China and Hong Kong Equity Research

4 March 2008

China shipping Market share expansion

Sailing at full speed. China’s massive infrastructure investment over the next
Industry overview 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
Sector view: overweight
expect the oil tanker market to turnaround by 2009 and China’s growing oil
imports shall benefit domestic oil shippers.

Market data
State policy to benefit shipping SOEs. China has predominantly relied on
HSI Index 23,584 foreign shippers to ship its energy imports but its increasing energy demand
HSCEI Index 13,439 has urged the government to protect its energy shipping security. State
HSCCI Index 5,282 government is working out relevant industry policy to encourage domestic
Closing price as of 3 March 2008 shippers to transport up to 50% of its key energy and materials imports by
Source: Bloomberg 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”).
HSCEI 1-year performance

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.
Source: Bloomberg

Overweight dry-bulk carrier and neutral on container. We recommend to

Wang Ren
buy dry-bulk shippers, including CSD, CCH and Sinotrans Shipping Limited
wangren@ccbintl.com
(368 HK, “SSL”) given a solid dry-bulk demand outlook throughout 2009.
(852) 2532 6749
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.

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

See the last page for analyst certification and important disclosures, including investment banking relationships.
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

China’s rapid economic growth and its infrastructure boom over the 11th-5 period
Favorable state policies to encourage (2006~2010) shall continue to boost strong shipping demand for iron ore, coal and
the development of China shipping
giants 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

Relatively immune from global sub-prime crisis, emerging market shall remain as a
Emerging market likely to maintain its
growth momentum despite US and key engine of global economy for the next few years. Strong domestic demand from
Europe slowdown 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 US Europe Japan Emerging market China
IMF 08 GDP growth forecast (%)
Previous forecast 4.9 2.2 2.6 1.9 7.8 11.4
Latest in Jan 2008 4.0 1.5 1.6 1.5 6.9 10.0

World Bank GDP growth forecast (%)

2007 estimate 3.6 2.2 2.7 2.0 7.5 11.3
2008 forecast 3.3 1.9 2.1 1.8 7.4 9.6
Source: IMF, World Bank

Strong China demand to sustain

China’s growing demand on energy and key materials has become a major driving
China is now the key driving power of
global shipping market 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 ore imports
China’s iron ore and coal imports remain
resilient 50% 500

384
40% 400
326

30% 275 300

208
20% 200
148

10% 100

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

Source: CEIC, CCB Int’l Securities

China’s coal imports

80% 6.0
5.1
60% 5.0

40% 3.8 4.0

20% 2.6 3.0

1.9
0% 2.0
1.1
-20% 1.0

-40% 0.0
2003 2004 2005 2006 2007

Coal imports (mn tons) Coal ex port grow th (y oy ) Coal import grow th (y oy )

Source: CEIC, CCB Int’l Securities

4
 Robust dry-bulk shipping outlook

As of Oct 2007, new capacity of dry-bulk vessel on order reached 48.4% of current
Modest supply growth in dry-bulk fleet in capacity, as compared to new delivery ratio of 40.4% and 60.7% in oil tankers and
2008
containerships market respectively. Of the new dry-bulk capacity, 80% will only be
delivered in 2009 and beyond. 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 % 41 .0%

2 8 .2% 3 8.7 %
20 %
19 .7%
1 2 .2% 9 .7%
0%
T an ke rs B ul ke rs C on ta ine rs hi ps

De li v er ed du rin g 0 7 to 08 De li v er ed in 20 09 a nd be y o nd

Source: SSL Prospectus, CCB Int’l Securities

Strong China demand to lengthen industry Driven by strong Asian dry-bulk demand, BDI index continued to breach record high
cycle during 2H07 with a year-round average at 7,070. Reducing coal exports from China
has spurred Japan and Korea to import their coal needs from further sources, such
as Australia. The lengthening ocean voyage and severe congestion at Australian
ports also contributed to the hiking freight rate. We expect such factors to persist
during the next 2 years and strong China demand to support 2008 average BDI
index at 7,500.

BDI performance since 2004

12,000

10,000
2007 average at 7,070
8,000
2004 average at 4,510

6,000
2006 average at 3,180
4,000
BDI found support at 6,000
2,000
2005 average at 3,371
0
Oct 04

Oct 05

Oct 06

Oct 07
Jan 04

Apr 04

Jul 04

Jan 05

Apr 05

Jul 05

Jan 06

Apr 06

Jul 06

Jan 07

Apr 07

Jul 07

Jan 08

BDI Index

Source: Bloomberg, CCB Int’l Securities

5
 China relies on ore imports

China’s ore demand to outpace mining China’s infrastructure boom over 2006~2010 is expected to drive a 10~15% yoy
capacity growth in China’s iron ore demand, which is in line with its steel production capacity
expansion for the next few years.

However, domestic ore supply is unlikely to catch up with increasing demand, given
a modest mining capacity expansion and a nation-wide environment concern. 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.

Modest mining FAI to cap supply growth

120%

100%

80%

60%

40%
Investment gap likely to sustain
20%

0%
Jan 06 Apr 06 Jul 06 Oct 06 Jan 07 Apr 07 Jul 07 Oct 07
-20%
FAI on ore m ining (y oy ) FAI on ore production (y oy ) F AI on m etal production (y oy )

Source: CEIC, CCB Int’l Securities

Domestic supply is low due to low grade Further, the low grade of China’s crude oil reserve also contributed to its rising
of China’s crude ore reserve reliance on ore imports. Chinese Academy of Geological Science (CAGS) reported
in 2007 that China has identified 59.4 billion metric tons of iron ore reserves
containing only 30~35% of iron ore contents, compared to an average ore grade of
over 60% for major ore exporters in the world.

Estimated breakdown of Global ore reserve base Low ore grade of China’s reserve compared to global ore exporters
(ore grade)
China, 12.4% 80%
Russia, 15.1%
67.2%
70% 64.1% 63.3% 62.5%
Australia, 10.8% 60% 55.4%

Brazil, 16.5% 48.6%

50%

40% 32.6%
29.4%
30%

20%

10%
Others, 26.8% 0%
Ukraine, 18.4%
Brazil Canada India Australia Russia Worldwide China Ukraine

Source: US Geological Survey (Mineral Commodity Summaries, Jan 2006), CCB Int’l Securities

6
 Rising coastal coal shipping market

Over 90% of China’s coal mines are based in inland provinces in Western and
Coastal area is the largest coal user and Midwest China, while the largest demand arises from coastal China. Costal urban
relies on waterway to transport coal
areas, including Shanghai and Guangdong, primarily rely on waterway for coal
transportation, i.e. 80% of Guangdong’s coal trading is seaborne.

