China and Hong Kong Equity Research 4 March 2008

China shipping
Industry overview

Market share expansion
Sailing at full speed. China’s massive infrastructure investment over the next few years shall continue to drive robust shipping demand on energy and key materials. As China is increasingly reliant on coal and ore imports in its iron & steel production, and power generation, we like dry-bulk shipping given its resilient growth prospects and still-favorable supply-demand outlook. We also expect the oil tanker market to turnaround by 2009 and China’s growing oil imports shall benefit domestic oil shippers. State policy to benefit shipping SOEs. China has predominantly relied on foreign shippers to ship its energy imports but its increasing energy demand has urged the government to protect its energy shipping security. State government is working out relevant industry policy to encourage domestic shippers to transport up to 50% of its key energy and materials imports by 2010. We believe the policy could potentially benefit leading shipping companies in China, including China COSCO Holdings (1919 HK, “CCH”) and China Shipping Development (1138 HK, “CSD”). Industry consolidation to create shipping conglomerates. In a move to integrate state-owned assets, China plans to cut the number of central state-owned enterprises (CSOE) from current 150 to 80~100 by 2010. Shipping is among the seven core sectors short-listed by the State and will be a key restructuring focus over the next 2 years. Economies of scale and market share are the keys to survive the shipping consolidation. We believe the market leaders, COSCO Group and China Shipping Group are likely to benefit from the consolidation and their listed subsidiaries may have more M&A opportunities. Overweight dry-bulk carrier and neutral on container. We recommend to buy dry-bulk shippers, including CSD, CCH and Sinotrans Shipping Limited (368 HK, “SSL”) given a solid dry-bulk demand outlook throughout 2009. Among the sector, CSD is our top-pick given its high exposure to China’s rising coastal coal shipping market and its more defensive shipping model. We are neutral on China Shipping Container Lines (2866 HK, “CSCL”) which is most vulnerable to a slowdown in China’s exports. Key risk factors to the sector include: (1) global recession to cut trade demand and dampen global shipping market; (2) further tightening measure by the State to curb fixed assets investment, which may slowdown its energy demand and energy imports; (3) ultimate shipping consolidation plan is yet to be finalized by the State and may not benefit the listed companies; (4) hiking vessel prices to undermine the expansion plan by large shipping SOEs.

Sector view: overweight

Market data
HSI Index HSCEI Index HSCCI Index
Closing price as of 3 March 2008 Source: Bloomberg

23,584 13,439 5,282

HSCEI 1-year performance

Source: Bloomberg

Wang Ren
wangren@ccbintl.com

(852) 2532 6749

Peer valuation Price (HK$) 1919 HK CCH 23.00 1138 HK CSD 24.75 2866 HK CSCL 3.47 368 HK SSL 5.06 2343 HK Pacific Basin 13.08 316 HK OOIL 48.70 Note: Closing price as of 3 March 2008 Source: Bloomberg, CCB Int’l Securities Code Company Mkt cap (HK$mn) 353,034 113,663 92,628 20,240 20,720 30,476 TP (HK$) 32.0 31.0 3.68 6.35 N/A N/A Rating O O N O NR NR 07F 11.0 15.9 11.1 14.0 4.7 1.5 PER (x) 08F 8.6 12.5 10.0 8.0 5.2 4.5 09F 9.2 9.9 8.6 7.7 5.8 1.2 PBR (x) 08F 3.2 3.2 1.0 1.2 1.3 0.9 ROE (%) 08F 38.4 28.9 9.9 16.9 39.1 12.8 Yield (%) 08F 2.1 2.6 2.5 3.1 10.5 3.8

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Table of contents
Industry overview .............................................................................................................................................. 3
Emerging market remains resilient ....................................................................................................................................3 Strong China demand to sustain........................................................................................................................................3 Robust dry-bulk shipping outlook.......................................................................................................................................5 China relies on ore imports................................................................................................................................................6 Rising coastal coal shipping market...................................................................................................................................7 Oil shipping to turnaround by 2009 ....................................................................................................................................9 Vulnerable container outlook ........................................................................................................................................... 10

State policy to benefit shipping SOEs........................................................................................................... 11
Market share expansion .................................................................................................................................................. 11 Industry restructuring underway ...................................................................................................................................... 12 Emerging shipping SOEs................................................................................................................................................. 13

Valuation and recommendation ..................................................................................................................... 14
Peer comparison.............................................................................................................................................................. 14 Recommendation............................................................................................................................................................. 16 Risk factors...................................................................................................................................................................... 18

Company research .......................................................................................................................................... 19
China COSCO Holdings (1919 HK): Evolving into a shipping conglomerate................................................................... 19 China Shipping Development (1138 HK): Solid growth prospects ................................................................................... 25 China Shipping Container Lines (2866 HK): Vulnerable industry outlook ........................................................................ 31 Sinotrans Shipping Ltd (368 HK): Improving growth visibility........................................................................................... 36

Appendix .......................................................................................................................................................... 40
Organization chart of listed shipping companies.............................................................................................................. 40 Fleet summary of listed shipping companies ................................................................................................................... 41

Disclaimer......................................................................................................................................................... 42

2

Industry overview
Favorable state policies to encourage the development of China shipping giants China’s rapid economic growth and its infrastructure boom over the 11th-5 period (2006~2010) shall continue to boost strong shipping demand for iron ore, coal and oil imports. However, China’s shipping power is still relatively underdeveloped to accommodate its growing shipping demand, mainly due to a lack of large-size vessels for long-haulage transportation. We believe the rapid capacity expansion and favorable state policies shall underpin strong growth prospects for large state-owned shipping enterprises (shipping SOEs). Emerging market remains resilient Emerging market likely to maintain its growth momentum despite US and Europe slowdown Relatively immune from global sub-prime crisis, emerging market shall remain as a key engine of global economy for the next few years. Strong domestic demand from China and other emerging countries shall be able to sustain their own growth momentum. We expect the shipping demand from US to remain sluggish over 2008~09 while Europe market is likely to slowdown in 2008. We maintain positive on Asia-Pacific shipping market, which is being led by robust regional economic growth and strong energy imports. Out of three shipping segments, we like dry-bulk shipping for its more favorable demand-supply outlook for the next 2 years, given a bulk of 80% new dry-bulk vessels will only be delivered in 2009 and beyond.
Global economic outlook World IMF 08 GDP growth forecast (%) Previous forecast 4.9 Latest in Jan 2008 4.0 World Bank GDP growth forecast (%) 2007 estimate 3.6 2008 forecast Source: IMF, World Bank 3.3 US 2.2 1.5 Europe 2.6 1.6 Japan Emerging market 1.9 1.5 7.8 6.9 China 11.4 10.0

2.2 1.9

2.7 2.1

2.0 1.8

7.5 7.4

11.3 9.6

Strong China demand to sustain China is now the key driving power of global shipping market China’s growing demand on energy and key materials has become a major driving power of global shipping market. China’s iron ore imports grew at 3-year CAGR of 23% to account for about 50% of global iron ore imports as in 2007. China has nearly tripled its coal imports in 3 years and is expected to become a net coal importer in 2008. Based on the research of International Energy Agency (IEA), China’s oil production is likely to peak during the next decade but its oil demand is going up steadily until 2030. In fact, IEA forecasted China to overtake Japan and nd become the world’s 2 largest oil importer soon after 2010. China is entering into a period of unprecedented infrastructure expansion as outlined by its 11th-5 development plan over 2006 to 2010. State government plans to construct infrastructure with a total budget of RMB3.8tn, about 73% higher than its previous five-year plan. We believe China’s massive infrastructure investment over the next few years shall sustain a strong materials imports and overseas shipping demand. We forecast China’s net coal import to grow at above 15% yoy for the next 2~3 years while iron ore import to grow at 8~10% yoy over 2008~2009. We expect China’s crude oil import to maintain a steady growth at 10~12% yoy by 2010.

3

China’s iron ore and coal imports remain resilient

China’s ore imports
50% 384 326 30% 208 20% 148 200 275 300 500

40%

400

10%

100

0% 2003 Ore imports (mn tons) 2004 2005 2006 2007 Crude steel produciton grow th (y oy ) Iron ore import grow th (y oy )

0

Source: CEIC, CCB Int’l Securities China’s coal imports
80% 5.1 60% 40% 20% 0% 1.1 -20% -40% 2003 2004 2005 Coal ex port grow th (y oy ) 2006 2007 Coal import grow th (y oy ) 1.0 0.0 1.9 2.6 3.8 5.0 4.0 3.0 2.0 6.0

Coal imports (mn tons)

Source: CEIC, CCB Int’l Securities

4

BDI performance since 2004 12.7% in oil tankers and containerships market respectively.000 4. new capacity of dry-bulk vessel on order reached 48.4% and 60. We expect such factors to persist during the next 2 years and strong China demand to support 2008 average BDI index at 7. such as Australia. Of the new dry-bulk capacity. 80% will only be delivered in 2009 and beyond.4% of current capacity.180 6.0% C on ta ine rs hi ps De li v er ed in 20 09 a nd be y o nd Source: SSL Prospectus. as compared to new delivery ratio of 40. CCB Int’l Securities 5 . BDI index continued to breach record high during 2H07 with a year-round average at 7.000 10.500.070.7 % 41 . Reducing coal exports from China has spurred Japan and Korea to import their coal needs from further sources.2% T an ke rs De li v er ed du rin g 0 7 to 08 9 . CCB Int’l Securities Strong China demand to lengthen industry cycle Driven by strong Asian dry-bulk demand. Global economic slowdown remains the key concern to containership while oil shipping market is expected to turnaround during late 2008 to 2009 given 27% of single-hulled tankers will be phased out of the market by 2010. Global vessel supply outlook 1 00 % 80 % 60 % 40 % 2 8 .2% 20 % 0% 1 2 .371 Oct 04 Oct 05 Oct 06 Jan 04 Jan 05 Jan 06 Jan 07 Oct 07 Apr 04 Apr 05 Apr 06 Apr 07 Jan 08 Jul 04 Jul 05 Jul 06 Jul 07 0 BDI Index Source: Bloomberg. The lengthening ocean voyage and severe congestion at Australian ports also contributed to the hiking freight rate.000 2005 average at 3.7% 3 8.000 2.Robust dry-bulk shipping outlook Modest supply growth in dry-bulk fleet in 2008 As of Oct 2007.510 2006 average at 3.7% B ul ke rs 19 .000 2007 average at 7.000 2004 average at 4.000 BDI found support at 6.070 8.

3% 62. compared to an average ore grade of over 60% for major ore exporters in the world. 18. the low grade of China’s crude oil reserve also contributed to its rising reliance on ore imports.4% Others.2% 70% 64. CCB Int’l Securities Domestic supply is low due to low grade of China’s crude ore reserve Further.China relies on ore imports China’s ore demand to outpace mining capacity China’s infrastructure boom over 2006~2010 is expected to drive a 10~15% yoy growth in China’s iron ore demand.4 billion metric tons of iron ore reserves containing only 30~35% of iron ore contents. 26. given a modest mining capacity expansion and a nation-wide environment concern.8% Brazil.8% 0% Brazil Canada India Australia Russia Worldwide China Ukraine Source: US Geological Survey (Mineral Commodity Summaries. CCB Int’l Securities 6 . Chinese Academy of Geological Science (CAGS) reported in 2007 that China has identified 59.6% Australia.1% China. Modest mining FAI to cap supply growth 120% 100% 80% 60% 40% Investment gap likely to sustain 20% 0% Jan 06 -20% FAI on ore m ining (y oy ) FAI on ore production (y oy ) F AI on m etal production (y oy ) Apr 06 Jul 06 Oct 06 Jan 07 Apr 07 Jul 07 Oct 07 Source: CEIC.6% 29.4% Ukraine. However.5% 60% 50% 40% 30% 20% 10% 32. 16.5% 55.4% 48. 10. 15. We expect China to source up to 50~55% of its annual ore demand from imports during 2008~2009 and ore import growth to maintain strong at above 10% yoy for the next 2 years. Estimated breakdown of Global ore reserve base Russia.1% 63. Jan 2006). domestic ore supply is unlikely to catch up with increasing demand. 12.4% Low ore grade of China’s reserve compared to global ore exporters (ore grade) 80% 67. which is in line with its steel production capacity expansion for the next few years.

Annual power capacity is expected to upgrade from 713mn KW in 2007 to 900~950mn KW by 2010. Market comparison Key coastal coal shippers Company Stock code FY07 COA volume (tons) CSD 1138 HK 89. We expect major railroads and port terminals to see capacity expansion at 10~15% yoy through 2010 and drives strong volume expansion in coastal coal shipping market.9% 40% 20% 60% 23% 79% Coastal coal capacity expansion (by CCBI forecast) FY08 (yoy growth) 2% 17% 15% 13% 20% FY09 (yoy growth) 12. including Shanghai and Guangdong. driven by robust coastal coal demand and strong railroad and port throughput upgrade during 2008~2010. CSD has signed a strategic agreement with Guangdong in Nov 2007 to become its major coal shipper from 2008 to 2010.Rising coastal coal shipping market Coastal area is the largest coal user and relies on waterway to transport coal Over 90% of China’s coal mines are based in inland provinces in Western and Midwest China. for the next 3 years. CCB Int’l Securities Strong power upgrade to meet growing electricity consumption (m n KW) 800 20% Electricity consumption steadily grows since 2003 600 16% 12% 400 8% 200 4% 0 1999 2000 2001 2002 Annual pow er c apac ity 2003 2004 2005 2006 2007 Elec tricity c onsum ption grow th (y oy %) 0% Source: CEIC. China targets to upgrade its power capacity during the 11th-5 period to meet rising electricity demand.e. Strong industrial growth in China continues to drive robust electricity consumption and coal demand. 1088 HK) to transport coal from coal mines in Western China to key waterway terminals in the east. including Daqin Railway (601006 CH) and Shuohuang Railway (owned by Shenhua. while the largest demand arises from coastal China. CCB Int’l Securities 7 . CSD is expected to increase its market share from 30% in FY07 to 35% by FY09 given its large contract base and strong capacity delivery in 2009. primarily rely on waterway for coal transportation.2mn Rising costal coal demand to fuel shipping rate Railroad upgrade to drive volume expansion Rising coastal coal shipping market to benefit CSD 2008 COA contracts (by company announcement) Volume (yoy growth) Rate (yoy growth) 6. 80% of Guangdong’s coal trading is seaborne.a.5% Source: Company data. We forecast total coastal coal shipment in China to increase by 10~12% yoy and coal shipping rate to grow by 30~15% yoy by 2010. China relies on a number of major coal-rails. Market leader. representing a steady increase of 8~10% p.4mn Ningbo Marine Shipping 600798 CH 5. Costal urban areas.0mn CS Haisheng 600896 CH 3. i.

