The author is an analyst for NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.
The transportation industry enjoyed a market boom during the pandemic era, but with trade volume growth slowing and supply growth accelerating, supply burden has increased, bringing down tariffs. The air transportation industry has yet to see passenger demand recover to pre-pandemic levels, but passenger peak-out worries are already emerging. In addition, oversupply concerns also exist amid greater supply of small-sized airplanes.
In 2024, uncertainties over demand should continue to linger across all transportation sectors. Transportation shares have corrected sharply in 2023, due to demand slowdown. We view supply contraction and industry structure overhaul as pre-conditions for a transportation share price rebound. Supply can be reduced through fleet restructuring and vessel demolition. And, the market landscape could be reshaped through M&As. In this regard, we draw attention to the KAL-Asiana merger and HMM stake disposal events next year.
In 2024, OP downtrend should continue across all transportation sectors, and chances of a structural tariff rebound look limited. We maintain a Neutral rating on the transportation sector, recommending Hyundai Glovis as a top pick for its relatively higher chances of rate expansion.
I. Air & parcel delivery: Slowing demand growth vs rising supply burden
Air passenger traffic has been recovering since re-opening began. We expect passenger demand to rebound to the 2019 level next year, but due to aggressive fleet expansion by LCCs, oversupply is likely for short-distance routes, and pressure to lower international fares is rising. Looking at the parcel delivery market, greater small-sized parcel volume supports overall volume growth, but with domestic consumption slowing, demand peak-out concerns continue. In addition, rising handling capacity at Coupang and Hanjin could lead to oversupply.
II. Shipping: Sustained demand uncertainties and subdued demolition
Strong downward pressure has continued on maritime freight rates throughout 2023. Amid slowing demand growth, oversupply concerns have risen on the delivery of new vessels and rising vessel operation rates. In 2024, supply growth is likely to outpace demand expansion for bulk carriers and container ships, in turn leading to sustained freight rate decline. While stricter environmental regulations should help to adjust supply growth, it is too early to expect a structural tariff rebound next year.
III. Major variables for 2024
It is worth keeping tabs on a possible reshaping of the competitive landscape, which could lead to structural price hikes. KAL’s Asiana acquisition and KDB’s HMM share disposal processes are underway. Depending on the results of these events, the competitive landscape of the air and marine transportation sectors could be reshaped. An end to the Russia-Ukraine war is an important macro variable. That said, it is unlikely that the supply chains for crude oil, natural gas, petrochemical products, etc will bounce back immediately once the war is over.
IV. Top picks
We maintain our Neutral stance on the transportation sector. Concerns over supply glut and demand peak-out in the transportation industry should place fares under downward pressure, sapping OP. But, Hyundai Glovis should still display differentiated earnings on the back of PCC freight rate hikes amid this continued logistics chaos. For the sector to warrant an upgrade to our investment rating, supply reduction is crucial.