Strong industrial growth in China continues to drive robust electricity consumption

Rising costal coal demand to fuel shipping
rate and coal demand. China targets to upgrade its power capacity during the 11th-5
period to meet rising electricity demand. Annual power capacity is expected to
upgrade from 713mn KW in 2007 to 900~950mn KW by 2010, representing a steady
increase of 8~10% p.a. for the next 3 years.

China relies on a number of major coal-rails, including Daqin Railway (601006 CH)
Railroad upgrade to drive volume
expansion and Shuohuang Railway (owned by Shenhua, 1088 HK) to transport coal from coal
mines in Western China to key waterway terminals in the east. 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.

Rising coastal coal shipping market to We forecast total coastal coal shipment in China to increase by 10~12% yoy and
benefit CSD coal shipping rate to grow by 30~15% yoy by 2010, driven by robust coastal coal
demand and strong railroad and port throughput upgrade during 2008~2010. Market
leader, 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. CSD has
signed a strategic agreement with Guangdong in Nov 2007 to become its major coal
shipper from 2008 to 2010.

Market comparison
Key coastal coal shippers
Company CSD Ningbo Marine Shipping CS Haisheng
Stock code 1138 HK 600798 CH 600896 CH
FY07 COA volume (tons) 89.4mn 5.0mn 3.2mn

2008 COA contracts (by company announcement)

Volume (yoy growth) 6.9% 20% 23%
Rate (yoy growth) 40% 60% 79%

Coastal coal capacity expansion (by CCBI forecast)

FY08 (yoy growth) 2% 17% 13%
FY09 (yoy growth) 12.5% 15% 20%
Source: Company data, CCB Int’l Securities

Strong power upgrade to meet growing electricity consumption

(m n KW)
800 20%
Electricity consumption steadily
grows since 2003
16%
600

12%
400
8%

200
4%

0 0%
1999 2000 2001 2002 2003 2004 2005 2006 2007
Annual pow er c apac ity Elec tricity c onsum ption grow th (y oy %)

Source: CEIC, CCB Int’l Securities

7
Estimated breakdown of China’s coal reserve Coal is vital in power generation
Inner Mongolia,
Coal-fired, 82.9%
Shanx i, 25.7% 22.4% Hydro power, 14.9%
Electricity
Nuclear power, 1.9% China burns 50% of its coal to
generation generate 80% of its electricity
Others, 0.3%

Shaanx i, 16.1% Electricity generation, 50.3%

Petroleum processing, 9.5%
Coal Iron & steel making, 8.9%
Coastal area,
6.6%
consumption
Chemical production, 4.9%
Residential uses, 3.5%

Other inland area, Other industrial uses, 23.0%

Xinjiang, 9.5%
19.6%
0% 20% 40% 60% 80% 100%

Source: CEIC, China Mining Association, 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) New capacity ov er 2005~2010

395
400

326 Total: 304

300
Shuohuang Railway
100
0
200

Daqin Railway

100 204

0
Nation-w ide Coal producing area Key coal-rails

Source: Shenhua Group, CCB Int’l Securities

8
 Oil shipping to turnaround by 2009

Around 27% of existing tankers are to be Oil shipping market continued to see freight rate under pressure over the past 2 to 3
phased out during 2009~ 2010 years due to tanker oversupply. Based on the order book as of Oct 2007, tanker
market will see new supply of as much as 40.4% of current capacity for the next few
years. However, 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. We
expect the oversupply to ease during 2009~2010 and tanker rate to turnaround by
2009.

Based on the forecast by IEA, China’ oil production will peak during the next decade
China’s net oil imports to quadruple by
2030 and its net oil imports will nearly quadruple from 3.5mn bbl/day in 2006 to 13.1mn
bbl/day by 2030 to account for 80% of its total oil consumption. We believe strong oil
demand from China shall benefit domestic shippers, including CSD and CCH, both
of which are well positioned to ride on China government’s strategy to boost
domestic tankers.

China’s net oil imports forecast by IEA

15
13.1

12 4.2% p.a.

9
6.8% p.a. 7.1

6 9.9% p.a. 5.1

3.5

0
2006 2010F 2015F 2030F

China's net oil imports (mn bbl/day )

Source: IEA; CCB Int’l Securities

Tanker market performance since 2004

(WS)
Strong rebound seen in late 2007
350

300

250

200

150

100

50
Tanker rate largely traded below WS100 over 2005 to 2007
0
Oct 04

Oct 05

Oct 06

Oct 07
Jan 04

Apr 04

Jul 04

Jan 05

Apr 05

Jul 05

Jan 06

Apr 06

Jul 06

Jan 07

Apr 07

Jul 07

Jan 08

Dirty VLCC rate (Arabian Gulf to Japan)

Source: Bloomberg, CCB Int’l Securities

9
 Vulnerable container outlook

Global economic slowdown and supply Container market performance was mixed for 2007. Asia/Europe market saw strong
glut are the key concerns freight rate recovery with good TEU growth while transpacific market continued to
underperform due to the weak US demand and overcapacity. Looking forward into
2008, 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. Regional liners, 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. Overall speaking, container outlook remains vulnerable for 2008.

Key Chinese liners, including CSCL and COSCON, have large exposure to
US/Europe market and they are highly leveraged to China’s export performance.
Over the last few months, China saw a weakening export growth and shrinking trade
surplus. China’s export to US and EU slowed from 20.5% and 37.4% yoy in 1Q07 to
10.7% and 30.0% yoy in 4Q07, respectively.

Key national liners

Company CCH (COSCON) CSCL
Stock code 1919 HK 2866 HK
TEU capacity as of 2007 439,677 446,418
Capacity expansion over 2007~2009 14.9% p.a. 12.2% p.a.
Domestic market share 40% 45%

Estimated market exposure as of FY07

Transpacific route 36.7% 37.4%
Asia/Europe route 35.8% 32.8%
China domestic 6.1% 11.5%
Source: Company data, CCB Int’l Securities

China’s recent trade performance

60% Trade surplus started to slide 30,000

50% 25,000

40% 20,000

30% 15,000

20% 10,000

10% 5,000

0% 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
Trade surplus (US$mn) Ex port growth (yoy) Import growth (yoy)

Source: CEIC, CCB Int’l Securities

10
 State policy to benefit shipping SOEs

Favorable state policies are the key rerating China has predominately relied on foreign shippers to transport most of its energy
catalysts to the sector imports but its mounting energy demand has urged the government to protect its
energy shipping security. The State is working out relevant industry policy, which
aims to encourage domestic shippers to transport up to 50% of its energy and key
materials imports by 2010. Meanwhile, State government attempts to consolidate its
key state-owned assets in shipping and six other sectors to cultivate worldwide
industry leaders.