23. 4. 50. 6.5% Iron & steel making. 0.9% Electricity generation Hydro power.9% Nuclear power.6% Xinjiang.5% 0% 20% 40% 60% 80% 100% Source: CEIC. 3. 9. 25.7% 22.5% Other industrial uses. 19.Estimated breakdown of China’s coal reserve Inner Mongolia.6% Coal consumption Petroleum processing. China Mining Association.9% Others. 1.0% Other inland area.9% Residential uses. 82. 9.9% Chemical production. Shanx i.1% Electricity generation.3% China burns 50% of its coal to generate 80% of its electricity Shaanx i.3% Coastal area. CCB Int’l Securities Railway expansion to match output growth by 2010 Coal producing area Coal self-supply area Coal consuming area Shenhua’s key coal mines Daqin Railway Qinhuangdao Port Huanghua Port Shuohuang Railway Ningbo & Shanghai Guangzhou CSD has signed strategic agreement with Guangdong to become its major coal shipper from 2008 to 2010 (mn tons) 400 395 New capacity ov er 2005~2010 326 300 Total: 304 Shuohuang Railway 100 200 0 Daqin Railway 100 204 0 Nation-w ide Coal producing area Key coal-rails Source: Shenhua Group. 16. 14. 8. CCB Int’l Securities 8 .4% Coal is vital in power generation Coal-fired.

1mn bbl/day by 2030 to account for 80% of its total oil consumption.1 6 3 0 2006 2010F 2015F 2030F China's net oil imports (mn bbl/day ) Source: IEA.a. CCB Int’l Securities 9 . We believe strong oil demand from China shall benefit domestic shippers. Based on the forecast by IEA.5 5. both of which are well positioned to ride on China government’s strategy to boost domestic tankers.2% p. about 27% of existing tanker fleet are single-hulled and will be phased out or rebuilt into double-hulls by 2010 to meet revised IMO regulations. 9 6.5mn bbl/day in 2006 to 13. including CSD and CCH.1 12 China’s net oil imports to quadruple by 2030 4. 9.Oil shipping to turnaround by 2009 Around 27% of existing tankers are to be phased out during 2009~ 2010 Oil shipping market continued to see freight rate under pressure over the past 2 to 3 years due to tanker oversupply.9% p.a.4% of current capacity for the next few years. However. CCB Int’l Securities Tanker market performance since 2004 (WS) 350 300 250 200 150 100 50 Strong rebound seen in late 2007 Tanker rate largely traded below WS100 over 2005 to 2007 0 Oct 04 Oct 05 Oct 06 Jan 04 Jan 05 Jan 06 Jan 07 Oct 07 Apr 04 Apr 05 Apr 06 Apr 07 Jan 08 Jul 04 Jul 05 Jul 06 Jul 07 Dirty VLCC rate (Arabian Gulf to Japan) Source: Bloomberg.1 7. tanker market will see new supply of as much as 40. China’s net oil imports forecast by IEA 15 13. Based on the order book as of Oct 2007. 3. We expect the oversupply to ease during 2009~2010 and tanker rate to turnaround by 2009.8% p. China’ oil production will peak during the next decade and its net oil imports will nearly quadruple from 3.a.

5% Trade surplus started to slide 30. 40% CSCL 2866 HK 446. Over the last few months. increasing capacity reallocation from transpacific route to A/E route could dampen current freight rate recovery while transpacific line is expected to remain sluggish given the worsening US economic outlook.7% 35.a. have large exposure to US/Europe market and they are highly leveraged to China’s export performance.9% p. Key national liners Company Stock code TEU capacity as of 2007 Capacity expansion over 2007~2009 Domestic market share Estimated market exposure as of FY07 Transpacific route Asia/Europe route China domestic Source: Company data. CCB Int’l Securities 10 .677 14. China’s export to US and EU slowed from 20. Regional liners. 45% 36.5% and 37.1% 37. Looking forward into 2008.000 20. container outlook remains vulnerable for 2008.000 25.000 15. respectively.000 0 Trade surplus (US$mn) Ex port growth (yoy) Import growth (yoy) Source: CEIC.4% 32. including CSCL and COSCON. Asia/Europe market saw strong freight rate recovery with good TEU growth while transpacific market continued to underperform due to the weak US demand and overcapacity.000 5.2% p.8% 6.000 10.7% and 30. China saw a weakening export growth and shrinking trade surplus.a.4% yoy in 1Q07 to 10. mainly TSA (Transatlantic Stabilization Agreement) are introducing new bunker surcharge program to raise transpacific rate but we question the weak demand could actually affect load factor.418 12. CCB Int’l Securities China’s recent trade performance 60% 50% 40% 30% 20% 10% 0% 01/07 02/07 03/07 04/07 05/07 06/07 07/07 08/07 09/07 10/07 11/07 12/07 01/08 CCH (COSCON) 1919 HK 439.0% yoy in 4Q07. Key Chinese liners. Overall speaking.8% 11.Vulnerable container outlook Global economic slowdown and supply glut are the key concerns Container market performance was mixed for 2007.

CCB Int’l Securities 11 . Sinotrans Group and China Merchant Group Source: Company data. of which it shall maintain absolute control and cultivate leading international enterprises. coal.State policy to benefit shipping SOEs Favorable state policies are the key rerating catalysts to the sector China has predominately relied on foreign shippers to transport most of its energy imports but its mounting energy demand has urged the government to protect its energy shipping security. aviation and shipping. there are five CSOEs operating shipping or shipping-related business. Summary of key shipping policies National energy security plan Energy shipping security State government aims to lift domestic shippers’ market share in shipping energy and other key materials imports to about 50% by 2010 and to 80% by 2015.000 DWT). power generation and distribution. The State is working out relevant industry policy. Meanwhile. SASAC. domestic players have accounted for an estimated 30% and 15% of iron ore and oil import shipping market. State government attempts to consolidate its key state-owned assets in shipping and six other sectors to cultivate worldwide industry leaders. Capacity expansion (N o of v essel for 2008~2010) 80 65 60 60 40 Total: 31 12 Total: 26 12 20 19 0 Capesize/VLOC on orders COSCO Group China Shipping Group VLOC needed 8 6 VLCC on orders Other SOEs VLC C needed Note: Other SOEs include Changjiang Shipping Group. CCB Int’l Securities CSOE restructuring Market share expansion Market share expansion to support capacity growth Currently. which aims to encourage domestic shippers to transport up to 50% of its energy and key materials imports by 2010. Source: National shipping security plan refers to Nanjing Waterway 2006 Annual Report (600087 CH). COSCO and China Shipping Group are likely to strengthen their market position in the shipping competition given their strong shipping power to control the market and mixed business model to create massive synergy. Among which. Implementation of such policies are the key rerating catalysts to China shipping sector. telecommunications. National state-owned assets reform plan The plan aims to consolidate key state-owned assets and reduce the number of CSOEs from currently over 150 to 80~100 by 2010. The market share expansion target could at least accommodate new domestic capacity of 110~115mn DWTs of iron ore and 80~85mn DWTs of crude oil by 2010.000 DWT) and 60 VLCCs (Very Large Crude Carrier. estimated as 250. oil and petrochemicals. National security State government has short-listed seven core sectors. We believe two shipping CSOEs (Central State-owned Enterprise). respectively. estimated as 300. The seven pillar industries include armaments. or at least 65 Capesize or VLOCs (Very Large Ore Carrier.

of which it will retain absolute control and cultivate worldwide industry leaders. COSCO Group and China Shipping Group are already two world competitive shipping enterprises. which together control an estimated 40% of China’s total shipping power.8% CSC . are likely to benefit from the consolidation trend.3% Sinotrans . including unlisted shipping business. CCH and CSCL are likely to be the key beneficiaries. We expect to see a two-phase restructuring roadmap: Phase 1 Parent of large SOEs shall accelerate assets injection into listed arms. Leading SOEs are expected to take major roles in the coming industry restructuring and shall have more M&A opportunities.Industry restructuring underway China shipping sector is currently at phase 1 of the consolidation trend In a move to strengthen major state-owned assets and enhance China’s national competitiveness in the world. 59. We believe five shipping CSOEs may potentially consolidate into 2~3 shipping conglomerates over the next 2 to 3 years. 22. 4.1% China Merchant . Shipping is among the seven pillar sectors and will be a key restructuring focus for the next 2 years. terminals and other shipping-related business. CCH is likely to undergo further assets restructuring with COSCO Group and may acquire its oil tanker business while CSCL targets to acquire all container-related assets from its parent after its A-share IPO in late 2007. 7. which is in line with the national plan to consolidate its 150 CSOEs into 80~100 by 2010. We believe leading shipping conglomerates. CCB Int’l Securities Unlisted assets Dry-bulk shipping (Sinochart) Phase 2. with strong economies of scale and solid market power. 6. Out of five CSOEs.0% COSCO . seven core sectors were named by state government. CCB Int’l Securities 12 .7% Source: Company data. Out of Hong Kong listed shipping counters. Key unlisted assets CSOEs Listed arms Listed assets China Shipping Group CSCL CSD Container shipping Dry-bulk shipping Oil tanker COSCO Group CCH Dry-bulk shipping Container shipping Container terminals Container Leasing Container manufacturing Oil tanker Sinotrans Group SSL Dry-bulk shipping Container shipping Oil tanker Container terminals LNG shipping Container leasing Container manufacturing Source: Company data. Estimate breakdown of current shipping power controlled by CSOEs China Shipping .

China Shipping Group plans to inject container terminals and other container-related assets into CSCL over the next 1~2 years.5% 17. Shipping conglomerate COSCO Group is the largest shipping force in China. Major shipping business includes its Shanghai-listed subsidiary. CSC Group has listed most of its shipping business in A-share market.7% 14. finance. including infrastructure. Merchant Energy Shipping (601872 CH). Their strong capacity base shall achieve better economies of scale and their comprehensive business mix. Shipping CSOE comparison COSCO Group 76. Inland river carrier Changjiang Shipping Group (“CSC”) is the largest inland-river shipping company in China.2% 7. Five shipping CSOEs are divided into three categories as follows.Emerging shipping SOEs Economies of scale and market share are crucial in shipping competition Economies of scale and market share are the key competition focuses in shipping sector.8% 0.8% Sinotrans Group 2. accounting for an estimated 10% of China’s inland-river capacity.3% 28. the largest coastal shipping force in China. COSCO and China Shipping Group are two leading shipping conglomerates with solid market power in each of three shipping segments.8% China Shipping Group 12. Oil tanker is expected to be injected into CCH the soonest by 2008.2% 0% 20% 40% 60% 80% 100% 120% 140% 160% Dry -bulk shipping market share Container market share Oil tanker market share Note: market share in terms of central state-owned capacity as of Dec 2007 Source: Company data. logistics and energy shipping. China Shipping Group mainly operates CSCL.5% 0. the world’s fourth largest container line and CSD. likely create massive synergy in the competition. particularly terminal-shipping operating models. Multi-functional shipper Sinotrans Group is the largest logistics group in China. Sinotrans Group has recently listed its shipping subsidiary.0% 45.0% China Merchant Group 1. China Merchant Group is a diversified conglomerate covering various industries. SSL in Hong Kong stock market.8% 20.3% CSC Group 6. We believe the two shipping giants shall strengthen their market position for the years to come and may potentially benefit from the industry consolidation. mainly engaged in agency and freight forwarding services. The group is the largest dry-bulk carriers in the world and has listed most of its shipping assets in CCH. real estate. occupying 38% of domestic shipping capacity. including its oil tanker Nanjing Waterway (600087 CH) and dry-bulk carrier CSC Phoenix (000520 CH).9% 40.2% 25. Currently. CCB Int’l Securities 13 .

2x 11. We value Chinese dry-bulk carriers at 11.000 5. Our valuation range is set as follows based on our peer group valuation. We believe the results of recent price talks between China’s steel makers and global iron ore exporters are favorable to Asian bulkers and BDI sentiment shall continue to improve throughout 1H08.0 (BDI) 12.9x 8.0 8.000 20. We give premium valuation to Chinese dry-bulk carriers.4x We value Chinese container lines in line with Asian peers.7x 8.0 2.4x 15. CCB Int’l Securities Global 1.2x 08F PBR.3x Asian 1.Valuation and recommendation Peer comparison We mainly benchmark with our global and regional peer group to value Chinese shipping stocks.0 1/1/06 3/1/06 5/1/06 7/1/06 9/1/06 1/1/07 3/1/07 5/1/07 7/1/07 9/1/07 11/1/06 11/1/07 1/1/08 0 Source: Bloomberg 14 .1x 14.1x Dry-bulk carriers Global 1. representing 30% premium to global peers supported by China’s strategy to boost domestic players. Our global liner peer group is currently trading at an average 08F PER of 15.1x PER 15.1x Asian 1. which is in line with current valuation of Asian peers. Valuation target Container Peer group 08F PBR 08F PER Target multiples 08F PBR 1.000 10.3x and PBR of 1.000 BDI peaked at 11.7x 08F PBR.1x 08F PBR and 14.0 Highest valuation at 19.1x 08F PER to value Chinese container liners.3x 08F PBR.000 6. High BDI drives high valuation (Peer group forw ard PER) 25.0x 08F PER 14. We used both PBR and PER to set our valuation range and derive the valuation base for individual company.0 4. We used 1.4x 08F PER and 1.039 10.0x 08F PER and 2. supported by favorable state policy. Global bulk carriers are currently trading at average 08F PER of 8.000 0.1x and 08F PBR of 1.4x while key Asian liners are trading lower at 1.0~1.1x Source: Bloomberg.9x while key Asian bulkers are trading at about 8.1x 2.

