Asia Shipping_ Looking Over the Horizon-Part VI_ Elevated rates for longer, U_G Evergreen and COSCO to Buy

Summary of Key Points from the Conference Call Industry Overview - The conference call focuses on the APAC shipping industry, particularly the performance and outlook of major shipping companies including Evergreen Marine (EMC) and COSCO Shipping Holdings (CSH) [1][3][4]. Core Insights and Arguments - Demand Outlook: Demand for shipping is expected to remain strong into March 2025, with a projected 4-5% growth in container demand. This is supported by discussions with major shipping companies indicating limited signs of demand fade [3][10]. - Earnings Forecasts: The 2025E core earnings for APAC liners have been increased by an average of 6 times, with revised earnings approximately 39% below market expectations, indicating a core ROE of 8-12% [4][28]. - Upgrades and Downgrades: - Evergreen Marine (EMC) and COSCO Shipping Holdings (CSH) have been upgraded to Buy from Sell, with target prices revised to NT$282 and HK$13.3 respectively [4][28]. - Yang Ming Marine (YM) has been downgraded to Sell from Neutral due to limited vessel orders and a challenging market position [4][29]. Financial Metrics - Target Prices: - EMC's target price is based on 1.1x 2025E PBV with a 12% core ROE. - CSH's target price is based on 0.85x 2025E PBV with an 8.5% core ROE [9]. - Market Capitalization: - CSH has a market cap of HK$194.72 billion and EMC has a market cap of NT$495.497 billion [4]. Risks and Considerations - Tariff Implications: Anticipation of Trump's second-term tariffs starting as early as June 2025 could impact shipping dynamics, with potential inventory building by US retailers due to expected tariff increases [3][30][38]. - Supply Chain Adjustments: The first term of Trump's tariffs led to supply chain alterations rather than a decline in US container imports, with significant market share gains for countries like Mexico, Vietnam, and Taiwan at the expense of China [11][17]. - Potential Strikes: The International Longshoremen's Association (ILA) strike negotiations beyond January 15, 2025 could pose an upside risk, potentially disrupting supply and increasing rates [43][64]. Additional Insights - Supply Dynamics: The effective supply growth is projected to be lower than scheduled due to delays in new vessel deliveries, with a forecast of 5% effective supply growth in 2026 [21][24]. - Global Inflation Impact: Easing global inflation may allow central banks to cut rates, historically supportive of container demand [19]. - Scrapping Rates: Scrapping of vessels has been less than 1% of the fleet, indicating a profitable environment for shipping lines [46]. Conclusion - The APAC shipping industry is poised for a positive outlook with strong demand and revised earnings forecasts. However, potential risks from tariffs, supply chain disruptions, and labor negotiations could impact future performance. The strategic upgrades of key players like EMC and CSH reflect confidence in their ability to navigate these challenges effectively.