Implementation of such policies are the key rerating catalysts to China shipping
sector. We believe two shipping CSOEs (Central State-owned Enterprise), 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.

Summary of key shipping policies

National energy security plan
Energy shipping State government aims to lift domestic shippers’ market share in shipping energy and
security other key materials imports to about 50% by 2010 and to 80% by 2015.

National state-owned assets reform plan

CSOE restructuring The plan aims to consolidate key state-owned assets and reduce the number of CSOEs
from currently over 150 to 80~100 by 2010. Among which, there are five CSOEs
operating shipping or shipping-related business.
National security State government has short-listed seven core sectors, of which it shall maintain absolute
control and cultivate leading international enterprises. The seven pillar industries include
armaments, power generation and distribution, oil and petrochemicals,
telecommunications, coal, aviation and shipping.
Source: National shipping security plan refers to Nanjing Waterway 2006 Annual Report (600087 CH); SASAC;
CCB Int’l Securities

Market share expansion

Market share expansion to support capacity Currently, domestic players have accounted for an estimated 30% and 15% of iron
growth ore and oil import shipping market, respectively. 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, or at least 65 Capesize or VLOCs (Very
Large Ore Carrier, estimated as 250,000 DWT) and 60 VLCCs (Very Large Crude
Carrier, estimated as 300,000 DWT).

Capacity expansion
(N o of v essel for 2008~2010)
80

65 60
60

40 Total: 31 Total: 26

12
20 12

19 8
6
0
Capesize/VLOC on VLOC needed VLCC on orders VLC C needed
orders
COSCO Group China Shipping Group Other SOEs

Note: Other SOEs include Changjiang Shipping Group, Sinotrans Group and China Merchant Group
Source: Company data; CCB Int’l Securities

11
 Industry restructuring underway

In a move to strengthen major state-owned assets and enhance China’s national

China shipping sector is currently at phase 1 competitiveness in the world, seven core sectors were named by state government,
of the consolidation trend
of which it will retain absolute control and cultivate worldwide industry leaders.
Shipping is among the seven pillar sectors and will be a key restructuring focus for
the next 2 years. We believe leading shipping conglomerates, with strong
economies of scale and solid market power, are likely to benefit from the
consolidation trend. We expect to see a two-phase restructuring roadmap:

Phase 1 Parent of large SOEs shall accelerate assets injection into listed arms,
including unlisted shipping business, terminals and other shipping-related business.
Out of Hong Kong listed shipping counters, CCH and CSCL are likely to be the key
beneficiaries. 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.

Key unlisted assets

CSOEs China Shipping Group COSCO Group Sinotrans Group
Listed arms CSCL CSD CCH SSL
Listed assets Container shipping Dry-bulk shipping Dry-bulk shipping Dry-bulk shipping
Oil tanker Container shipping Container shipping
Container terminals Oil tanker
Container Leasing
Container manufacturing
Unlisted assets Container terminals LNG shipping Oil tanker Dry-bulk shipping
Container leasing (Sinochart)
Container manufacturing
Source: Company data, CCB Int’l Securities

Phase 2. Leading SOEs are expected to take major roles in the coming industry
restructuring and shall have more M&A opportunities. We believe five shipping
CSOEs may potentially consolidate into 2~3 shipping conglomerates over the next 2
to 3 years, which is in line with the national plan to consolidate its 150 CSOEs into
80~100 by 2010. Out of five CSOEs, 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.

Estimate breakdown of current shipping power controlled by CSOEs

China Shipping ,
22.0%

COSCO , 59.8%

CSC , 7.3%

Sinotrans , 6.1%

China Merchant ,
4.7%

Source: Company data, CCB Int’l Securities

12
 Emerging shipping SOEs

Economies of scale and market share are the key competition focuses in shipping
Economies of scale and market share are sector. Currently, COSCO and China Shipping Group are two leading shipping
crucial in shipping competition
conglomerates with solid market power in each of three shipping segments. Their
strong capacity base shall achieve better economies of scale and their
comprehensive business mix, particularly terminal-shipping operating models, likely
create massive synergy in the competition. We believe the two shipping giants shall
strengthen their market position for the years to come and may potentially benefit
from the industry consolidation. Five shipping CSOEs are divided into three
categories as follows.

Shipping conglomerate
COSCO Group is the largest shipping force in China, occupying 38% of domestic
shipping capacity. The group is the largest dry-bulk carriers in the world and has
listed most of its shipping assets in CCH. Oil tanker is expected to be injected into
CCH the soonest by 2008.

China Shipping Group mainly operates CSCL, the world’s fourth largest container
line and CSD, the largest coastal shipping force in China. China Shipping Group
plans to inject container terminals and other container-related assets into CSCL over
the next 1~2 years.

Inland river carrier

Changjiang Shipping Group (“CSC”) is the largest inland-river shipping company in
China, accounting for an estimated 10% of China’s inland-river capacity. CSC Group
has listed most of its shipping business in A-share market, including its oil tanker
Nanjing Waterway (600087 CH) and dry-bulk carrier CSC Phoenix (000520 CH).

Multi-functional shipper
Sinotrans Group is the largest logistics group in China, mainly engaged in agency
and freight forwarding services. Sinotrans Group has recently listed its shipping
subsidiary, SSL in Hong Kong stock market.

China Merchant Group is a diversified conglomerate covering various industries,

including infrastructure, finance, real estate, logistics and energy shipping. Major
shipping business includes its Shanghai-listed subsidiary, Merchant Energy
Shipping (601872 CH).

Shipping CSOE comparison

COSCO Group 76.9% 40.2% 25.8%

China Shipping Group 12.0% 45.3% 28.5%

0.3%
CSC Group 6.5% 17.7%

Sinotrans Group 2.8%14.2% 7.8%

0.0%
China Merchant Group 1.8% 20.2%

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, CCB Int’l Securities

13
Valuation and recommendation

Peer comparison

We mainly benchmark with our global and regional peer group to value Chinese
shipping stocks. We used both PBR and PER to set our valuation range and derive
the valuation base for individual company. Our valuation range is set as follows
based on our peer group valuation.