4 11.0 N/A 20.50 75.5 1.2 5.2 1.8 ROE (%) 08F 09F 38.2 2.2 10.6 2.4 1.4 40.3 0.1 13.1 14.8 10.9 4.0 08F 3.5 2.5 15.3 10.7 12.3 4.2 11.6 47.2 5.3 5.7 6.8 11.1 36.00 24.7 N/A 27.548 11.1 8.2 2.1 1.1 26.8 4.6 2.7 8.0 2.6 9.012 2.2 1.3) 6.5 13.9 5.8 1.5 4.042 HRZ US Horizon Lines 20.03 2.9 28.7 9.0 3.89 13.8 1.6 11.4 10.4 N/A 8.2 PBR (X) 09F 2.6 0.3 1.196 850 3.9 4.30 211 23.6 1.8 13.7 11.6 N/A 2.5 1.9 8.8 32.5 4.762 59.2 1.9 9.7 25.5 11.0 N/A N/A 12.6 1.8 4.3 31.9 10.4 1.4 1.7 17.9 (1.9 1.3 1.6 4.2 7.8 2.6 N/A 25.4 1.441 1.6 1.0 2.14 937 2.6 3.4 1.8 13.4 0.3 9.7 0.17 MISC MK MISC Berhad 8.2 1.2 1.1 1.0 17.304.9 6.2 8.9 1.0 N/A 10.5 5.3 2.4 7.6 2.1 17.1 14.7 N/A 26.2 29.3 7.2 3.4 6.7 07F 4.0 0.9 7.75 3.693 1.9 2.8 0.4 26.8 13.7 1.2 1.2 41.2 1.6 2.5 2.2 N/A 2.9 21.6 11.06 Mkt cap (Local’mn) 353.5 9.2 2.240 07F 11.4 15.0 8.1 2.2 9.5 14.6 2.9 15.3 1.3 1.9 24.3 15.3 1.60 3.5 19.3 2.7 9.5 10.807 4.57 38.4 0.6 1.3 N/A 2.4 13.3 39.8 8.0 10.1 16.8 1.7 12.6 44.0 N/A 8.5 9.2 4.5 5.5 2.5 9.209 665.0 8.8 24.9 11.720 72.1 3.1 N/A 2.461 1.4 1.2 1.6 6.3 9.6 1.1 12.7 15.4 4.3 2.1 7.0 11.644 5.4 1.7 30.7 10.5 7.5 1.120 2.2 11.5 0.3 16.9 N/A 10.9 1.2 15.1 13.5 12.1 3.9 9.6 10.2 07F 48.325 9107 JP K Line 1.6 7.1 (%) 09F 2.2 2.4 25.2 N/A N/A 12.0 9.9 10.0 2.8 07F 1.8 21.9 1.593 603 32.46 408 28.5 2.3 Diversified shipping conglomerates MAERSKB MAERSK 49.9 N/A N/A 12.827 2.9 8.531 30.9 17.3 10.4 18.5 2.2 NM 42.0 9.9 N/A 2.4 N/A N/A 5.2 9.2 7.5 1.9 1.7 5.2 1.183.1 16.9 2.4 21.0 1.6 1.4 15 .9 18.078 13.452 1.7 13.8 2.0 17.6 1.4 1.1 1.0 PER (x) 09F 9.8 6.3 22.0 28.3 2.2 3.2 2.6 12.1 1.4 1.3 1.7 5.8 10.9 22.75 Average Note: Closing price as of 3 March 2008 Source: Bloomberg 218.1 14.0 6.7 6.7 1.5 3.0 9.3 6.3 66.0 26.1 1.3 6.2 Global dry-bulk carriers 005880 KS Korea Line DSX US Diana shipping DRYS US Dryships Inc SCI IN Shp Corp India QMAR US Quintana Mari STX SP STX Pan Ocean 2343 HK Pacific Basin 2606 TT U-Mine Marine Average Global containers 2603 TT Evergreen 2609 TT Yang Ming NOL SP NOL DAC US Danaos Corp SSW US Seaspan Corp 011200 KS Hyundai Marine 000700 KS Hanjin Shipping 316 HK OOIL Average Global tankers 1192 HK Tijan Petroleum GESCO IN Great Eastern NAT US Nordic American FRO US Frontline Ltd 9112 JP IINO Kaiun Average 200.378 104.5 44.5 9.1 9.0 15.9 14.9 N/A 0.2 1.9 16.9 4.9 10.9 N/A N/A 0.9 7.0 4.8 1.8 4.8 3.00 2.441 1.3 2.4 Yield 08F 2.8 9.6 8.1 3.7 0.2 15.9 N/A 6.1 12.2 13.0 08F 8.6 0.4 2.6 0.6 N/A 23.0 25.8 8.6 3.0 6.0 5.6 7.7 2.9 N/A 10.41 28.3 20.931 6.0 20.7 8.9 1.7 15.3 2.8 5.9 14.1 1.8 6.800 48.08 85.5 1.0 1.663 92.1 N/A 3.6 25.770.800 9101 JP NYK Line 962 9104 JP MOL 1.4 39.5 2.400 34.9 0.4 1.3 7.4 17.476 9.3 3.0 25.85 20.6 7.598.47 5.6 19.0 25.5 8.4 2.0 1.1 9.1 8.6 12.628 20.4 2.4 6.7 2.3 2.0 4.34 45.1 2.2 21.3 2.9 9.1 5.034 113.4 16.0 17.2 13.1 3.8 20.03 26.000 28.0 19.2 2.Global shipping peer group Code 1919 HK 1138 HK 2866 HK 368 HK Name CCH CSD CSCL SSL Price (Local) 23.5 0.7 12.0 13.341 5.5 9.7 13.033 47.5 6.3 12.2 4.7 7.110.5 15.946 62.3 16.8 14.9 5.5 8.9 2.5 1.8 7.3 1.1 0.8 13.6 7.0 1.5 2.9 11.5 16.2 16.8 1.1 2.0 1.8 1.5 N/A 2.3 2.3 14.0 1.70 78.1 2.2 18.8 4.949 20.9 30.0 11.9 30.

CCH and SSL Favorable industry outlook. CCH and SSL. Has the most sensitivity to BDI volatility among peers but we have already factored in a 25% BDI decline in its earnings forecast model. We are neutral on container liner CSCL. Rapid capacity expansion in Asia/Europe and domestic route over FY08~09 Has the most aggressive expansion target among peers but surging vessel price is likely to undermine its capacity expansion plan. We recommend to overweight China shipping sector and buy dry-bulk carriers CSD. Buy. driven by new vessel deliveries Stable TCE improvement to drive visible growth in FY08 Evolving into a shipping conglomerate and shall further comprehend its shipping business mix for the next few years. Strong delivery in FY09 to support its market share expansion in both coastal coal shipping and iron ore imports shipping market. Market leadership to sustain pricing power and strong freight rate improvement to boost margins over FY08~09. given their resilient growth prospects. Discounted price vs. freight volume. Competitive analysis Competitive factors Growth prospects CCH CSD CSCL SSL Industry outlook CCH CSD CSCL SSL Profit margins CCH CSD CSCL SSL Capacity expansion CCH CSD CSCL SSL Risk factors CCH CSD CSCL SSL Scores Comments 2 4 1 3 2 4 1 3 2 3 1 4 3 4 2 1 Earnings may slowdown in FY09 due to BDI retrenchment. The counter is fairly valued at current price level and key upside risk may come from China’s strong export performance towards Europe. good growth. Sustainable margins with synergies among different shipping segments. Buy. which is the best shelter from worldwide shipping cyclicity. 2 4 1 3 Recommendation CCH CSD CSCL 11 19 6 Key beneficiary of favorable industry trend and buy recommended. Generate lowest margins among peers with high leverage to spot market Leveraged to dry-bulk chartering and yields highest margins among peers.Recommendation We recommend to overweight China shipping sectors. SSL 14 Source: CCB Int’l Securities 16 . Our stock picks derive from our competitive analysis as follows. bunker costs and RMB appreciation. Stable delivery over 2008~2009 but is expected to build more large-size dry bulk carriers for iron ore imports shipping. High exposure to coastal coal shipping market. strong government support and ongoing consolidation focus are the key rerating catalysts. Our most preferred shipping play with visible earnings growth. Improving growth visibility with good TCE improvement but surging vessel prices may dampen its fleet expansion target. Potential acquisition of oil tanker shall bode well for its earnings stability. Container freight rate vulnerable to global economic slowdown Leverage to dry-bulk shipping boom and shall renew its contacts on high BDI. given the vulnerable container outlook. Neutral. Maintain good growth over FY08~FY09 with strong costal freight rate outlook and capacity expansion. Highest sensitivity to freight rate. and buy CSD. Modest growth over FY08~09. Ride on rising coastal coal shipping market and China’s strategy to boost domestic players in energy overseas shipping.

7 40.3 15.6 27.5 11.7 23.8 97.3 N 3.3 Target PBR (x) 08F 4.6 SSL 52.3 11.1 51.00 25.8 NPM 08F 22.4 53.0 4.9 0.2 45.2 40.0 14.5 31.7 46.China shipping comparison Valuation and ratings Company valuation Rating TP (HK$) Upside (%) O 32.5 16.8 60.0 25.8 17 .2 23.0 28.0 38.1 46.1 07F 21.0 EPS growth (yoy) 08F 28.35 25.7 7.4 28.5 62.0 GPM 07F 08F 09F CCH 32.4 25.6 1.0 OPM 08F 28.5 8.8 128.5 71.0 10.1 3.6 61.6 46.3 2.5 27.3 Tanker capacity (yoy) 07F 08F 09F 8.0 62.2 14.2 15.6 4.4 51.7 Container capacity (yoy) 07F 08F 09F 11.4 11.1 22.9 6.5) 72.3 32.0 28.8 45.9 11.00 39.5 10.7 51.0 62.1 11.2 47.2 19.0 1.9 9.2 30.68 6.0 09F 11.6 36.6 11.4 142.9 14.7 11.9 16.1 15.3 33.4 Target PER (x) 08F 11.2 17.9 07F 495.0 44.0 (6.0 3.6 37.6 45.5 09F 3.4 22.8 29.6 68.3 CSD 43.3 9.3 07F 48.9 16.0 11.8 5.3 09F 26.7 10.4 8.3 291.9 36.9 8.9 24.0 18.8 07F 27.7 10.7 36.4 5.4 34.6 29.5 10.5 Bunker /operation cost 07F 08F 09F 14.5 Revenue growth (yoy) 07F 08F 09F 91.7 71.0 07F 6.8 1.8 62.0 10.0 20.1 0.0 159.1 45.1 O 31.0 60.2 92.0 12.7 25.3 26.9 30.6 27.5 10.1 O 6.3 12.6 12.5 12.8 8.3 CSCL Net cash Net cash Net cash SSL Net cash Net cash Net cash Capacity expansion (%) Dry-bulk capacity (yoy) 07F 08F 09F CCH 4.7 ROE 08F 38.5 1.2 15.5 Source: CCB Int’l Securities 07F 26.5 15.8 46.0 16.1 EBIT margin 08F 29.3 11.1 09F 25.8 13.9 2.5 3.4 CCH CSD CSCL SSL Growth prospects (%) CCH CSD CSCL SSL Profit margins (%) Net profit growth (yoy) 07F 08F 09F 885.1 3.7 CSD 45.8 Depreciation/operation cost 07F 08F 09F 6.9 09F 20.2 41.8 0.5 38.0 1.8 09F 26.8 74.9 41.1 10.5) 25.8 16.2 09F (6.7 4.6 8.6 CAGR over 06A to 09F Revenue Net profit EPS 33.7 9.4 2.2 Financial performance (%) Net gearing 07F 08F 09F CCH Net cash Net cash Net cash CSD 15.6 7.5 CSCL SSL 2.4 4.7 10.5 11.9 1.5 07F 14.9 42.8 11.3 16.2 CSCL 12.2 22.9 12.

5% +3.9% CSCL SSL -4.1% -17.0% CSCL SSL -4.0% +11.2% -0.5% Operating costs Bunker costs +3.2% Bulk -4.9% -3.8% -0.6% -0.5% -0. Policy risks Macro tightening by state government to curb overheated economy may cut national infrastructure investment budget and is likely to reduce China’s material imports.8% -1.2% Change in valuation CCH -3.0% Freight rate Container Tanker -1.8% +0.8% -1.1% -0.2% -0.0% -1.6% -0. Economic risks US and Europe recession are the key risks to CSCL. Further high-than-expected bunker prices and runway operating costs could significantly cut profit margin.6% -0.8% CSD -2. Further. CSCL is the most vulnerable to freight rate volatility and mounting bunker costs.2% +0.5% -0.3% +1.8% -0.1% -3.0% -4.3% -0.2% -0.7% Freight volume Container Tanker -1.7% -3.Risk factors Freight rate and operating performance of shipping companies are sensitive to a number of factors.6% -14. Other risks China will renew its iron ore contracts with global ore exporters from year to year.3% +3. bunker costs and other seasonal factors.6% -11.3% Change in FY09 EPS CCH -3.3% +0.1% -2.7% -13.5% CSD -3. Key risk factors of China shipping sector is summarized as follows. given its high exposure to US and Europe market.8% -15.8% +3. the ultimate consolidation plan of shipping SOEs is yet to finalized by state government. Sensitivity summary Key assumptions (-5% change) Change in FY08 EPS CCH CSD CSCL SSL Bulk -4. change in demand or supply.2% -0.6% -0.8% -4. Operational risks Hiking vessel prices could potentially hamper SOEs’ fleet expansion plan.6% -0.5% -2.2% +3.8% +10.3% -0.0% -0.4% -3.5% -0.6% -0.0% -17.6% -0. and may not benefit the listed companies. a significant economic slowdown in China will weaken its overall material demand and undermine the growth prospects of dry-bulk carriers.9% -3. Further. Significant change of current contract prices and conditions may adversely affect shipping volume of iron ore.0% Source: CCB Int’l Securities 18 .8% +8. including global/regional economic outlook.

