1 21-May-1 21-Jul-1 21-Sep-1 21-Nov -1 3 2-Mar-11 21-Jan-11 4 O 21-Mar-11 21- May- 11 Clos ing Pric e Target Price Initiation/Assumption Rating O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts stock ratings are defined as follows: Outperform (O): The stock s total return is expected to outperform the relevant benchmark* by at least 1-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock s total return is expected to be in line with the relevant benchmark* (range of ±1-15%) over the next 12 months. Underperform (U): The stock s total return is expected to underperform the relevant benchmark* by 1-15% or more over the next 12 months. *Relevant benchmark by region: As of 29 th May 29, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock s absolute total return potential to its current share price and (2) the relative attractiveness of a stock s total return potential within an analyst s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-japan Asia stocks, ratings are based on a stock s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 1-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +1-15% and -1-15% levels in the Neutral stock rating definition, respectively. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 2% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts coverage universe weightings are distinct from analysts stock ratings and are based on the expected performance of an analyst s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 5 in the U.S.) over the next 12 months. Credit Suisse s distribution of stock ratings (and banking clients) is: Global Ratings Distribution Outperform/Buy* 48% (61% banking clients) Neutral/Hold* 39% (57% banking clients) Underperform/Sell* 1% (52% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Credit Suisse s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html Container Manufacturing Sector 15
Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. See the Companies Mentioned section for full company names. Price Target: (12 months) for (39.SZ) Method: We use PB-ROE as our primary valuation metric to reach our fair value and target price estimates of Rmb15.2, as we expect earnings uncertainty on possible softening box demand and price. Our target PB multiple of 2.x is derived from cost of equity of 11.8% and terminal growth rate of 3.5% and ROE of 21.2%. Risks: Our target price of Rmb15.2 is subject to the following major risks: 1) growth of global trade, which will impact box demand growth and box prices 2) faster-than-expected industry capacity expansion which will lead to higher competition and thereby lower box prices; 3) changes in steel prices; 4) a sharp and sudden RMB appreciation; 5) further delivery delay penalty of its offshore rig business and 6) any faster or irrational expansion to other new business Price Target: (12 months) for (239.SZ) Method: We set our new TP for CIMC 'B' at HKD13.6, at a 25% discount to the PB-ROE based fair value estimate. We think the discount valid as the 'B' shares usually trade at discount to its 'A' share peers due to the poor liquidity and outlook of China's 'B' share market. Risks: Our target price of HKD13.6 is subject to the following major risks: 1) slower-than-expected global trade, which may lead to changes in box demand growth; 2) faster-than-expected industry capacity expansion, which will lead to higher competition and thereby lower box prices; 3) changes in steel prices; 4) a sharp and sudden RMB appreciation; 5) further delivery penalty of its offshore rig business and 6) further expansion to other new business which may make the company exposed to additional operation risk. Price Target: (12 months) for (716.HK) Method: We use PB vs ROE as our primary valuation metric to reach our fair value and target price of HKD3.15. Our target PB multiple is based on cost of equity of 12.5%, terminal growth of 2% and average ROE of 2.2%. Risks: Our target price of HKD3.15 is subject to the following risks: 1) slower-than-expected growth of global trade which will impact box demand growth and box prices; 2) faster-than-expected industry capacity expansion, leading to higher competition and thereby lower box prices; 3) changes in steel prices; 4) a sharp and sudden RMB appreciation; 5) equity fund-raising Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names. The subject company (39.SZ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided non-investment banking services, which may include Sales and Trading services, to the subject company (39.SZ) within the past 12 months. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (716.HK) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (39.SZ) within the past 12 months. Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (39.SZ, 239.SZ, 716.HK) within the past 12 months. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. 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Taiwanese Disclosures: Reports written by Taiwan-based analysts on non-taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. To the extent this is a report authored in whole or in part by a non-u.s. analyst and is made available in the U.S., the following are important disclosures regarding any non-u.s. analyst contributors: The non-u.s. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-u.s. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Ingrid Wei, non-u.s. analyst, is a research analyst employed by Credit Suisse (Hong Kong) Limited Shanghai Representative Office. Container Manufacturing Sector 16
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