Valuation target
Container Dry-bulk carriers
Peer group Global Asian Global Asian
08F PBR 1.4x 1.1x 1.9x 1.7x
08F PER 15.3x 14.1x 8.1x 8.4x

Target multiples
08F PBR 1.1x 2.2x
08F PER 14.1x 11.0x
Source: Bloomberg; CCB Int’l Securities

We value Chinese container lines in line with Asian peers. Our global liner peer
group is currently trading at an average 08F PER of 15.3x and PBR of 1.4x while
key Asian liners are trading lower at 1.0~1.3x 08F PBR. We used 1.1x 08F PBR and
14.1x 08F PER to value Chinese container liners, which is in line with current
valuation of Asian peers.

We give premium valuation to Chinese dry-bulk carriers, supported by

favorable state policy. Global bulk carriers are currently trading at average 08F
PER of 8.1x and 08F PBR of 1.9x while key Asian bulkers are trading at about 8.4x
08F PER and 1.7x 08F PBR. 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. We value Chinese
dry-bulk carriers at 11.0x 08F PER and 2.2x 08F PBR, representing 30% premium
to global peers supported by China’s strategy to boost domestic players.

High BDI drives high valuation

(Peer group forw ard PER) (BDI)
25.0 12,000
BDI peaked at 11,039

10,000
20.0

Highest valuation at 19.1x PER 8,000

15.0

6,000

10.0

4,000

5.0
2,000

0.0 0
1/1/06

3/1/06

5/1/06

7/1/06

9/1/06

11/1/06

1/1/07

3/1/07

5/1/07

7/1/07

9/1/07

11/1/07

1/1/08

Source: Bloomberg

14
Global shipping peer group
Code Name Price Mkt cap PER (x) PBR (X) ROE (%) Yield (%)
(Local) (Local’mn) 07F 08F 09F 07F 08F 09F 07F 08F 09F 07F 08F 09F
1919 HK CCH 23.00 353,034 11.0 8.6 9.2 4.8 3.1 2.3 48.9 38.4 26.0 1.4 2.1 2.3
1138 HK CSD 24.75 113,663 15.9 12.5 9.9 4.1 3.2 2.5 30.8 28.9 28.5 2.0 2.6 3.5
2866 HK CSCL 3.47 92,628 11.1 10.0 8.6 1.4 1.0 0.9 13.0 9.9 10.3 11.6 2.6 3.2
368 HK SSL 5.06 20,240 14.0 8.0 7.7 1.0 1.2 1.2 11.8 16.9 15.8 1.4 3.1 3.2

Global dry-bulk carriers

005880 KS Korea Line 200,000 2,304,827 6.0 9.1 14.2 2.5 1.7 N/A 41.5 19.1 N/A 1.3 0.6 0.6
DSX US Diana shipping 28.50 2,120 13.5 9.9 11.0 2.7 2.6 2.6 19.6 26.3 23.9 5.3 10.2 9.8
DRYS US Dryships Inc 75.30 2,762 5.7 4.1 6.0 2.7 1.6 1.3 47.7 39.3 21.6 1.1 1.1 1.1
SCI IN Shp Corp India 211 59,693 10.1 12.0 N/A 1.2 1.2 N/A 12.4 10.2 N/A 3.7 3.5 3.5
QMAR US Quintana Mari 23.03 1,341 9.7 9.0 10.7 2.5 2.6 2.8 25.9 29.3 25.8 6.2 7.2 6.0
STX SP STX Pan Ocean 2.89 5,949 7.9 8.2 15.8 2.4 1.8 2.2 30.4 22.6 13.7 2.7 2.4 3.0
2343 HK Pacific Basin 13.08 20,720 4.7 5.2 5.8 1.8 1.3 N/A 39.1 25.8 N/A 11.5 10.5 N/A
2606 TT U-Mine Marine 85.00 72,931 8.1 7.6 8.0 2.9 2.4 2.1 36.3 32.0 26.9 8.0 9.7 8.6
Average 8.2 8.1 10.2 2.3 1.9 2.2 31.6 25.6 22.4 5.0 5.7 4.7

Global containers
2603 TT Evergreen 25.85 78,033 9.9 16.4 10.5 1.1 1.1 1.0 11.3 6.8 10.0 5.0 3.9 5.4
2609 TT Yang Ming 20.60 47,807 10.9 11.1 9.9 1.0 1.0 1.0 9.4 8.9 9.7 4.9 5.1 4.2
NOL SP NOL 3.03 4,452 9.6 8.7 7.1 1.5 1.3 1.1 15.4 14.9 15.5 2.8 2.8 4.6
DAC US Danaos Corp 26.41 1,441 12.2 12.9 13.0 2.2 2.1 2.0 17.9 16.2 15.5 0.0 6.8 7.1
SSW US Seaspan Corp 28.57 1,644 NM 24.7 20.5 1.9 1.9 1.9 (1.3) 7.9 9.1 6.2 6.7 7.1
011200 KS Hyundai Marine 38,400 5,110,012 42.5 30.2 44.7 2.6 N/A N/A 6.0 N/A N/A 1.3 1.3 1.3
000700 KS Hanjin Shipping 34,800 2,770,531 4.9 13.9 17.6 0.9 N/A 0.7 19.4 N/A 3.8 2.9 2.8 2.8
316 HK OOIL 48.70 30,476 1.5 4.5 1.2 0.9 0.9 0.4 40.9 12.8 14.5 18.5 3.8 4.2
Average 13.1 15.3 15.5 1.5 1.4 1.2 14.9 11.2 11.2 5.2 4.1 4.6

Global tankers
1192 HK Tijan Petroleum 0.46 2,946 13.4 7.2 4.9 0.9 0.8 0.8 6.8 10.5 15.3 0.0 0.0 0.0
GESCO IN Great Eastern 408 62,196 6.2 8.1 5.8 1.5 1.3 1.2 24.8 16.7 20.7 2.8 2.7 2.8
NAT US Nordic American 28.34 850 18.2 13.1 21.0 1.3 1.3 1.6 7.0 9.6 6.3 13.4 13.4 10.6
FRO US Frontline Ltd 45.14 3,378 N/A 14.9 9.9 6.5 6.6 6.1 N/A 44.0 66.7 N/A 16.4 11.9
9112 JP IINO Kaiun 937 104,078 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Average 12.6 10.8 10.4 2.6 2.5 2.4 12.9 20.2 27.3 5.4 8.1 6.3

