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Well-positioned to withstand downturns

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Trading Buy rating and TP of W21,000

• Our target price of W21,000 is based on HMM’s trough P/B (five-year average low of 0.6x) and our adjusted BPS estimate.

• With our target price implying 15% upside, we present a Trading Buy recommendation on the stock. We believe additional share price weakness should be viewed as a buying opportunity.

• We believe demand is bottoming out. This, together with supply adjustments, could support a stabilization in container freight rate indices.

• We think the stock could rebound quickly if HMM exercises the call provision of its convertible bonds and its largest shareholders sell their stakes.


Investment points


Well-positioned to withstand downturns, given ample cash and lower unit cost

• At end-1Q23, HMM held W13tr in cash and had a debt ratio of 28% (vs. 73% in 2021).

• Even if the industry descends into another price war amid a severe recession, we believe the company will be able to persevere for at least four years on the back of its healthy balance sheet.

• Cost per TEU was US$974 in 2021 and US$1,200 in 2022, down from US$1,304 in 2010.

Container freight rate indices are near record lows

• We expect the container market to remain oversupplied through 2024, given the massive orders placed during the industry’s unprecedented boom.

• However, the mismatch between supply and demand has been gradually easing since 2022. As a result, the pace of decline in freight rates has been slowing.

• Notably, a reduction in vessel speeds to meet CO2 regulations should reduce effective supply by 1.5-2%.

• The Shanghai Containerized Freight Index (SCFI) is close to its all-time low. We believe freight rates are more likely to stabilize than to fall sharply.


Risks

Structural oversupply and potential dilution

• We think the supply/demand balance is unlikely to be restored for some time, given the high orderbook-to-fleet ratio (29%).

• Potentially dilutive shares from convertible bonds are equivalent to around 100% of HMM’s current share count. Dilution could reach 40% in 2023 alone.

• Along with freight rate movements, we think the risk of share dilution will be a major share price determinant in the near term.