Pan Ocean
The author is an analyst for NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.
Pan Ocean’s 1Q23 results met consensus. Short-term earnings momentum is disappointing due to weak commodity demand from China and fewer long-term charters, but mid/long-term bulk carrier freight rates should rise amid supply constraints such as policy and environmental regulations.
Short-term demand concerns exist, but mid/long-term supply constraints should boost rates
We maintain a Buy rating and TP of W7,200 amid limited earnings estimate revisions. Near-term demand concerns have expanded as China’s commodity demand remains sluggish and commodity prices have weakened.
Shrinking supply is key to mid/long-term market strength. Limited newbuilding orders, falling order backlogs, and environmental regulations (CII, carbon intensity, starting in 2024) are expected to amplify supply reduction effects from 2024. The second-hand ship price index is up 13% since the start of the year to 180.3p, indicating rising values for existing vessels. Short-term demand uncertainty remains, but freight rate levels should gradually increase as supply factors accumulate in the mid/long term.
1Q23 earnings meet consensus; long-term charter fleet shrinkage disappointing
Pan Ocean posted 1Q23 sales of W996.4bn (-30.8% y-y) and OP of W112.6bn (-33.4% y-y; OPM of 11.3%), meeting consensus. The bulk shipping division booked sales of W687.9bn (-31% y-y) and OP of W65.2bn (-47% y-y; OPM of 9.5%). Despite weak market conditions, the firm defended its profitability through ship charters. Bulk carrier operating fleet increased by 11 vessels q-q to 244, but long-term charter fleet decreased to 30. Meanwhile, the tanker division saw sales of W82.5bn (+61% y-y) and OP of W30bn (+329% y-y; OPM of 36.4%).
As of May 11, the BDI continues to rebound to 1,640p, but its strength is disappointing, and the decline in long-term chartered vessels will limit the bulk carrier division’s OP improvement in 2Q23. Overall OP is estimated at W130.8bn in 2Q23 due to lower tanker and container profits.