Diversified shipping conglomerates

MAERSKB MAERSK 49,800 218,461 11.9 9.7 7.8 1.4 1.3 1.1 12.1 13.3 14.4 1.2 1.4 1.5
9101 JP NYK Line 962 1,183,441 9.9 9.7 9.5 1.6 1.4 1.3 16.0 14.4 13.4 2.5 2.5 2.6
9104 JP MOL 1,325 1,598,209 8.4 8.6 8.3 2.2 1.8 1.5 25.8 21.0 18.3 2.3 2.3 2.3
9107 JP K Line 1,042 665,593 7.9 7.9 7.7 1.6 1.3 1.2 20.0 17.0 15.2 2.4 2.5 2.6
HRZ US Horizon Lines 20.17 603 9.8 7.7 5.9 2.6 1.9 1.2 26.6 25.1 21.3 2.3 2.5 3.0
MISC MK MISC Berhad 8.75 32,548 13.7 12.8 11.5 1.6 1.5 1.4 11.9 12.0 12.2 4.0 4.1 4.3
Average 13.3 10.3 9.3 2.2 1.8 1.5 17.2 17.5 16.4 17.2 17.5 16.4
Note: Closing price as of 3 March 2008
Source: Bloomberg

15
 Recommendation

Favorable industry outlook, strong government support and ongoing consolidation

We recommend to overweight China
shipping sectors, and buy CSD, CCH and focus are the key rerating catalysts. We recommend to overweight China shipping
SSL sector and buy dry-bulk carriers CSD, CCH and SSL, given their resilient growth
prospects. We are neutral on container liner CSCL, given the vulnerable container
outlook. Our stock picks derive from our competitive analysis as follows.

Competitive analysis
Competitive factors Scores Comments

Growth prospects
CCH 2 Earnings may slowdown in FY09 due to BDI retrenchment. Potential acquisition
of oil tanker shall bode well for its earnings stability.
CSD 4 Maintain good growth over FY08~FY09 with strong costal freight rate outlook
and capacity expansion.
CSCL 1 Modest growth over FY08~09, driven by new vessel deliveries
SSL 3 Stable TCE improvement to drive visible growth in FY08
Industry outlook
CCH 2 Evolving into a shipping conglomerate and shall further comprehend its
shipping business mix for the next few years.
CSD 4 Ride on rising coastal coal shipping market and China’s strategy to boost
domestic players in energy overseas shipping.
CSCL 1 Container freight rate vulnerable to global economic slowdown
SSL 3 Leverage to dry-bulk shipping boom and shall renew its contacts on high BDI.
Profit margins
CCH 2 Sustainable margins with synergies among different shipping segments.
CSD 3 Market leadership to sustain pricing power and strong freight rate improvement
to boost margins over FY08~09.
CSCL 1 Generate lowest margins among peers with high leverage to spot market
SSL 4 Leveraged to dry-bulk chartering and yields highest margins among peers.
Capacity expansion
CCH 3 Stable delivery over 2008~2009 but is expected to build more large-size dry
bulk carriers for iron ore imports shipping.
CSD 4 Strong delivery in FY09 to support its market share expansion in both coastal
coal shipping and iron ore imports shipping market.
CSCL 2 Rapid capacity expansion in Asia/Europe and domestic route over FY08~09
SSL 1 Has the most aggressive expansion target among peers but surging vessel
price is likely to undermine its capacity expansion plan.
Risk factors
CCH 2 Has the most sensitivity to BDI volatility among peers but we have already
factored in a 25% BDI decline in its earnings forecast model.
CSD 4 High exposure to coastal coal shipping market, which is the best shelter from
worldwide shipping cyclicity.
CSCL 1 Highest sensitivity to freight rate, freight volume, bunker costs and RMB
appreciation.
SSL 3 Improving growth visibility with good TCE improvement but surging vessel
prices may dampen its fleet expansion target.

Recommendation
CCH 11 Key beneficiary of favorable industry trend and buy recommended.
CSD 19 Our most preferred shipping play with visible earnings growth. Buy.
CSCL 6 Neutral. The counter is fairly valued at current price level and key upside risk
may come from China’s strong export performance towards Europe.
SSL 14 Discounted price vs. good growth. Buy.
Source: CCB Int’l Securities

16
China shipping comparison
Valuation and ratings
Company valuation Target PBR (x) Target PER (x)
Rating TP (HK$) Upside (%) 07F 08F 09F 07F 08F 09F
CCH O 32.00 39.1 6.4 4.1 3.1 14.2 11.1 11.8
CSD O 31.00 25.3 5.0 3.8 3.1 19.1 15.0 11.9
CSCL N 3.68 6.1 1.5 1.0 0.9 11.2 10.1 8.7
SSL O 6.35 25.5 1.3 1.5 1.5 17.4 10.0 9.6
Growth prospects
(%) Revenue growth (yoy) Net profit growth (yoy) EPS growth (yoy) CAGR over 06A to 09F
07F 08F 09F 07F 08F 09F 07F 08F 09F Revenue Net profit EPS
CCH 91.4 22.3 2.3 885.6 29.0 (6.5) 495.5 28.6 (6.5) 33.8 128.2 92.8
CSD 32.2 30.3 26.6 72.5 27.7 25.3 71.4 27.7 25.3 29.7 40.2 40.0
CSCL 27.9 11.9 16.9 291.5 10.8 16.4 142.4 10.8 16.4 18.7 71.6 46.3
SSL 2.8 97.0 16.0 11.0 159.6 4.0 2.2 74.1 4.0 33.0 44.2 22.8
Profit margins
(%) GPM OPM EBIT margin NPM
07F 08F 09F 07F 08F 09F 07F 08F 09F 07F 08F 09F
CCH 32.4 34.5 31.3 26.2 28.1 25.1 27.8 29.6 26.7 21.6 22.9 20.7
CSD 43.8 46.2 47.2 45.5 45.7 46.3 45.5 45.7 46.3 37.5 36.8 36.4
CSCL 12.9 12.3 12.6 11.4 10.8 11.0 11.4 10.8 11.0 8.7 8.6 8.6
SSL 52.5 62.0 62.2 51.1 60.7 60.8 53.3 62.0 62.1 51.9 68.4 61.3
Financial performance
(%) Net gearing ROE Depreciation/operation cost Bunker /operation cost
07F 08F 09F 07F 08F 09F 07F 08F 09F 07F 08F 09F
CCH Net cash Net cash Net cash 48.9 38.4 26.0 6.9 6.7 7.2 14.0 14.5 16.2
CSD 15.5 10.8 5.3 30.8 28.9 28.5 14.0 12.6 11.7 41.9 41.9 42.2
CSCL Net cash Net cash Net cash 13.0 9.9 10.3 4.0 4.0 3.7 23.4 25.9 24.5
SSL Net cash Net cash Net cash 11.8 16.9 15.8 23.1 22.0 25.7 15.7 11.3 9.3
Capacity expansion
(%) Dry-bulk capacity (yoy) Tanker capacity (yoy) Container capacity (yoy)
07F 08F 09F 07F 08F 09F 07F 08F 09F
CCH - 4.6 7.7 - - - 11.9 14.2 15.5
CSD 45.5 3.6 12.5 8.6 1.1 51.9 - - -
CSCL - - - - - - 12.2 15.6 8.8
SSL 2.5 38.0 20.5 0.0 28.6 36.8 0.0 38.0 10.5
Source: CCB Int’l Securities

17
 Risk factors

Freight rate and operating performance of shipping companies are sensitive to a

number of factors, including global/regional economic outlook, change in demand or
supply, bunker costs and other seasonal factors. Key risk factors of China shipping
sector is summarized as follows.