(3) lack of an efficient management over multiple shipping businesses could lead to decreasing economies of scale. We expect a 496% yoy earnings growth for CCH in FY07 to be boosted by full-year profit contribution from its dry-bulk shipping business which is estimated to account for a bulk 74% of FY07 EBIT.2 2.500 in 2008 and drop by 25% in 2009 on rising new supply.5 11.900 2.1 38.4 FY09F 137.45/5. We used sum-of-the-part model and valued CCH at HK$32.6% yoy during 2007 driven by the strong recovery in Asia/Europe rate while EBIT from terminals to rise 32.7 7. (HK$ mn) 52-wk hi/lo Average turnover (mn share) Major shareholders COSCO Group Acquisition to boost strong FY07 results.0% yoy for FY08 but to decline by 19% yoy in FY09.737 Source: Historical data from the company.527 28.6 2.3 26.580 353. thanks to the tariff improvement and robust throughput growth.0 1. COSCO Group and became the world’s largest dry-bulk shipping company.1x 08F PER.330 (69.5% yoy in FY09.584 13.com (852) 2532 6749 BVPS (RMB) 3.1 7.311 2.5) 9. (2) macro tightening by the State to restrict its material demand.098 1. Undemanding valuation.210 32.282 2009F 9. assuming average BDI to peak at 7.0 9.9 FY08F 134.0 7.771 27.6 8. Financed by its A-share IPO fund.022 JP Morgan# Morgan Stanley# UBS# # H-share only * Closing price as of 3 March 2008 Source: Bloomberg Market data HSI Index HSCEI Index HSCCI Index 2008F 7.806 3. We forecast CCH’s Asia/Europe and transpacific freight rate to decline by 2. Financial Summary FYE Dec (RMB mn) Turnover EBIT FY06 50.8 % 53.4% yoy. others are CCB Int’l Securities’ estimates 19 .305 27.193 23.902 35.4 48.538 25. (2) capacity expansion to drive container EBIT growth at CAGR of 35% over 2006 to 2009. We believe CCH is likely to undergo further asset restructuring with its parent and may acquire its oil shipping business during the next 1~2 years.168 0.034 39.392 6. which represents about 10% premium compared to global shipping conglomerates. 1919.076 4. CCH’s strategy to diversify into other shipping segments shall bode well for its earnings stability.6% yoy in FY08 but to peak off by 6. CCH has acquired the dry-bulk fleets from its parent.364 (6. Further catalysts include stronger than expected results and BDI performance. Key risk factors to CCH include: (1) a sharp correction in BDI led by global recession.379 2. Our earnings forecast has factored in: (1) strong dry-bulk EBIT growth at 42.Company research China Shipping Outperform (initiate) China COSCO Holdings (1919 HK): Evolving into a shipping conglomerate Restructuring underway.964 495.994 4.1% Share data Bloomberg code Share price (HK$)* Total issued shares (mn) Market cap.7) 65.5% and 5% yoy in FY08 respectively due to the weak US and Europe trade outlook.158 21. Earnings may peak during 2008.4 Target price: HK$32.00 2. EBIT from container shipping is expected to jump by 56.5 FY07F 112.HK 23. Our earnings forecast for FY07 is largely in line with CCH’s latest profit guidance at not less than RMB18bn.26 37.736 2. The premium is well supported by CCH’s potential assets restructuring with its parent. We forecast earnings to grow by 28.6 8.8 1.0 per share or 11.439 5.283 BVPS consensus (RMB) EPS consensus (RMB) Source: Bloomberg Stock price performance Source: Bloomberg Net profit EPS (RMB) y-o-y chg (%) PER (x) Yield (%) ROAE (%) Wang Ren wangren@ccbintl.0 Upside: 39.

2% 80. Healthy container leasing growth. We expect transpacific and Asia/Europe rate to drop by 5% and 2.7~4.7% Dry -bulk shipping.0% Container leasing.5% yoy due to the weakening US and Europe trade volume. and become the world’s largest dry-bulk shipping company. COSCO Group during 2H07.5% yoy.8% Container shipping. Capacity expansion to boost container growth. 39. CCH has acquired the entire dry-bulk shipping business from its parent. based on the following projections.1% Logistics & others. Container terminals shall account for about 3. COSCON the container shipping arm of CCH. 0.1% Container leasing. 6. We forecast FY07 earnings to grow at 496% yoy. EBIT from container leasing is expected to grow at 16~18% yoy over FY08~FY09 in line with CCH’s overall container volume growth.6% of CCH’s total EBIT during FY08~ FY09. Solid dry-bulk shipping performance. 2. Revenue breakdown as in FY08F EBIT breakdown as in FY08F Logistics & others. CCH’s annual shipping capacity is expected to increase by about 50% to reach 580mn TEUs by 2009. flat FY09. Strong FY08 vs. We forecast FY08 earnings to grow by 28. CCH targets to develop itself into diversified shipping conglomerate and we believe CCH may acquire the oil tanker business from its parent to comprehend its business portfolio for the years to come. Stable container terminal growth. which is estimated to account for 74% of CCH’s FY07 EBIT. assuming about 65~70% of its dry-bulk capacity is chartered-in and annual average BDI to peak off in 2009. mainly driven by strong container throughput growth in Bohai Rim. and segment EBIT is expected to grow at 42. 3.6% Source: Company data. 4.2% Container terminals. The robust growth is attributed to full-year profit contribution from the newly-acquired dry-bulk shipping business. CCB Int’l Securities 20 . CCH’s strategy to gain controlling stake through equity investments could fuel earnings of the segment. We have already factored in a 25% yoy decline in 2009 average BDI in our earnings forecast.6% yoy and a modest FY09 earnings decline by 6. 48. 10. Dry-bulk segment shall continue to be the key driver for CCH in FY08.3% Dry -bulk shipping.1% over FY06~FY09. We forecast 13~18% yoy growth for CCH’s liner revenue over 2008 to 2009 to be driven by strong capacity expansion. 5.A diversified shipping conglomerate Potential breakthrough in assets restructuring with its parent Funded by its A-share IPO. Currently. occupies about 65% of CCH’s leasing capacity.0% yoy in FY08 but to decline by 19% yoy in FY09. EBIT from container terminals shall maintain stable growth at CAGR of 22. Container shipping.0% Container terminals. in line with company’s recently revised profit guidance.

807 14. others are CCB Int’l Securities’ estimates 21 .5 27.774 6.789 31.8 2009F (Yoy %) (14.855 5.1 2.621 11.5 5.175 12.550 18.000 TEUs) . Australia) .Intra-Asia (incl.domestic market .913 796 313 22 782 1.0 19.5 7.176 46.9 60.787 12.0 2.5 (5.6% 2007F (Yoy %) 153.5 17.5 7.9) 14.5 2.145 10.3% 39.912 3.7 34.others GPM at container shipping OPM at container shipping Container terminals Total container thought put (1.5 2008F (Yoy %) 26.5 20.3 13.5 20.591 1.846 9.2 1.0 5.442 21.0 (3.8 5.3% 6.5) 11.910 9.111 1.264 8.2% 44.024 4.7% 3.5 14.2 15.076 11.373 4.2) 14.588 94.Asia/Europe (incl.784 2.0 27.9 4.Key segment statistics Dry-bulk shipping Revenue from dry-bulk segment (RMB’mn) .7 26.5 10.1 44.161 11.525 1.360 1.044 2.6 15.478 6.6% 1.3) 7.0% 2009F 55.5 2.062 3.121 2.2% 11.3 21.9% 5.753 1.719 689 285 34 711 1.transpacific .Pear River Delta .5 15.Others 10.226 7.234 3.5) 27.6) (19.793 4.5 7.501 257 842 6.2 19.022 4.740 15.732 10.shipping agency services .1% 5.6 11.managed container fleet Total container fleet (1.Int’l master leasing .Yangtze River Delta .340 15.2) (1.792 13.970 9.0 (2.439 35.817 5.chartered-in vessels GPM at dry-bulk shipping OPM at dry-bulk shipping Container shipping Container shipping volume (1.0 2.4) Source: Historical data from the company.2 26.0 17.351 4.5) (2.1) (5.0 20.038 2.0 12.431 7.4 17.5 13.3 5.7% 2007F 51.5 30.209 1.504 566 239 37 661 1.3 5.third-party logistics .0 5.Asia/Europe (incl.Int’l long-term leasing .817 2.7 27.411 3.497 258 1.546 3.9 15.0 (8.8 15.8% 21. Mediterranean) .019 31.domestic market .1 51.0 3.9 100.3 12.137 6.5) 5.3% 36.387 50.Overseas Revenue from container terminals (RMB’mn) Profit from associates/JCEs (RMB’mn) Investment returns (RMB’mn) Container leasing Total container leasing volume (1.0 20.7 7.0 18.0% 4.0 (34.Bohai Rim .1 2006 20.391 10.8 16.777 1.0 0.604 1.2) (2.2 0.0 2.481 8.335 10.7 20.0 10.1% 7.870 10.227 232 609 162 40.0) 35.000 TEUs) .167 2.1% 6.251 98.0 37.5 12.transpacific .000 TEUs) .5 2.566 2.5 20.922 10.7% 41.885 1.425 558 1.813 94.401 1.106 8.998 95.4 15.COSCON .5 1.034 1.self-owned vessels . Australia) . Mediterranean) .593 9.2) 10.609 264 1.003 25.3) (6.491 1.Intra-Asia (incl.778 373 774 187 48.0 32.426 251 1.233 457 120 27 630 1.9 25.312 4.3 15.1 2.1 11.303 1.699 8.859 25.699 1.0 17.5 (8.4 12.8 20.9 24.others Average container rate (RMB/TEU) .000 TEUs) Container utilization rate Logistic operation Total services income (RMB’mn) .7 19.5 3.487 10.5 (7.473 39.0 21.701 463 909 211 56.601 23.813 9.2% 2008F 64.5 (1.1 150.812 47.0 13.854 5.967 13.3 3.9 23.5 1.5) 12.0) (2.268 9.195 20.8% 1.505 15.7 15.0) (2.0 (2.452 12.7% 1.279 4.021 239 23.1 157.8 7.

59 18. or COSCO Logistics at 9.8 10.82 0.5mn.22 0. which is based on our FY08 book value projection of CCH’s container segment. COSCO Group currently occupies oil tanker fleet with total capacity of about 3.1x.0x 08F PER.8 21. we expect CCH may undergo further assets restructuring with its parent.18 14.12 0.2 58 34 92 1.4x 08F PER. Our divisional valuation is comparable to Asian liner peers. compared to Asian peer average of 8.0 No of vessels 9 12 5 6 32 DWT (mts) 2.2 25.8 for CCH’s 51. which translates into 08F PER of 11.3% stake of COSCO Pacific (1199 HK) valued by current market price with a holding company discount of 15%.9 for container shipping valued at 1.6 19. 22 .1x 08F PBR. Following table summarizes the key unlisted shipping assets held by COSCO Group: Key shipping assets remaining at COSCO Group Oil tankers VLCC Panamax Handysize LPG carrier Sub-total General cargo ships Multi-purpose General cargo Sub-total Specialized vessels Semi-submersible Asphalt Ro-Ro Sub-total Source: COSCO Group 3 11 7 21 0.02 3. which is largely in line with current valuation of key China logistic operators.41 0.47 1. container manufacturing business and holds 49% of COSCO Logistics. which is expected to grow by 85~100% by 2010.05 0.0x 08F PER.0 13.8 25.0 for CCH’s dry-bulk cargo shipping business valued at 11.47 Average fleet age 3. COSCO Pacific operates CCH’s container leasing. based on the Group’s tanker expansion plan.0 We applied sum-of-the-part method and valued CCH at HK$32. The valuation represents about 15% premium to current valuation of global shipping conglomerates.8 17.4 9. (2) HK$3. 25% premium is given the state government’s policy to protect domestic players. COSCO Group and may acquire the oil tanker business from its parent. (4) HK$0. or COSCON.1 Undemanding valuation SOTP valuation at HK$32.0 12. (3) HK$1.4 for CCH’s remaining 51% stake of CCH’s logistic operation.0 per share.Key growth catalyst – asset restructuring Tanker capacity may double by 2010 To diversify its business mix.06 0. Our SOTP valuation of CCH mainly comprises the following: (1) HK$26.06 0. container terminals.

3 1.89 2.1 36.1 10.0 1.9 4.4 2.2 2.1 2.0 11.0x 08F PER 3. (2) stringent macro tightening by state government to cut its infrastructure budget and overall materials demand.9 1.6 10.9 0.3 17.9 21.5 10.5 1.00 Mkt cap (Local’mn) 353.8 14.2 11.00 2.8 3.4 4.1 China’s logistic operator 598 HK Sinotrans 2.6 N/A 8.1 11.1 1.3 2.5 11.4 1.7 0.1 2.7 20.3 07F 48.1 1.598.1 18.5 14.7 5.9 N/A N/A 26.8 10.2 1.5 39.2 07F 4.476 9.3 11.7 1.6 23 .9 200.85 Average Note: Closing price as of 3 March 2008 Source: Bloomberg.8 8.3 2.1 4.1 2.5 6.3 11.4 2.1 20.8 3.8 7.8 9.629 78.1 0.6 1.4 1.1 1.4 13.0 07F 1.2 8.7 1.2 2.9 0.8 14.7 3.2 5.5 9.5 1.3 5.579 28.6 1.4 36.7 2.47 25.770.548 11.75 217.8 N/A 12.911 9.9 8.3% 51% Valuation methodology 11.14 32.8 1.8 3.4 13.9 4.0 Key risk factors to our valuation include: (1) a sharp correction in BDI index led by global recession.827 20.1x 08F PBR Valuation (RMB’mn) 231.8 PBR (X) 08F 3.7 11.600 1.9 8.3 Shipping conglomerate MAERSKB MAERSK 9107 JP K Line 9104 JP MOL MISC MK MISC Berhad Average Global container 2866 HK CSCL 2603 TT Evergreen 000700 KS Hanjin Shipping 316 HK OOIL Average Global bulker 005880 KS Korea Line 2343 HK Pacific Basin 2606 TT U-Mine Marine STX SP STX Pan Ocean Average 49.8 3.6 1.4 13.8 7.283 12.9 ROE (%) 08F 09F 38.931 5.5 9.0 25.9 2.0 15.9 1.4 0.0 0.325 8.3 14.2 1.5 8.3 8.3 1.2 10.4 1.2 3.0 22.802 665.034 07F 11.2% 5.9 9.08 85.5 1.0 4.593 1.2 9.672 34.4 2.4 5.0 21.1 7.6 7.7 8.6 12.0 1.1 09F 2.825 % of valuation 81. and (3) higher-than-expected bunker costs and operation costs to undermine fleet returns.6 24.171 285.4 2.8 1.0 2.6 3.8 1.1 1.5 8.7 10.9 13.4 15.3 8.5 1.8 19.949 6.7 8.0 1.0 2.4 26.8 8.8 32.2 7.5 10.7 11. CCB Int’l Securities 10.8 14.5 3.1% - Market value with 15% holding company discount 15.0 15.3 4.0x 08F PER 1.5 1.0 5.042 1.70 92.3 19.4 15.1 3.8 N/A N/A 2.4 9.7 10.1 25.4 1.209 32.6 1.4 1.8 2.1 1.6 2.9 1.0 4.6 19.4 Yield (%) 08F 09F 2.3 1.9 17.0 3.0 2.3 1.8 0.3 12.9 6.6% 1.000 13.0 12.800 48.5 12.8 11.7 6.2 14.033 2.2 7.1 N/A 0.4 2.1 5. Valuation comparison Code 1919 HK Name CCH Price (Local) 23.9 18.5 1.6 8.0 PER (x) 08F 8.5 12.6 09F 9.5 7.3 4.2 2.SOTP valuation breakdown Key assets Dry-bulk shipping Container shipping COSCO Pacific COSCO Logistics NAV NAV/share (RMB) Exchange Target price (HK$) Source: CCB Int’l Securities Stake 100% 100% 51.3 4.3 12.8 4.2 18.6 7.0 9.4 40.5 2.6 2.5 1.2 41.720 72.3 30.9 2.42 152 HK Shenzhen Int’l 0.3 1.7 7.7 3.304.8 3.8 10.085 11.0 1.6 2.7 12.3 3.5 2.8 10.7 9.7 5.531 30.1% 12.2 15.9 2.6 1.85 34.4 1.1 16.5 17.

