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Feb.03, 2012
Event: Overcapacity may stymie rate increase attempts (Neutral.)
Primasia Comment
We recently visited Evergreen Marine (2603 TT/NR/NT$18), Taiwan’s largest container carrier. Management believes the business environment will remain overshadowed by the general overcapacity issue in 2012, while the current fierce price competition in Asia-Europe (AE) routes may ease given the joint efforts by carriers to increase rates. We are cautious on the effectiveness of such joint rate increases, given the overcapacity issue and the lack of discipline among carriers.
Evergreen indicates that while the overcapacity issue will persist in 2012, there is currently only 4% of capacity that is idling the industry, although there may extra laid up capacity later in the year. On the demand side, the company sees Intra-Asian routes as the strongest, followed by transpacific (TP) routes and with AE to be the slowest. According to Alphaliner, traffic for AE routes will grow by just 1.5% this year, while TP traffic may grow 4.6%. Global capacity, meanwhile, is expected to grow by 8.3%, suggesting worsening overcapacity, especially in AE and TP routes.
While the apparent reason for Maersk (DN) to introduce its “Daily Maersk” service to AE routes back in October 2011 was to gain market share and squeeze out weaker players in the market, Evergreen sees the recent general rate increase (GRI) announcement may signal a shift in focus for the market leader to protect its profitability. In addition to Maersk, several liners including Orient Overseas (HK), China Cosco (CN) and Hapag-Lloyd (GR) have also announced their respective GRIs for AE routes, and Evergreen will also follow, as indicated by the company. Management noted that the magnitude of actual freight rate increases will depend on how disciplined the carriers are.
While we believe the GRIs announced by carriers are generally positive for the industry as current AE rates are below the break-even point (US$700-$800 vs. US$1200-$1300), we are wary of the effectiveness of such rate raises on overcapacity and the difficulty of market discipline. Alphaliner reports that capacity growth for large vessels (8,000TEU+) will outpace general capacity growth (25% vs.8%) and that the majority of those ships will be injected into AE routes.
On the recent share price outperformance by container carriers, we believe it was driven by market sentiment as opposed to fundamental factors, as the actual effects of intended rate increase are yet to be seen. We also believe that share prices will rapidly correct themselves if rates fail to rise. Taiwanese carriers, including Evergreen, Yang Ming (2609 TT/NR/NT$14.85) and Wan Hai (2615 TT/NR/NT$16.40), are now trading at 1.0x, 1.4x and 1.1x their respective 2012E consensus BV, all at a premium compared to the regional average of 0.9x. At current price levels there is significant downside risk if the GRI among all carriers fails to materialize.
Feb.03, 2012
Event: Minister of Interior downbeat on China property investment (Neutral.)
Primasia Comment
To address elevated housing prices, Dr. Lee Hong-yuan, the incoming Minister of Interior, wants to increase social housing projects and put vacant homes owned by investors on the market for sale. Although capital from China is desired for public infrastructure funding, he strikes a cautious tone on the prospect of allowing Chinese capital investment in Taiwan’s property market. We interpret his statement as a symbolic gesture to appease public outcry toward housing affordability issues, however, and expect the government to make future concessions toward allowing Chinese capital inflow in the property sector.
In a brief interview with the media, Minister Lee touched upon key housing policy measures. Details are as follows:
1. Vacant homes: There are currently some 1.5m vacant houses around the island, with 44% of those in Taipei and New Taipei, where average pre-sale home prices have more than doubled over the past 10 years. Short-term speculation and long-term investment needs of wealthy individuals, fueled by prolonged low interest rates, have driven up prices and pushed vacancy rates to a record high. Armed with ample funding and still anticipating future price appreciation on these vacant homes, speculators and individuals are reluctant to sell. This issue is critical in addressing affordability as it encompasses 1.5m units of potential supply that would greatly alleviate the supply shortage and bring prices in line with affordability. We suspect the government lacks the resolve to roll out provisions such as higher property taxes on second homes to motivate owners to sell these vacant properties. Despite the gravity of this issue, we do not foresee the government making significant progress on this front.
2. Chinese investments in public infrastructure and properties: The government has recently allowed Chinese investments in BOT public infrastructure projects to bridge the NT$200bn funding gap. However, given the thin profit margin and long payback period of infrastructure projects, policy changes are unlikely to generate strong future interest from Chinese investors. These investors may, nevertheless, demand official concessions concerning property investments, which we expect to be made mostly in high-end residential and commercial leisure properties such as resorts and hotels.
3. Social Housing: Prior to the recent election, the government rolled out large-scale social housing projects which featured affordable prices in New Taipei City. Social housing fails to address the core of the housing issue, however, which is the substantial gap between market prices and affordability and excess home inventory, both in the form of recently constructed and currently vacant homes. We also question the effectiveness of project implementation and suspect that social housing will be an instrumental policy tool in the long term.
Despite the Minister's statements, we doubt that government will introduce any drastic housing policy changes. Excess home inventory and mounting liquidity pressure on developers should eventually lead to meaningful price corrections for average homes, however, while high-end residential properties will continue to receive support from wealthy investors and the prospect of Chinese investment. While we expect the sector to undergo more challenges, we expect the luxury end of the sector to outperform.
Source: Primasia Investment Consultancy Co., Ltd.
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| TAIEX |
7674.99 |
| Electronics Index |
288.31 |
| Financials Index |
834.72 |
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