Economic risks
US and Europe recession are the key risks to CSCL, given its high exposure to US
and Europe market. Further, a significant economic slowdown in China will weaken
its overall material demand and undermine the growth prospects of dry-bulk carriers.

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.
Further, the ultimate consolidation plan of shipping SOEs is yet to finalized by state
government, and may not benefit the listed companies.

Operational risks
Hiking vessel prices could potentially hamper SOEs’ fleet expansion plan. Further
high-than-expected bunker prices and runway operating costs could significantly cut
profit margin.

Other risks
China will renew its iron ore contracts with global ore exporters from year to year.
Significant change of current contract prices and conditions may adversely affect
shipping volume of iron ore.

CSCL is the most vulnerable to freight rate Sensitivity summary

volatility and mounting bunker costs. Key assumptions Freight rate Freight volume Operating costs
(-5% change) Bulk Container Tanker Bulk Container Tanker Bunker costs
Change in FY08 EPS
CCH -4.4% -1.6% - -4.2% -1.8% - +3.2%
CSD -3.0% - -0.6% -0.9% - -0.6% +3.8%
CSCL - -14.6% - - -15.8% - +10.3%
SSL -4.0% -0.5% -0.2% -3.7% -1.1% -0.5% +0.3%
Change in FY09 EPS
CCH -3.8% -2.0% - -3.6% -2.1% - +3.5%
CSD -2.9% - -0.8% -0.8% - -0.8% +3.0%
CSCL - -17.0% - - -17.0% - +11.8%
SSL -4.2% -0.5% -0.2% -4.1% -1.3% -0.6% +0.3%
Change in valuation
CCH -3.5% -0.6% - -3.3% -0.7% - +1.8%
CSD -3.0% - -0.6% -0.9% - -0.6% +3.8%
CSCL - -11.2% - - -13.8% - +8.2%
SSL -4.0% -0.5% -0.2% -3.7% -1.1% -0.5% +0.3%
Source: CCB Int’l Securities

18
 Company research

China Shipping China COSCO Holdings (1919 HK): Evolving into a shipping

conglomerate
Outperform (initiate)
Restructuring underway. Financed by its A-share IPO fund, CCH has
acquired the dry-bulk fleets from its parent, COSCO Group and became the
world’s largest dry-bulk shipping company. We believe CCH is likely to
Target price: HK$32.0 undergo further asset restructuring with its parent and may acquire its oil
Upside: 39.1% shipping business during the next 1~2 years. CCH’s strategy to diversify
into other shipping segments shall bode well for its earnings stability.
Share data
Bloomberg code 1919.HK
Acquisition to boost strong FY07 results. We expect a 496% yoy
Share price (HK$)* 23.00 earnings growth for CCH in FY07 to be boosted by full-year profit
Total issued shares (mn) 2,580 contribution from its dry-bulk shipping business which is estimated to
Market cap. (HK$ mn) 353,034 account for a bulk 74% of FY07 EBIT. EBIT from container shipping is
52-wk hi/lo 39.45/5.26 expected to jump by 56.6% yoy during 2007 driven by the strong recovery in
Average turnover (mn share) 37.8 Asia/Europe rate while EBIT from terminals to rise 32.4% yoy, thanks to the
tariff improvement and robust throughput growth. Our earnings forecast for
Major shareholders % FY07 is largely in line with CCH’s latest profit guidance at not less than
COSCO Group 53.6 RMB18bn.
JP Morgan# 8.0
Morgan Stanley# 7.7
Earnings may peak during 2008. We forecast earnings to grow by 28.6%
UBS# 7.4 yoy in FY08 but to peak off by 6.5% yoy in FY09. Our earnings forecast has
# H-share only factored in: (1) strong dry-bulk EBIT growth at 42.0% yoy for FY08 but to
* Closing price as of 3 March 2008
decline by 19% yoy in FY09, assuming average BDI to peak at 7,500 in
Source: Bloomberg
2008 and drop by 25% in 2009 on rising new supply; (2) capacity expansion
Market data to drive container EBIT growth at CAGR of 35% over 2006 to 2009. We
forecast CCH’s Asia/Europe and transpacific freight rate to decline by 2.5%
HSI Index 23,584 and 5% yoy in FY08 respectively due to the weak US and Europe trade
HSCEI Index 13,439 outlook.
HSCCI Index 5,282

Undemanding valuation. We used sum-of-the-part model and valued CCH
2008F 2009F at HK$32.0 per share or 11.1x 08F PER, which represents about 10%
BVPS consensus (RMB) 7.900 9.736 premium compared to global shipping conglomerates. The premium is well
EPS consensus (RMB) 2.193 2.283 supported by CCH’s potential assets restructuring with its parent. Further
Source: Bloomberg catalysts include stronger than expected results and BDI performance.

Stock price performance

Key risk factors to CCH include: (1) a sharp correction in BDI led by global
recession; (2) macro tightening by the State to restrict its material demand;
(3) lack of an efficient management over multiple shipping businesses could
lead to decreasing economies of scale.

Financial Summary
FYE Dec (RMB mn) FY06 FY07F FY08F FY09F
Turnover 50,994 112,771 134,902 137,210
EBIT 4,806 27,158 35,305 32,538
Source: Bloomberg Net profit 3,168 21,098 27,379 25,311
EPS (RMB) 0.330 1.964 2.527 2.364
Wang Ren y-o-y chg (%) (69.7) 495.5 28.6 (6.5)
wangren@ccbintl.com
PER (x) 65.8 11.0 8.6 9.2
(852) 2532 6749
Yield (%) 1.1 1.4 2.1 2.3
ROAE (%) 7.5 48.9 38.4 26.0
BVPS (RMB) 3.076 4.392 6.737 9.022
Source: Historical data from the company, others are CCB Int’l Securities’ estimates

19
 A diversified shipping conglomerate

Potential breakthrough in assets Funded by its A-share IPO, CCH has acquired the entire dry-bulk shipping business
restructuring with its parent from its parent, COSCO Group during 2H07, and become the world’s largest
dry-bulk shipping company. 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.