1 3.801 736 12.575) 34.325) (2.370 6.159 431 235 18.030 10.111) (599) (1.625 7 1 36.172 13.813 14.5 Net cash 23.797 10.294) 34.788 27.646 (5.686) (383) (5.906) 346 0 30.045 10.117 1.3 5.586 1.136 339 278 24.902 64.4 18.7 6.303) 8.924 11 5 7.884 32.5 64.669 13.180) 31.784 (81.379 (1.5 3.356 1.341 50.527) 21.467 80.6 73.6 4.489) 0.5 18.2 25.910) 1.146 (5.137) 2.935 8.349 11.651 288 300 24.775) (2.632) 27.1 48.9 22.2 5.195 8.330 0. instruments Tax payable Current liabilities LT borrowings Other LT liabilities Non-current liabilities Total liabilities Net assets Shareholders' equity Minority interest Net assets Cash flow projections FYE 31 Dec (RMB’mn) Pretax Profits Adj: non-cash items Interest received Tax paid Net cash from operating Capex & investment Investment income & Net Cash from Investing Equity raised/ (repaid) Change in borrowings Interest expense Dividends & distributions Others Net Cash from Financing Net change in cash 2006 4. net Profit before tax Income tax expense Net profit Minority interests Net attributable profit Dividends EPS (RMB) DPS (RMB) BVPS (RMB) Financial ratios FYE 31 Dec (%) Gross margin Operating margin EBIT margin Pre-tax margin Net margin S&D/revenue Effective tax rate Dividend payout ratio ROAE ROAA Current ratio (x) Quick ratio (x) Net debt/equity Interest coverage (x) Inventories days Receivables days Payable days 2006 9. others are CCB Int’l Securities’ estimates 24 .346 2008F 44.129 268 26.225 1.076 2007F 112.364 0.098 (1.719 35.0 1.964 0.8 32.771 51.338 55.023) 1.290 2009F 55.888) 300 0 33.174 14.806 (714) 4.323 40.881 (8.305 (1.448) 349 (15.311 (1.290 68.7 1.0 22.859) 7.454 375 (6.284) (1.3 23.373 369 (6.Financial Summary Income statement forecasts FYE 31 Dec (RMB’mn) Total revenue .logistic & others Cost of services Gross profit Administrative expenses Other income.135 80.496 9.6 1 0.8 6.462 48.166) (13.561) 25.995 598 38.390 Source: Historical data from the company.168 (1.063 17.0 21.080) 20.161 8.0 6.0 38.4 5.020) 4.container leasing .099) 0 (10.365 463 2.250) 1.5 24.527 0.9 1.3 46.959 295 30.740) (839) 9.554) 0 (3.123 602 8.0 18.164) 24.460 11.828 54.548 1.546 (93.401 129 10.450 4. net Share reform Operating profit Profit from JCEs/assos EBIT Finance costs.983 27.591 (7.7 22.477 18.425 1.995) 38.4 8.657) 30.031 0 (1.740 274 322 24.297 4.429) 25.022 Balance sheet forecasts FYE 31 Dec (RMB’mn) PP&E Intangible assets Long-term investments Other non-current assets Total non-current assets Inventories Trade receivables Other receivables Derivative fin.843) 1.039 4.030 40.143 53.174 (7.601 62.1 Net cash 16.6 3.7 63.220) (1.dry bulk shipping .9 26.215 (7.411 920 10.9 90.647) 2.3 7.732 (440) 3.1 2008F 30.859 53.477 2007F 31.255) 22.4 70.167 (46.4 24.2 2007F 28.541 27.754 1.2 20.3 2006 50.390 92.217 137.225) (1.654 1.425 16.500 8 1 28.798 15.392 2008F 134.729 (4.5 3.1 22.098) 2007F 25.4 26.2 18.014 120.018 (3.8 21.033 232 1.373 95.838 8 1 38.container terminal .005 16.929 2006 26.890 2.0 26.5 2009F 27.411 (98.729 118 349 (4.826) (881) (2.025 1.971 19.011 (6.071) 2.041) 879 120 25.092 (924) 3.6 1.915) (1.994 40.731) 177 (18.8 19.477 2008F 34.container shipping .823 11.218 105.1 1.728) 25.538 (499) 32.995 (13.069 373 2.158 (1. instruments Cash and cash equivalents Current assets Total assets Trade and others payable Short-term borrowings Derivative fin.025 1.455 6.098 15.7 2.242 3.8 63.9 4.059 4.729) 41.7 23.408 2009F 32.382 87.129 41.124 (15.669 (15.756 9.186 32.796 17.974 (2.011 6.654 558 2.346 44.610 27.6 32.195 47.092 (864) 261 (1.6 9.210 55.631) 21.737 2009F 137.6 Net cash 43.818 (4.031 (1.9 26.947 841 9.7 24.257 72.039 (6.757 1.590 54.573 7.991 242 20.265 (18.581 105.396 7.863) (931) (7.8 18.096) 1.986 15.0 15.

(2) CSD has secured a 40% yoy rate improvement in its renewed 2008 coastal coal contracts to contribute 65% of its FY08 revenue.3 1.439 5.5 FY07F 12.883 9. (HK$ mn) 52-wk hi/lo Average turnover (mn share) Major shareholders China Shipping Group 1138.63 11.575 3.659 7.5 28.814 27.6 28.068 1.66. Robust earnings CAGR of 40. We expect CSD’s VLCC rate to see a 5% yoy improvement in 2009.20/9.296 113.431 2.602 2. Our valuation of CSD translates into a 15. which could potentially protect its profit margins and earnings. significant BDI correction and significant change of current contract model.0x 08F PER.720 Stock price performance Source: Bloomberg FYE Dec (RMB mn) Turnover EBIT Net profit EPS (RMB) y-o-y chg (%) PER (x) Yield (%) ROAE (%) FY06 9.3 9.7 12. on the back of: (1) strong capacity expansion at 50% yoy for tanker and 10% yoy for dry-bulk fleet in 2009.5% yoy during FY08 and FY09. thanks to the rising freight rate and efficient cost control. and we forecast earnings to maintain strong growth at 20~25% yoy over FY08 to FY09. Favorable industry outlook. others are CCB Int’l Securities’ estimates 25 . Key risks factors to CSD include state government’s macro control to slowdown energy demand. The 35% premium is justified by its defensive business mix and buoyant industry outlook.538 6.759 0. We expect CSD’s market share in coastal coal shipping market to improve from current 30% to 35% by FY09. CSD is likely to sustain its leadership in domestic market and continues to enjoy a stronger pricing power as compared to its peers.5 2.China Shipping Outperform (initiate) China Shipping Development (1138 HK): Solid growth prospects Better growth visibility.4 27.3% Share data Bloomberg code Share price (HK$)* Total issued shares (mn) Market cap. CSD is nearly 70% exposed to buoyant domestic shipping market.009 5. the phasing-out of single-hulls during late 2008 to 2009 is likely to accelerate.0 30.929 1.0% over FY06 to FY09F.763 4. as 6 VLCCs and 1 VLOCs will be delivered.468 7.420 71.272 25.5 8.3 23.5 7. Strong electricity consumption and easing coal-rail bottleneck shall drive robust coastal coal shipping demand.8 FY08F 16. CSD is better sheltered from the volatile shipping cycle than its domestic shipping peers.4 15.867 Wang Ren wangren@ccbintl. Further.584 13.663 27.787 5. Relatively immune from US recession and global trade slowdown.9 FY09F 20. as compared to our valuation of Chinese bulk carriers at 11. given that: (1) CSD has locked-in over 80% of its current capacity by COA contracts.829 2.076 Source: Historical data from the company.0.658 5.0 Upside: 25.6 % 47.com (852) 2532 6749 BVPS (RMB) 3. (2) strong coal contract rate increment at 28. which may ease current tanker oversupply.490 7. We forecast earnings to grow by 71.752 1. (3) occupying 70% and 30% of China’s coastal oil and coal shipping market.9 3.5% and 9.9 2.0x 08F PER.75 1. We expect COA contracts to generate 90% of its total revenue by FY09.4% yoy in FY07 to be boosted by acquisition of 42 bulkers and disposal gain from old tankers. We expect costal coal shipment to remain strong throughout 2010 and overall costal shipping rate to grow at 10~15% yoy during 2008 to 2009. (3) Improving operating margins and fleet return.2 4.HK 24.9 Davis Selected Ad# JP Morgan# # H-share only * Closing price as of 3 March 2008 Source: Bloomberg Market data HSI Index HSCEI Index HSCCI Index 2008F BVPS consensus (RMB) EPS consensus (RMB) Source: Bloomberg 23.282 2009F 7. Target price at HK$31. mainly on a freight rate plus fuel charges basis. Financial Summary Target price: HK$31. Our target price is also well supported by our DCF valuation of CSD at HK$37.324 2.

We expect CSD’s domestic coal shipment to rose 7.9 4.0% Domestic market. Further.0 12. We expect earnings to maintain strong growth at 25~28% yoy over FY08 and FY09 respectively. 17. Further earnings upside may come from its rapid expansion into ore import shipping and potential turnaround of global tanker market during late 2008 to 2009.0~12.3 36.5 7. to be boosted by improving freight rate and aggressive fleet expansion.5 12. Revenue breakdown by shipping business (FY08F) BDI-related int'l bulk.0 15. the phasing-out of single-hulled tankers between late 2008 to 2009 is likely to ease current oversupply.0 4.Strong organic growth 13.6 28.5) Source: Historical data from the company.3 5.7 (24.0% between FY06 to FY09F We forecast a 71.1 (20.5% Source: Bloomberg.5 4. thanks to full-year profit contribution from its 42 bulkers acquired from its parent and disposal income from old tankers.4% Int'l oil shipping.0 8.7) 16.0 13. CCB Int’l Securities Robust earnings momentum at CAGR of 40. We expect CSD’s VLCC rate to see a 5% yoy improvement in 2009. 69.8 0.0 FY06 FY07F FY08F FY09F International oil 3.0 6. to be fueled by robust coastal coal demand and strong coal-rail expansion.0 6. is better sheltered from global economic slowdown and the BDI cyclicity. which has the highest exposure to domestic shipping market.0 10.5% yoy with average contract rate up by 40~10% yoy between FY08 to FY09.4% exposed to BDI index CSD.5 5.0) (2. 13. CSD has secured a 40% yoy freight rate increment in its FY08 coastal coal contracts and we expect a further 10% rate improvement in its FY09 contracts.2 19. contributing 69.7 4.0 5. others are CCB Int’l Securities’ estimates 26 . Strong VLCC delivery in 2009~2010 to ride on tanker market turnaround Optimistic industry outlook.0 15.4% yoy earnings growth in FY07.3 10.1 69. Key performance statistics for CSD Growth (yoy %) Business volume Domestic coal International coal Domestic oil International oil Average contract rate Domestic coal International coal Domestic oil 9. Coastal shipping continues to be a key driver of CSD.5% of CSD’s estimated FY08 revenue.0 11. Driven by a strong costal coal demand.9 40.4 16.

2% 40. CCB Int’l Securities CSD’s capacity expansion (mn DWTs) 15 12 9 6 3 3.22 6.40 0 2006 2007F Tanker capacity 2008F 2009F 2010F 3. to be driven by strong VLCC delivery in 2009 and the potential tanker rate recovery. in terms of business volume.8% 28. We expect both GPM and OPM to see good improvement over FY07 to FY09.55 5. Currently.52 5. Key contracts to sustain growth Key customer Shougang (000959 CH) Baosteel (600019 CH) Wuhan Steel (600005 CH) Sinopec (0386 HK) Shenhua (1088 HK) Segment Int’l iron ore Int’l iron ore Int’l iron ore Int’l oil Coastal coal Contract term 2H09~2019 2010~2020 15~20 years 2H06~1H16 Set up a 50/50 JV 2008~2010 Volume 37mn tons 37mn tons 170mn tons 10~12mn tons by 2010 1mn tons by 2010 Volume not specified Key beneficiary of China’s strategy to boost domestic energy shippers Guangdong provincial gov. upon delivery of 8 VLCCs and 4 VLOCs during 2009 to 2010.64 Improving profitability 25% 21.5% 30.4% 15% 28. Under such contract terms.9% 23.67 6. We expect CSD to maintain its coastal oil market share for the next few years and strengthen its coastal coal market share to 35% by FY09. CSD shall protect itself from a significant freight rate and bunker volatility. We estimate CSD to locked-in about 96% of its 2009 capacity by long-term contracts with key oil and steel makers in China.5% 10% 15. Fleet expansion to sustain growth.5% by FY09 on rising capex. CSD’s tanker and bulk capacity is expected to grow at CAGR of 20% and 10% respectively from 2007 to 2010.7% 20% 43.8% 37. but ROE may decline slightly to 28.0% 28.3% 20.0% Total capacity to grow at 16.31 5.16 3. We forecast a 25. CSD occupies about 70% and 30% of China coastal oil and coastal coal shipping market respectively.Expanding market share in coastal coal shipping market Market leadership to be strengthened.5% 46.0% 47.0% Dry-bulk capacity 2009F ROE Source: Company data.6% CAGR over FY06 to FY10F 35. 80% of Guangdong’s coal trading are transported by sea. Under the agreement. Based on current fleet expansion plan.8% 36. CCB Int’l Securities 27 . CSD’s signed COA contracts were mainly based on a freight rate plus fuel charges.3% as in FY09.3% yoy growth in FY09 earnings.69 3.5% 10.73 5. given its rapid fleet growth. on the back of rising coal freight rate and efficient cost control. CSD will become a key shipper to transport coastal coal to major power plants based in Guangdong during 2008 to 2010. Net gearing is expected to maintain at low level of 5.8% 5. Coastal coal Source: Company data.0% 0. Favorable contract terms to protect margins. close business tie with customers and strong government support as witnessed by its recent strategic agreement with Guangdong Municipal Government.0% 50.3% 5% 0% 2006 2007F Net gearing GPM 2008F NPM 10.2% 36. Currently. due to its huge capex needs. but we expect the company may gear up in FY10 and onwards.8% 30.