Strong FY08 vs. flat FY09. We forecast FY07 earnings to grow at 496% yoy, in line
with company’s recently revised profit guidance. The robust growth is attributed to
full-year profit contribution from the newly-acquired dry-bulk shipping business,
which is estimated to account for 74% of CCH’s FY07 EBIT. We forecast FY08
earnings to grow by 28.6% yoy and a modest FY09 earnings decline by 6.5% yoy,
based on the following projections.

Solid dry-bulk shipping performance. Dry-bulk segment shall continue to be the

key driver for CCH in FY08, and segment EBIT is expected to grow at 42.0% yoy in
FY08 but to decline by 19% yoy in FY09, assuming about 65~70% of its dry-bulk
capacity is chartered-in and annual average BDI to peak off in 2009. We have
already factored in a 25% yoy decline in 2009 average BDI in our earnings forecast.

Capacity expansion to boost container growth. We forecast 13~18% yoy growth

for CCH’s liner revenue over 2008 to 2009 to be driven by strong capacity expansion.
CCH’s annual shipping capacity is expected to increase by about 50% to reach
580mn TEUs by 2009. We expect transpacific and Asia/Europe rate to drop by 5%
and 2.5% yoy due to the weakening US and Europe trade volume.

Healthy container leasing growth. EBIT from container leasing is expected to

grow at 16~18% yoy over FY08~FY09 in line with CCH’s overall container volume
growth. Currently, COSCON the container shipping arm of CCH, occupies about
65% of CCH’s leasing capacity.

Stable container terminal growth. EBIT from container terminals shall maintain
stable growth at CAGR of 22.1% over FY06~FY09, mainly driven by strong
container throughput growth in Bohai Rim. Container terminals shall account for
about 3.7~4.6% of CCH’s total EBIT during FY08~ FY09. CCH’s strategy to gain
controlling stake through equity investments could fuel earnings of the segment.

Revenue breakdown as in FY08F EBIT breakdown as in FY08F

Logistics & others, Logistics & others,

10.0% Dry -bulk shipping, 4.1%
Container leasing, 48.1% Container leasing,
2.0% 5.2%
Container
Container terminals, 3.7%
terminals, 0.3% Dry -bulk shipping,
80.8%
Container
shipping, 6.2%

Container shipping,
39.6%

Source: Company data, CCB Int’l Securities

20
Key segment statistics
Dry-bulk shipping 2006 2007F 2008F 2009F 2007F 2008F 2009F
(Yoy %) (Yoy %) (Yoy %)
Revenue from dry-bulk segment (RMB’mn) 20,226 51,195 64,859 55,601 153.1 26.7 (14.3)
- self-owned vessels 7,787 20,019 25,473 23,789 157.1 27.2 (6.6)
- chartered-in vessels 12,439 31,176 39,387 31,812 150.6 26.3 (19.2)
GPM at dry-bulk shipping 35.3% 46.3% 50.2% 47.7% 11.0 3.9 (2.5)
OPM at dry-bulk shipping 36.7% 39.2% 44.0% 41.6% 2.5 4.8 (2.4)

Container shipping
Container shipping volume (1,000 TEUs) 5,111 5,699 6,591 7,566 11.5 15.7 14.8
- transpacific 1,303 1,525 1,753 2,034 17.0 15.0 16.0
- Asia/Europe (incl. Mediterranean) 1,209 1,360 1,604 1,885 12.5 18.0 17.5
- Intra-Asia (incl. Australia) 1,501 1,426 1,497 1,609 (5.0) 5.0 7.5
- domestic market 257 251 258 264 (2.0) 2.5 2.5
- others 842 1,137 1,478 1,774 35.0 30.0 20.0
Average container rate (RMB/TEU) 6,487 6,846 6,699 6,910 5.5 (2.1) 3.1
- transpacific 10,264 9,391 8,922 9,145 (8.5) (5.0) 2.5
- Asia/Europe (incl. Mediterranean) 8,062 10,279 10,022 10,373 27.5 (2.5) 3.5
- Intra-Asia (incl. Australia) 3,970 4,268 4,481 4,593 7.5 5.0 2.5
- domestic market 9,777 9,044 8,817 9,038 (7.5) (2.5) 2.5
- others 1,870 2,076 2,335 2,452 11.0 12.5 5.0
GPM at container shipping 10.7% 11.1% 10.0% 12.1% 0.5 (1.2) 2.1
OPM at container shipping 3.9% 5.3% 4.1% 6.2% 1.4 (1.2) 2.1

Container terminals
Total container thought put (1,000 TEUs) 32,792 40,550 48,442 56,003 23.7 19.5 15.6
- Bohai Rim 13,431 18,106 21,813 25,161 34.8 20.5 15.4
- Yangtze River Delta 7,732 8,175 9,807 11,505 5.7 20.0 17.3
- Pear River Delta 10,401 12,491 14,121 15,912 20.1 13.1 12.7
- Overseas 1,227 1,778 2,701 3,425 44.9 51.9 26.8
Revenue from container terminals (RMB’mn) 232 373 463 558 60.5 24.0 20.5
Profit from associates/JCEs (RMB’mn) 609 774 909 1,021 27.2 17.4 12.3
Investment returns (RMB’mn) 162 187 211 239 15.2 12.9 13.3

Container leasing
Total container leasing volume (1,000 TEUs) 1,233 1,504 1,719 1,913 21.9 14.3 11.3
- COSCON 457 566 689 796 23.9 21.7 15.5
- Int’l long-term leasing 120 239 285 313 100.0 19.0 10.0
- Int’l master leasing 27 37 34 22 37.3 (8.3) (34.2)
- managed container fleet 630 661 711 782 5.0 7.5 10.0
Total container fleet (1,000 TEUs) 1,251 1,588 1,813 1,998 27.0 14.2 10.2
Container utilization rate 98.6% 94.7% 94.8% 95.8% (3.9) 0.1 1.0

Logistic operation
Total services income (RMB’mn) 10,167 11,784 13,546 15,411 15.9 15.0 13.8
- third-party logistics 2,234 2,793 3,351 3,854 25.0 20.0 15.0
- shipping agency services 3,312 4,024 4,855 5,817 21.5 20.7 19.8
- Others 4,621 4,967 5,340 5,740 7.5 7.5 7.5
Source: Historical data from the company, others are CCB Int’l Securities’ estimates

21
 Key growth catalyst – asset restructuring

To diversify its business mix, we expect CCH may undergo further assets
Tanker capacity may double by 2010 restructuring with its parent, COSCO Group and may acquire the oil tanker business
from its parent.