Sensitivity analysis Change in assumptions Corresponding year Freight volume -5% in domestic coal -5% in domestic oil -5% in other bulks Freight rate -5% in int’l tanker rate -5% in annual average BDI Operating costs +5% in bunker costs Source: CCB Int’l Securities -3. or 15x 08F forward PER.1. visible business growth and relatively sustainable profit margins for the next few years. given its higher earnings visibility as compared to peers. (3) terminal growth of 2. (2) a collapse in BDI index to hurt market sentiment.8% -3.8% -3. We also used DCF model to underpin our valuation as we believe CSD’s COA contracts shall continue to provide stable cash flow.8% -0. Our DCF model valued CSD at HK$37.5% -0.4x. (3) sluggish global tanker demand to weaken CSD’s VLCC return. (4) rising bunker costs and inability of the company to pass through bunker costs in new contracts.9% -0.5%.0% -0.0x 08F PER.7% FY08F Change in EPS FY09F 28 . which represents a 20% premium to Asian dry-bulk carriers trading at an average10.66 based on the following key assumptions: (1) company beta of 1.6% -0.Premium valuation warranted Premium valuation supported by DCF model We value China dry-bulk carriers at 12. Key risk factors to our valuation includes: (1) unexpected slowdown in coastal coal shipment to be triggered by macro tightening or reducing coastal power generation. We believe CSD deserves a premium valuation at HK$31.8% -3.0% -0.0x 08F forward PER as we believe domestic players have a huge room to expand their market share in dry-bulk imports the industry policy. (2) we expect the company to maintain debt-to-equity ratio at 25% going forward.1% -0.5% -0.

2008 (R M B m n ) E B IT T a x ra te D e p re cia tio n C apex In cre a se in n e t w o rkin g ca p ita l F re e ca sh flo w P re se n t va lu e D isco u n t fa cto r T im e fa cto r R isk-fre e ra te B e ta E q u ity risk p re m iu m C o st o f e q u ity C o st o f d e b t E ffe ctive ta x ra te A fte r ta x co st o f d e b t C a p ita l stru ctu re D ebt % E q u ity % W ACC L o n g -te rm g ro w th NPV C a sh a t h a n d T o ta l d e b t C o m p a n y va lu a tio n N u m b e r o f sh a re s F a ir va lu e (R M B ) E xch a n g e F a ir va lu e (H K $ ) FY 07F 5 .1 0 3 5 .6 7 0 520 1 0 .2 0 2 .7 6 3 1 4 .6 3 2 8 .7 1 3 5 .1 2 2 4 .1 4 3 4 .9 5 1 .3 1 3 4 .4 7 1 4 .0 9 8 N /A N /A N /A 5 .6 8 5 3 .0 0 FY10F 1 0 .8 1 9 1 .2 8 2 7 .0 0 FY09F 9 .5 3 8 1 7 .8 6 9 0 .0 1 3 8 .1 % 2 0 .2 0 0 1 1 0 .4 1 3 3 .9 4 0 8 .0 0 T e rm in a l v a lu e S e n s itiv ity a n a ly s is o n ta rg e t p ric e (H K $ ) L T g ro w th 1 2 .0 % 1 .1 9 7 391 1 2 .0 0 FY 12F 1 2 .8 % 2 5 .4 % 3 4 .7 4 8 6 .4 7 4 9 .0 6 3 6 .8 2 3 1 .9 8 2 .0 8 8 1 0 .0 % 3 0 .0 % 1 3 .6 5 9 1 9 .1 1 4 460 1 2 .2 3 5 0 .3 4 6 3 2 .5 8 3 2 .0 % 4 2 .0 % 3 3 .0 3 0 1 .4 8 3 6 .0 0 FY 11F 1 1 .0 6 3 5 .6 6 FY 08F 7 .4 % 2 .6 0 4 4 .6 1 3 2 5 .0 % 3 9 .8 6 1 .1 4 3 7 .0 4 3 .0 % 1 3 .1 1 3 9 .4 7 .6 3 2 1 .2 8 8 6 9 .6 0 4 4 .8 8 2 1 .4 1 0 707 1 1 .2 % 998 6 .5 % 4 3 .DCF valuation .3 4 1 5 .0 % 1 .5 % 4 0 .6 6 3 8 .0 % 1 .6 6 7 0 .1 5 3 7 .4 2 2 0 .0 % 5 .2 8 Source: CCB Int’l Securities 29 .7 3 3 2 3 .0 % 1 .6 4 3 4 .4 7 3 975 8 .0 0 1 1 5 .5 % 1 5 .0 % 4 5 .7 5 3 7 .5 6 9 8 .9 9 3 0 .7 7 7 2 .0 % 8 0 .9 8 3 5 .5 7 0 2 1 .5 % W ACC 1 3 .7 2 3 9 .5 % 6 .0 % 1 .2 6 1 3 .4 8 4 5 .0 % 1 .5 % 1 1 2 .5 5 3 .2 9 1 5 .6 2 4 1 .0 0 0 0 .

888 80 1.795 8.385 (1.2 47.111) 5.597 12.431 (129) 3.0 ROAE 23.011 (11.194) 3.4 16.385 960 274 (1.0 19.249) 6.445 435 850 788 80 2.8 22.658 4.658 1.153 3.818) 143 2009F 9.507 869 56 2. net Profit before tax Income tax expense Net profit Minority interests Net attributable profit Dividends EPS (RMB) DPS (RMB) BVPS (RMB) 2006 9.93 Quick ratio (x) 0.7 46.490 5.677 23.434) 0 2.713 6.207 365 850 750 65 2.1 Receivables days 16.778 29.8 44.659 0 9.521) 0 1.526 3.029) 142 (4.955 (207) (1.756 998 0.296 2008F 26.8 45.661) 0 (2.2 Operating margin 35.317 1.883 6.597 0 12.54 0.2 32.539 1.5 36.8 41.659 (274) 9.752 1.597 2007F 21.787 2007F 12.302 384 129 (448) 3.8 1.3 35.942 1.034 9.763 0 5.468 2008F 16.78 0.280 3.770) 1.7 15.3 44.455 5.8 46.Coal shipping .538 (226) 7.223 5 4 35 26.625 5.224 227 1.5 ROAA 18.820 (5.575 5.627 12.420 0.3 16.068 0 6.887) 0 150 (260) (2.296 18.4 4.3 43.759 (3) 2.Oil shipping .151 35.8 28.438 6.5 45.7 46.81 1. net Administrative expenses Operating profit Profit from JCEs/assos EBIT Finance costs.530 23.719) 285 (6.8 37.244 (4.45 1.815 3.050 1.346 11.446) 0 1.0 22.7 33.123 224 (804) 6.228 876 2008F 7.750 24.968 4.6 23.272 0.3 16.9 9.538 0 7.661 2.3 15.300 138 3.8 45.068 1.2 17.311 (1.367 (4.667 30 .0 32.283) 506 (150) (232) (1.763 (224) 5.076 2009F 20.0 35.628 (7.799) 8.387 60 2.294 125 934 150 150 2.0 1.677 2009F 31.267 180 737 200 180 1.3 EBIT margin 35.5 45.500 5.296 0 18.588) 142 (4.Other dry-bulk shipping Operating costs Gross profit Other income.381 273 (224) 3.8 5.079 20 5 45 15.3 Pre-tax margin 34.473) 190 (4.855 137 (333) 9.300 3.98 1.4 Source: Historical data from the company.7 25.028) 9.253 18.9 28.104 (8.514 2.3 16.814 0.350 150 3.5 30.243) 6.0 Dividend payout ratio 36.9 Net margin 28.547 473 (257) 5.677 0 23.431 0 3.5 43.163 2006 15.8 36.749 7 4 39 21.3 Inventories days 11.311 (44) 226 (1. others are CCB Int’l Securities’ estimates Cash flow projections FYE 31 Dec (RMB’mn) Pretax Profits Adj: non-cash items Interest received Tax paid Net cash from operating Capex & investment Investment income Net Cash from Investing Equity raised/ (repaid) Change in borrowings Interest expense Dividends & distributions Others Net Cash from Financing Net change in cash 2006 3.602 2.030 3.940 29.752 0 4.611 215 (289) 7.539 (787) 4.2 S&D/revenue 2.867 Balance sheet forecasts FYE 31 Dec (RMB’mn) PP&E Intangible assets Long-term investments Other non-current assets Total non-current assets Bunker inventories Trade receivables Other receivables ST investments Cash and cash equivalents Current assets Total assets Trade payables Short-term borrowings Other payables Tax payables Current liabilities LT borrowings Other LT liabilities Non-current liabilities Total liabilities Net assets Shareholders' equity Minority interest Net assets Financial ratios FYE 31 Dec (%) 2006 2007F 2008F 2009F Gross margin 35.5 10.25 0.Financial Summary Income statement forecasts FYE 31 Dec (RMB’mn) Total revenue .667 29.5 Current ratio (x) 0.580 7.352 2.30 Net debt/equity 21.9 41.252 5 3 33 31.302 (543) 2.829 0.719 (185) (998) 0 537 (543) 2007F 5.149 202 428 620 160 664 2.6 Effective tax rate 16.942) 0 (1.3 Payable days 13.082 (6.792 4.074 17.521 1.0 14.879) 7.667 0 29.4 14.799 180 566 270 220 1.3 2.602 0 7.643 2.3 Interest coverage (x) 26.415 880 (6.9 42.500 125 3.2 7.549 318 1.783) 7.4 Bunker/operating costs 41.

362 2. We are cautious with CSCL given its high leverage to China’s export to US and Europe and increasing exposure to spot market.119 (80.4 8.68.622 Market data HSI Index HSCEI Index HSCCI Index 2008F BVPS consensus (RMB) EPS consensus (RMB) Source: Bloomberg 23. strong A/E rate recovery during 2007 could be short-lived as increasing capacity reallocation from transpacific route to A/E route may lead to oversupply.0) 27. i. We forecast CSCL’s overall container rate to remain flat in FY08 and grow by 5% yoy in FY09.8 4.372 16.5% yoy in FY08 despite regional liners’ effort to introduce new bunker surcharge program and raise transpacific rate.9 % 47. We expect CSCL to maintain its leadership in domestic market with a share of approximately 45%. We question the effectiveness of possible rate hike due to the potential declining load factor.9 4.5% in 2008 and pick up by 2. 2866. Financial Summary FYE Dec (RMB mn) FY06 30.729 0. Furthermore.584 13.288 142. We expect FY08~09 earnings to grow at CAGR of 13. (HK$ mn) 52-wk hi/lo Average turnover (mn share) Major shareholders China Shipping Group Baring Asset Mgmt# Cheung Kong (0001 HK)# # H-share only * Closing price as of 3 March 2008 Source: Bloomberg Flat container rate.019 5.0 2.219 FY08F 43.677 859 0.6 13.e.47 3.9 3.68 Upside: 6.282 2009F 2.342 0.936 0.6 3.8 10. We believe CSCL is fairly valued at current price level and further upside may come from acquisition of container-related assets from its parent.290 FY07F 39.0 1. Container market outlook is likely to deteriorate triggered by the weakening global trade demand. mainly driven by new vessel deliveries.600 4.319 10.659 4.364 0.2 10. We valued CSCL at 1.215 FY09F 51.0 2.2 2.4 11.751 92. Transpacific line is expected to remain flat over 2008 but is likely to see revival in 2009 while increasing supply could shorten the freight rate recovery in Asia/Europe route.419 0. CSCL is the most sensitive to bunker costs which accounts for about 25% of its total operating costs. increasing operating costs.003 4. which represents a 10% discount to Asian liners given its increasing exposure to spot market.6%. others are CCB Int’l Securities’ estimates 31 . (2) compared to other Chinese shipping counters. We forecast FY07 earnings to grow at 142% yoy on the back of strong A/E rate recovery and improving margins.5% yoy in FY09.0 5.317 Stock price performance Source: Bloomberg Turnover EBIT Net profit EPS (RMB) y-o-y chg (%) PER (x) Yield (%) ROAE (%) BVPS (RMB) Wang Ren wangren@ccbintl.com (852) 2532 6749 Source: Historical data from the company. port and railroad charges. 90% of its FY08 Asia/Europe capacity shall be on spot market.3 3.1 11.China Shipping Neutral (initiate) China Shipping Container Lines (2866 HK): Vulnerable industry outlook Weak global demand.702 3.502 1.57 79. (2) A/E rate to drop by 2. based on: (1) transpacific rate to decline by 7.628 10. but we are cautious with its FY08~FY09 earnings prospects. Vulnerable earnings outlook over FY08~09.1% Share data Bloomberg code Share price (HK$)* Total issued shares (mn) Market cap.6 9.0x 08F PBR. Key risks to our valuation includes: (1) high volatility in container rate in transpacific and A/E line.439 5.HK 3.1 Target price: HK$3. mainly bunkers.447 3. (3) accelerating RMB appreciation to undermine CSCL’s earnings prospects as it has the largest currency mismatch compared to domestic peers.88/1. (3) robust demand in domestic container market to drive domestic container rate up by 12~10% yoy over FY08 to FY09. Fair valuation at HK$3. could further undermine its earnings outlook.

1 23.5 21.9 (1.4 23.1) 5.8) 23.1 5.3 (0. Particularly in Asia/Europe route.7% yoy rate hike during FY07 in its Asia/Europe route.7) (12.6 101.3% in FY08.2 27.9 17.9 5.0 4.3 11.0 36.8 96.5 22.6) 2.9% in FY07.8 (28. i.5 12.7 (5. total container capacity will increase by 40% to reach 630.0) (7.9% in FY06 to an estimated 12.5 8. FY07 earnings is expected to jump by 142% yoy but we are cautious with CSCL’s FY08 and FY09 earnings due to the following factors.9 12.0 19.9 (6.6 27.8 2.0 4.5) 2.9 12.2 8.9 (8. We expect CSCL to see significant bunker costs hike of 25% yoy in FY08 and GPM shall decline from 12.0) (2. we expect 90% of CSCL’s A/E capacity to be on spot market.5 5. We forecast CSCL’s overall freight rate to remain flat in FY08 and grow by 5% yoy in FY09 to capture the weakening transpacific demand and increasing oversupply in Asia/Europe market. largely triggered by a lower-than-expected supply.2 11.2 (55.1 (2. particularly due given its relatively high exposure in spot market.e.5 27. CSCL successfully locked-in about 30% of its bunker costs at around US$55/bbl in FY07 and boosted its GPM from 6.9% in FY07 to 12.000 TEUs by 2012.1 2007F 2008F 2009F Source: Historical data from the company.5 15.2) (10.6) (25.4 10. Our earnings forecast have already factored in short US recession in 2008 and are subject to further downside in FY09 should the US economy fail to recovery in 2009. Key operating statistics over 2006 to 2009F 2006 Volume growth (yoy %) Transpacific Asia/Europe Asia Pacific China domestic Others Total Effective freight rate growth (yoy %) Transpacific Asia/Europe Asia Pacific China domestic Others Total Revenue growth (yoy %) Transpacific Asia/Europe Asia Pacific China domestic Others Total 18.6 15.0 2.5 1.1) (8.0 24.0 7. while increasing load factor and effective cost control may lead to a significant margin improvement.1 18.2 48.0 2. mainly to be delivered in 2008 and 2011.4) 37. The volume-driven earnings expansion is susceptible to major US or Europe downturn.1 344.7) (8.3) 85.3 43.3 10.Vulnerable earnings outlook over FY08~09 Further downside risks in freight rate Global container rate continued to rebound since 2H06. Based on the company’s expansion plan.5 10.4) 24. During FY07.9 5.7) 49. others are CCB Int’l Securities’ estimates 32 .5 16.7 7.5 8.8 48. CSCL enjoyed a 37.8) 12. CSCL will renew its service contracts with major railroads in US in 1Q08 and we expect a 15~20% yoy increase in service charges.9 (17.7) (0.1 10.

We believe the acquisition of terminal assets shall greatly comprehend CSCL’s current business mix given the potential synergy between potential terminal business and its container shipping business.000 19.800 1. CSCL targets to acquire all container-related assets from its parent.9% 0 2H07 2008 2009 2010 New deliv ery 2011 2012 Source: Company data. Major assets likely to be acquired by CSCL include 13 container terminals with a total throughput capacity of 20mn TEUs and container manufacturing.500. 32. Key terminal assets at China Shipping Group Container terminals Domestic terminals Dalian Dagang Dalian Int’l III Jinzhou New Century Qinhuangdao Port CT Tianjin Five Continents Int’l DP World Yantai Lianyungang New Oriental Int’l Lianyungang new Oriental CT Shanghai China Shipping CT GZ Nansha Terminal Phase I Zhanjiang Port China Shipping CT Overseas terminals US Western Coast CT Egypt Damietta Int’l Total Container manufacturing China Shipping Investment Source: China Shipping Group 40 20 4 6 45 Production centers Lianyungang.000.250 13. CCB Int’l Securities Key rerating catalyst – terminal acquisitions Acquisition to comprehend business mix According to the CSCL’s A share IPO prospectus.800 Production capacity (TEU) 450.444 40. China domestic.500.000 400. 6.000 47.500.9% Strong capacity delivery in 2008 and 2011 (TEU) 80.500.000 2.500 60.589.000 1.697 66.000 Asia Pacific.000. 12.000.Revenue breakdown by market (FY08F) Others.7% 32.000. China Shipping Group. leasing business.000 400.300 Asia/Europe. Guangzhou 2.2% Transpacific.3% 26.000 Est.000 69. 15. for the next few years.000 CSCL’s stake (%) No of berth Throughput capacity (TEU) 33 . 2.000 3.000 35 30 51 30 14 35 55 55 50 40 50 1 5 2 2 4 2 4 5 1 7 2 177.302.000 9.000 310. Jinzhou.000 1.600 20.000 3.000 1.

1. 1.5 Source: Bloomberg. (3) we have factored in a 6~7% rise in RMB over the year of 2008 but faster-than-expected RMB appreciation could undermine CSCL’s earnings.5 Dananos (16.9) 0. CSCL has the largest currency mismatch compared to its domestic peers.9.Fair valuation We valued CSCL at 1.7% -2. Sensitivity analysis Change in assumptions Corresponding year -1% in contract rate -1% in transpacific volume -1% in A/E rate -1% in A/E volume +1% in bunker cots +1% in RMB application forecast Source: CCB Int’l Securities FY08F -3.0 14.8. CCB Int’l Securities Key risks to our valuation are: (1) high volatility in freight rate in transpacific and Asia/Europe container market. We believe CSCL is fairly valued at current price level. representing a 10% discount compared to its Asian peers trading at 1.9.8% -3. Asian containers are currently trading at fair value of 1.9. 1.8% -2.0 0. as over 85% of CSCL’s revenue is settled in foreign currency while 60% of its expenses paid in foreign currency.0 18.9% Change in EPS FY09F -3. Further rerating catalyst include better-than-expected results.0 4.5% -3.9.3% 34 . 0.0) OOCL (13.0 12.0) 1. or HK$3. strong recovery in US demand and potential terminal acquisition.0 16.0 6.9) NOL (14. 1.0 10. Bunker costs is estimated to account for about 25% of CSCL’s total operating costs as in FY08. 1.0 8.5 (% 08F ROE) 0.0x 08F PBR.0 1.0 2.5% -2.1% -2.0~1.1) Yang Ming (8. (2) hiking bunker costs to trim CSCL’s profit margins.1) 2.2.3.1% -2.3% -3. 2.0% -3.1x 08F PBR.0 Seaspan (7.68 per share.3x 08F PBR (x 08F PBR) 2. to highlight our concern of its increasing exposure to spot market.3) Ev ergreen (6.3% -3.0 CSCL (9.

9 24.9 10.3 15.5 11.766 (3.038 (363) (724) 462 413 1.519 572 1.4 10.593 2007F 26.143 (278) 865 (6) 859 241 0.850 6.390 193 15.9 2.111 133 (574) 1.216 0.604 636 3.993 2009F 33.455 2.3 ROAA 2.546 2.China domestic Operating costs Gross profit Other income.692 9 4.729 969 0.230 7. net Administrative expenses Operating profit Profit from JCEs/assos EBIT Finance costs.355 Financial ratios FYE 31 Dec (%) 2006 2007F 2008F 2009F Gross margin 6.2 13.702 (159) 4.211 70 4.868 3.5 Net cash Net cash Net cash Interest coverage (x) 3.982) 5.014) (619) 11.291 5.622 LT borrowings Other LT liabilities Non-current liabilities Total liabilities Net assets Shareholders' equity Minority interest Net assets Cash flow projections FYE 31 Dec (RMB’mn) Pretax Profits Adj: non-cash items Interest received Tax paid Net cash from operating Capex & investment Investment income Net Cash from Investing Equity raised/ (repaid) Change in borrowings Interest expense Dividends & distributions Others Net Cash from Financing Net change in cash 2006 1.003 13.447 (446) 4.490 9.542 (795) 3.018 4.961) 5.218) (213) (1.6 Operating margin 5.1 10.104 3.347 35.744 2.949 Source: Historical data from the company.0 Dividend payout ratio 28.748 (19) 3.7 8.875 16.4 4.5 26.5 17.9 12.0 26.347) (290) (1.3 10.Financial Summary Income statement forecasts FYE 31 Dec (RMB’mn) Total revenue .921 815 4.0 ROAE 5.0 2.414) 4.659 13.5 7.275 (606) 4.922 963 1.290 2007F 39.875 7.392) 2.Transpacific .335 3.542 (1.Asia-pacific .319 0.853 Balance sheet forecasts FYE 31 Dec (RMB’mn) PP&E Intangible assets Long-term investments Total non-current assets Bunker inventories Trade receivables Other receivables Cash and cash equivalents Current assets Total assets Trade payables Short-term borrowings Other payables Tax payables Current liabilities 2006 23.824 44 39.467 (4.111 2008F 30.198 35.677 (534) 1.2 7.8 11. net Profit before tax Income tax expense Net profit Minority interests Net attributable profit Dividends EPS (RMB) DPS (RMB) BVPS (RMB) 2006 30.538 4.6 8.752 8.115 22.600 (212) 5.670 7 1.916 7.4 10.805 3.1 30.305 11.143 1.001 14.021 182 (763) 4.370 2.014 60 91 26.490 10.689 (765) 5.1 1.576 16.099 1.590 10 5.0 9.0 EBIT margin 5.538) 2009F 5.6 Net margin 2.089 56.205 1.140 30.0 Current ratio (x) 1.442 181 (1.440 7 4.214 156 16.342 1.219 2008F 43.108 1.101 95 4.502 13.575 14.533 43 16.490 98 2.347 3.145 81 5.3 Payable days 28.4 30.4 10.087 13.750) 159 (4.020 2.8 8.3 Quick ratio (x) 0.627 (2.6 7.3 12.0 28.139 125 5.2 4.334 2.215 2009F 51.7 37.035 12.036 9.853 44.715 (44.550 (38.420 (28.7 11.381 48.4 8.226 1.8 40.485 (33.375) 0 (393) (138) (1.743 4.182 614 1.920 2.577 20.034) 5.490 10.8 Bunker/TEU (RMB) 1.364 (22) 4.726 4.other markets .425 850 5.2 23.875 2.0 Effective tax rate 24.868 39.0 Pre-tax margin 3.8 7.4 25.028 39.5 19.019 13.309) 5.115 1.001 1.698 2. others are CCB Int’l Securities’ estimates 35 .264 61 100 33.381 (17) 3.591) 0 (879) (103) (969) (462) (2.577) 6.083 3.3 31.001 (620) 3.3 28.670 (2.253 (1.9 1.0 2.164 707 4.875 10.6 4.0 29.9 8.500) 125 (2.833 (210) 2.490 11.975 51.214 Operating costs/TEU (RMB) 5.687) 0 1.168 16.868 23.349 214 (872) 4.824 5.550) 128 (2.Asia/Europe .387 1.514 3.5 S&D/revenue 1.119 0.009 0.033 2.764 60 97 30.368 191 17.896 3.364 1.422) 15.782) 96 (3.372 0.387 1.0 1.024) 4.288 0.576 4.9 12.387 (1.951 4.5 11.6 Bunker/operating costs 22.661 44.695 4.4 Inventories days 8.310 37 35.200 2008F 4.014) 5.143 (508) 2007F 4.7 10.222 (1.9 36.604 6.0 Receivables days 41.542 1.464 60 81 23.804 49 44.2 Net debt/equity 22.411 2.

3% over FY07 to FY09 as a majority of SSL’s rental income is generated offshore and largely borne by charterees. Based on the fleet expansion. representing a capacity growth of 18~35% p.532 FY09F 581.9) 14.045 0.2 15. (3) effective tax rate to remain low at 0.com (852) 2532 6749 Source: Historical data from the company.078 0.8mn DWTs by 2012.0 1.541 615. (HK$ mn) 52-wk hi/lo Average turnover (mn share) Major shareholders Sinotrans Group * Closing price as of 3 March 2008 Source: Bloomberg 368. Funded by IPO proceeds.9 0.515 243.439 5.420 237.584 13. SSL yielded high margins.000 20. representing 10% discount compared to our valuation of Chinese’s dry-bulk carriers. SSL is the third largest dry-bulk vessel owner in China. we forecast SSL to acquire another 15 vessels.18/4.5% Share data Bloomberg code Share price (HK$)* Total issued shares (mn) Market cap.9 0.4 11. Strong earnings CAGR at 22.8% over FY06 to FY09. i.657 714. in which it does need to bear heavy bunker costs or vessel leasing expenses.282 2009F 0. We expect SSL’s daily TCE (time charter rental) to improve by 55% yoy in FY08 but decline by 8% yoy in FY09 on potential retrenchment in BDI.1 33.713 262. which shall generate 80~86% of its revenue over FY07 to FY09. including 13 dry-bulk carriers and 2 VLCC tankers during 2008~2009 to achieve its capacity target. Further rerating catalysts may come from acquisition of other vessel chartering business from its parent.158 FY07F 254.2~0. SSL has outlined an aggressive fleet expansion plan to reach dry-bulk capacity of 5mn DWTs and tanker capacity of 1.046 (30.367 710.HK 5. Unlike its major bulk peers CCH or CSD operating voyage-charter under COA contracts.075 Stock price performance Source: Bloomberg Turnover EBIT Net profit EPS (US$) y-o-y chg (%) PER (x) Yield (%) ROAE (%) BVPS (US$) Wang Ren wangren@ccbintl. SSL is strategically focusing on time-charter.8 0. Most of SSL’s existing charters were signed during 2005 with average BDI trading low at 3.085 4.075 0.06 4.543 Target price: HK$6.648 FY08F 501.8 0.561 265.081 74.35 Upside: 25. others are CCB Int’l Securities’ estimates 36 .788 0.35 We valued SSL at 10. Key risk factors include a sharp correction of BDI during 2009 and rising vessel price to undermine SSL’s fleet expansion plan.200 0.0 3. Other than its planned new-buildings.1 8.0 7.300. Driven by a robust demand on dry-bulk vessels to meet China’s growing material imports. We project the growth to be driven by: (1) rapid fleet expansion. Fleet expansion to sustain growth.514 0.1 16. operating a total dry-bulk capacity of 1.047 2.0x 08F PER. SSL targets to focus on dry-bulk time-charter. we expect SSL’s dry-bulk capacity to rise 36~22% yoy over FY08~09. (2) strong rental improvement to sustain high margins.14 27. Financial Summary FYE Dec (US$000) FY06 247. SSL will renew about 70% of its existing vessel contracts by 2009 and reset the contract rates to reflect the updated BDI.7 3. Target price at HK$6. Under the model.3 % 66.33mn DWTs as in 2007.2 14.3 0.487 647.e. Visible rate improvement.a.1 Market data HSI Index HSCEI Index HSCCI Index 2008F BVPS consensus (US$) EPS consensus (US$) Source: Bloomberg 23. we estimate 70% of SSL’s FY08 capacity and 35% of its FY09 capacity will be exposed to spot market.570 0. GPM of 48~64% between FY04 to FY06.China Shipping Outperform (initiate) Sinotrans Shipping Ltd (368 HK): Improving growth visibility High leverage to dry-bulk shipping boom.240 8.

688 0 4.410 12.0 2007F 2008F 2009F Source: Historical data from the company.3) 19.5 (4.095 1.4 4.9 4.5 97.2 35.190 2.5 (0.490 0 4.095 1.015 730 1.9% Container time charter.9 (8.2) 190 44 12 246 (18.608 9.Other dry-bulk vessel Oil tanker/VLCC Container Total 9.SSL’s revenue breakdown (FY08F) Dry -bulk time charter.Handysize .1 37.399 2.1 (18.0 97. 4.1 97.2 41.745 2.1 28. CCB Int’l Securities Key chartering assumption 2006 Chartering revenue (US$) Dry-bulk vessel Oil tanker Container Total revenue yoy change (%) Average TCE (US$’000) Dry-bulk vessel yoy change (%) Oil tanker yoy change (%) Container yoy change (%) Total revenue yoy change (%) Utilization rate (%) Dry-bulk vessel Oil tanker Container Total Vessel available days Dry-bulk .1 4.Capesize .170 97.015 730 2.292 15.5 95.3 95.7 (5.5 7.3) 7.190 2.555 730 1.920 4.3 97.5 97.825 12.2% Source: Company data.2 26.958 548 4.6) 19.015 2.278 5.2 16.1) 6.2 97.753 730 1. others are CCB Int’l Securities’ estimates 37 .015 2.513 1.7% Oil v oy age charter.5 97.3) 6.Handymax .3 95.1% Others. 0.6) 18.3 94.4 28.5 98.2 55.0 97.4) 37.5 25.5 (26.825 12.4 477 79 24 580 16.840 3.6 (14.3 95.2 10.8) 205 36 12 253 2.285 21.8 435 45 21 500 97.650 4.0 97.373 3. 8.935 17.5 (4.1 (17.1 9. 86.4) 45.Panamax .

0 8.9.0) (30.0 10.5. 5.0.0 (10.0 20.0 0.0 12.5) C SD (15. 34. Sensitivity analysis Change in assumptions Corresponding year -5% in bulk TCE -5% in tanker TCE -5% in dry-bulk capacity -5% in tanker capacity -3% in utilization rate Source: CCB Int’l Securities FY08F -3.0 18.3% -0. which represents 10% discount to our valuation of Chinese dry-bulk carriers.5) Note: Data for Pacific Basin and OOIL are sourced from Bloomberg consensus Source: Bloomberg. 26.0 4.7.5% -2.Discounted valuation vs.0.8) 0.0) 2. (2) SSL’s FY08~09 fleet expansion is only based on our forecast and is subject to execution risk.0 16.0 10.35.7) (x 07F PER ) SSL (14.1% -0.7) (50. 9. CCB Int’l Securities Key risk factors to our valuation mainly include: (1) a sharp correction in BDI index could deteriorate SSL’s TCE outlook. The discount is justified given 20~25% of SSL’s FY08~09 earnings is driven by fleet acquisition based on company guidance while we forecast CSD and CCH’s fleet expansion mainly based on their disclosed contracts.0) OOC L(1.0 Pacific Basin (4.1% -4.7) C C H (11. -46. Sinochart which performs similar chartering business in both PRC and overseas market.3% -4.1% -1.1% 38 .5% -3. Further price catalysts could come from its acquisition of intra-group company.0) (20. good growth We valued SSL at 10.0 C SC L (11.1.0 6. SSL represents the largest discount to earnings growth among HK-listed shipping peers (% C AGR 07~09F ) 40.7% -1. (3) hiking vessel price could undermine SSL’s fleet expansion plan.0 30.0 14. 13.8% Change in EPS FY09F -4.0) (40.0x 08F PER or HK$6.

776 35.081 (129.219) 2.9 15.866) 361.162 0.944 714.663.245 758.009) (1.713 (3.645 6.696.145 1.444.836 124.347 1.247 2.272 610.455 2.9 1.4 61.3 15.413) 1.1 0.7 11.045 89.395 575.829.238.336 2.7 60.367 (3.200 0 647.036 0.400) 262.782 16.543 Trade payables Short-term borrowings Tax payables Current liabilities LT borrowings Other LT liabilities Non-current liabilities Total liabilities Net assets Shareholders' equity Minority interest Net assets Cash flow projections FYE 31 Dec (US$’000) Pretax Profits Adj: non-cash items Interest received Tax paid Net cash from operating Capex & investment Investment income Net Cash from Investing Equity raised/ (repaid) Change in borrowings Dividends & distributions Net Cash from Financing Net change in cash 2006 119.285 96.0 62.829.Others Operating costs Gross profit Other income.0 25.083 0.919) 304.118 (7.990 267.086.867 (822) 710.025 166.850 (12.929 150.3 62.2 0.0 ROAE 33.597 409.550 216.075 0 262.8 ROAA 12.3 53.420 (5.313 (238) 262.185 213 127.4 29.808 0 409.9 Net debt/equity 17.7 60.085 2.826 1.518 2.036 2.124 0 (124.561 205.887 (687) 647.908 1.080 2.093 33.217) 353.703 0.337 33.162) (126.3 S&D/revenue 4.000 50 32.260.243 166.808 111.081 2.9 11.450 2.779 (10.786 Financial ratios FYE 31 Dec (%) 2006 2007F 2008F 2009F 47.150 52 35.381.3 9.8 16.585) 310.4 14.875 44.702 2.500 120 198.3 Bunker/operating costs 14. net Profit before tax Income tax expense Net profit Minority interests Net attributable profit Dividends EPS (US$) DPS (US$.684) (657.9 10.679 2.205 603.841 485.711 1.487 32.1 1.476 0 (24.1 Pre-tax margin 48.350 (11.490) 118.286.516.917) 133.202 162.501 161.1 52.236.249.5 Net margin 48.897 2008F 343.216.238 (223) 112.937 2009F 357.968) 117.052 33.118 0.2 4.046 0.260) 478.1 51.243 1.9 15.0 25.344 336 319 303 Source: Historical data from the company.2 Inventories days 4 5 4 3 Receivables days 675 169 110 104 Payable days 1.3 Quick ratio (x) 0.658) 18.8 0.107) 39 .454.959) (1.150 (89. cents) BVPS (US$) 2006 247.500) 710.075 26.342 1.155 0.150 150 182.846 2007F 132.955 5.365 11.0 68.023 33.4 2.595) 130.308 16.515 190.427 2.744 1.130 1.365) 0 2.2 Gross margin Operating margin 48.135 (120.444 71.045 0 710.500 50 33.1 Effective tax rate 0.354 41 62.455 Balance sheet forecasts FYE 31 Dec (US$’000) PP&E Long-term investments Total non-current assets Bunker inventories Trade receivables Other receivables Cash and cash equivalents Current assets Total assets 2006 467.413 0.661 (227) 146.992.315 1.050 230.405 2007F 577.999) (26.000 (217.9 68.5 119.661 15.677 2.331 2.677 117.285) (80) (850.400 647.763 20. net Administrative expenses Operating profit Profit from JCEs/assos EBIT Finance costs.281 32.386 311.324 1.286.960 79.0 51.702 265.011 135.961 (10.8 Net cash Net cash Net cash Interest coverage (x) 20.954 (166) 237.455 0 2.151 2008F 1.192 (190.0 62.750 (822) 431.101 615.Dry-bulk shipping .500 143 513.684 1.161 1.192) 1.808 409.790 3.243 0 1.200 85.584 243. others are CCB Int’l Securities’ estimates (109.350 (689) 539.Crude oil shipping .588 1.202 62.2 Dividend payout ratio 1.532 2009F 581.739 2.788 0 237.941 (2.5 8.199.047 0.251 (219.559 34.090 985.466) 237.1 60.423 360.222 500.2 2.409 11.648 2008F 501.0 0.360) 1.739 1.547 11.490 457.286.541 434.057) (2.086.3 Current ratio (x) 0.8 EBIT margin 50.706 35.005) (506.247 182.330 44.Financial Summary Income statement forecasts FYE 31 Dec (US$’000) Total revenue .238.285) (50) (75) (110.703) (110.158 2007F 254.968 33.247 0 2.935 0.238.5 62.981) (85.274 36.8 20.302 13.110 (850.788 2.301 24.765 2009F 2.5 61.829.5 52.668 16.Container shipping .657 476.8 4.080 23.155) (87.2 0.

express services. Dry-bulk vessel time chartering (third party-owned vessels) 100% Sinotrans Ltd Freight forwarding. Freight forwarding Dry-bulk shipping Third-party logistics. Shipping agency Container terminals. Storage and terminal services.57% H-share holders CCH Container shipping.05% SSL 100% Sinochart Dry-bulk vessel voyage charter. Container leasing and manufacturing 51.Appendix Organization chart of listed shipping companies CCH’s organization chart A-share holders COSCO Group 53. Dry-bulk vessel time chartering (third party-owned vessels) Source: Company data. Domestic trade shipping 100% Sinotrans (Germany) Freight forwarding. Container trade. Dry-bulk cargo voyage charter. shipping agency. container vessel liner shipping 100% Sinotrans-MOL Shipping Co Ltd Car carrier 100% Sinotrans Shipping (Shenzhen) Ltd Car carrier business. trucking. CCB Int’l Securities SSL’s organization chart Sinotrans Group H-share holders 66.34% 49% COSCO Pacific 100% COSCO Bulk 100% COSCON 100% COSCO HK Shipping 100% COSCO Qingdao 100% COSCON COSCO Logistics 51% Source: Company data. CCB Int’l Securities 40 .

000 TEU 222.220.418 Number 2 13 11 DWT 64.350.000 3.423 Source: Company data.990.994 457.89% CSCL 100% China Shipping 100% Car Carrier Co Car carrier business Container manufacturing China Shipping Investment Co Source: Company data.000 TEU 429.708 Number 62 81 53 25 221 Number 56 DWT 10.000 1.110.710.929 Number 83 146 133 61 423 Number 144 DWT 13. CCB Int’l Securities 41 .000 20.608 Number 74 TEU 214.240.000 5.000 6.994 457.540.423 Total 34 2.000 1.490.550.46% CSD 100% China shipping LNG investment LNG shipping 100% China Shipping Terminal Development Container terminals 47.990.000 2.241 807.000 10.981 - - 5 34 38.201.490.981 2.810 Number 154 TEU 446.754 Number - DWT - Number 2 13 11 DWT 64.000 33.000 4.241 807.350.840.000 12.453 - - 3 832.000 TEU 206.780.637 Number 80 TEU 231.453 5 38.Organization chart of CSD and CSCL China Shipping Group H-share holders A-share holders H-share holders A-share holders 47. CCB Int’l Securities Fleet summary of listed shipping companies Fleet summary as of Dec 2007 Owned CCH Dry-bulk vessels Capesize Panamax Handymax Handysize Total Container shipping Containerships CSCL Container vessels Containerships SSL Dry-bulk vessels Multipurpose vessels Handymax/ Handysize Panamax Oil tanker VLCC Container vessels Containerships Chartered-in Total Number 21 65 80 36 202 Number 88 DWT 3.754 3 832.201.000 2.230.

89 Queensway. hereby declares that: (i) all of the views expressed in this report accurately reflect his personal views about any and all of the subject securities or issuers. opinions and expectations contained herein are based on fair and reasonable assumptions. objectives. The recipient should be aware that CCBIS does and seeks to do business with the issuer(s) of the stock(s) covered in this research report (or the associates of such issuer(s)) or may hold interest in such stock(s) from time to time. While all reasonable care has been taken to ensure that the facts stated herein are accurate and that the forward-looking statements. This report is not intended as an offer or solicitation for the purchase or sale of any financial instrument. (ii)) neither he nor his respective associates serve as an officer of any of the Hong Kong listed companies covered in this report.expected return 10% over the next twelve months Neutral – expected return between –10% to 10% over the next twelve months Underperform – expected return < -10% over the next twelve months Analyst Certification: Wang Ren. Admiralty. Hong Kong Tel: (852) 2532 6100 Fax: (852) 2537 0097 42 . the author of this report. CCBIS has not been able to verify independently such facts or assumptions and neither CCBIS nor any of its affiliates shall be liable for the accuracy. The opinions and recommendations herein do not take into account individual client circumstances. (ii) no part of any of their compensation was. or needs and are not intended as recommendations of particular securities. financial condition and prospects of companies referred to in this report. The recipient must make its own assessment of the relevance. Opinions and estimates constitute our judgement as of the date of this material and are subject to change without notice. financial instruments or strategies mentioned herein may not be suitable for all investors. Investors should consider this report as only a single factor in making their investment decision. is. The reader is cautioned that actual results may differ materially from those set forth in any forward-looking statements herein. Wang Ren further confirms that (i) neither he nor his respective associates (as defined in the Code of Conduct issued by the Hong Kong Securities and Futures Commission) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to the date of issue of the report. financial instruments or strategies to particular clients.Disclaimer Rating definitions Outperform . in this regard. and (iii) neither he nor his respective associates have any financial interests in the stock(s) covered in this report. Past performance is not indicative of future results. express or implied. Neither CCBIS nor any other person accepts any liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith. accuracy and adequacy of the information contained in this report and make such independent investigation as it may consider necessary or appropriate for such purpose. investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. or will be directly or indirectly related to the specific recommendations or views expressed in this report. completeness or correctness thereof and no representations or warranty is made. Securities. Each recipient of this report shall be solely responsible for making its own independent investigation of the business.. Disclaimers: CCB International Securities Limited is a wholly-owned subsidiary of China Construction Bank Corporation. As a result. Two Pacific Place. Information has been obtained from sources believed to be reliable but CCB International Securities Limited or its affiliates and/or subsidiaries (collectively CCBIS) do not warrant its completeness or accuracy except with respect to any disclosures relative to CCBIS and/or its affiliates and the analyst’s involvement with the issuer. 34/F. CCB International Securities Limited Suite 3408. and (iii) no insider information/ non-public price-sensitive information in relation to the subject securities or issuers which may influence the recommendations were being received by the author.

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