COSCO Group currently occupies oil tanker fleet with total capacity of about 3.5mn,
which is expected to grow by 85~100% by 2010, based on the Group’s tanker
expansion plan. Following table summarizes the key unlisted shipping assets held
by COSCO Group:

Key shipping assets remaining at COSCO Group

Oil tankers No of vessels DWT (mts) Average fleet age
VLCC 9 2.41 3.4
Panamax 12 0.82 9.0
Handysize 5 0.22 13.6
LPG carrier 6 0.02 19.8
Sub-total 32 3.47 10.1

General cargo ships

Multi-purpose 58 1.12 18.2
General cargo 34 0.47 25.8
Sub-total 92 1.59 21.0

Specialized vessels
Semi-submersible 3 0.05 14.0
Asphalt 11 0.06 12.8
Ro-Ro 7 0.06 25.8
Sub-total 21 0.18 17.2
Source: COSCO Group

Undemanding valuation

We applied sum-of-the-part method and valued CCH at HK$32.0 per share, which
SOTP valuation at HK$32.0
translates into 08F PER of 11.1x. The valuation represents about 15% premium to
current valuation of global shipping conglomerates. Our SOTP valuation of CCH
mainly comprises the following:

(1) HK$26.0 for CCH’s dry-bulk cargo shipping business valued at 11.0x 08F PER,
compared to Asian peer average of 8.4x 08F PER. 25% premium is given the
state government’s policy to protect domestic players.

(2) HK$3.9 for container shipping valued at 1.1x 08F PBR, which is based on our
FY08 book value projection of CCH’s container segment, or COSCON. Our
divisional valuation is comparable to Asian liner peers;

(3) HK$1.8 for CCH’s 51.3% stake of COSCO Pacific (1199 HK) valued by current
market price with a holding company discount of 15%. COSCO Pacific operates
CCH’s container leasing, container terminals, container manufacturing business
and holds 49% of COSCO Logistics.

(4) HK$0.4 for CCH’s remaining 51% stake of CCH’s logistic operation, or COSCO
Logistics at 9.0x 08F PER, which is largely in line with current valuation of key
China logistic operators.

22
 SOTP valuation breakdown
Valuation
Key assets Stake Valuation methodology (RMB’mn) % of valuation
Dry-bulk shipping 100% 11.0x 08F PER 231,672 81.1%
Container shipping 100% 1.1x 08F PBR 34,825 12.2%
COSCO Pacific 51.3% Market value with 15%
holding company discount 15,911 5.6%
COSCO Logistics 51% 9.0x 08F PER 3,171 1.1%

NAV - - 285,579 -
NAV/share (RMB) - - 28.0 -
Exchange - - 1.14 -
Target price (HK$) - - 32.0 -
Source: CCB Int’l Securities

Key risk factors to our valuation include: (1) a sharp correction in BDI index led by
global recession; (2) stringent macro tightening by state government to cut its
infrastructure budget and overall materials demand; and (3) higher-than-expected
bunker costs and operation costs to undermine fleet returns.

Valuation comparison
Code Name Price Mkt cap PER (x) PBR (X) ROE (%) Yield (%)
(Local) (Local’mn) 07F 08F 09F 07F 08F 09F 07F 08F 09F 07F 08F 09F
1919 HK CCH 23.00 353,034 11.0 8.6 9.2 4.8 3.1 2.3 48.9 38.4 26.0 1.4 2.1 2.3

Shipping conglomerate
MAERSKB MAERSK 49,600 217,802 11.8 9.6 7.8 1.4 1.3 1.1 12.1 13.3 14.4 1.2 1.4 1.6
9107 JP K Line 1,042 665,593 7.9 7.9 7.7 1.6 1.3 1.2 20.0 17.0 15.2 2.4 2.5 2.6
9104 JP MOL 1,325 1,598,209 8.4 8.6 8.3 2.2 1.8 1.5 25.8 21.0 18.3 2.3 2.3 2.3
MISC MK MISC Berhad 8.75 32,548 13.7 12.8 11.5 1.6 1.5 1.4 11.9 12.0 12.2 4.0 4.1 4.3
Average 10.5 9.7 8.8 1.7 1.5 1.3 17.4 15.8 15.0 2.5 2.6 2.7

Global container
2866 HK CSCL 3.47 92,629 9.9 10.1 8.8 1.4 1.3 1.1 14.1 12.7 12.1 3.7 2.7 3.0
2603 TT Evergreen 25.85 78,033 9.9 16.4 10.5 1.1 1.1 1.0 11.3 6.8 10.0 5.0 3.9 5.4
000700 KS Hanjin Shipping 34,800 2,770,531 4.9 13.9 17.6 0.9 N/A 0.7 19.4 N/A 3.8 2.9 2.8 2.8
316 HK OOIL 48.70 30,476 1.5 4.5 1.2 0.9 0.9 0.4 40.9 12.8 14.5 18.5 3.8 4.2
Average 6.5 11.2 9.5 1.1 1.1 0.8 21.5 10.7 10.1 7.5 3.3 3.9

Global bulker
005880 KS Korea Line 200,000 2,304,827 6.0 9.1 14.2 2.5 1.7 N/A 41.5 19.1 N/A 1.3 0.6 0.6
2343 HK Pacific Basin 13.08 20,720 4.7 5.2 5.8 1.8 1.3 N/A 39.1 25.8 N/A 11.5 10.5 N/A
2606 TT U-Mine Marine 85.00 72,931 8.1 7.6 8.0 2.9 2.4 2.1 36.3 32.0 26.9 8.0 9.7 8.6
STX SP STX Pan Ocean 2.89 5,949 7.9 8.2 15.8 2.4 1.8 2.2 30.4 22.6 13.7 2.7 2.4 3.0
Average 6.7 7.5 10.9 2.4 1.8 2.2 36.8 24.9 20.3 5.9 5.8 4.1

China’s logistic operator

598 HK Sinotrans 2.42 10,283 11.7 9.3 8.3 1.2 1.1 1.0 10.1 11.6 12.0 3.1 3.6 4.4
152 HK Shenzhen Int’l 0.85 12,085 11.0 8.3 14.7 2.0 1.6 1.4 18.2 19.4 9.7 4.5 7.3 2.8
Average 11.4 8.8 11.5 1.6 1.3 1.2 14.2 15.5 10.8 3.8 5.4 3.6
Note: Closing price as of 3 March 2008
Source: Bloomberg; CCB Int’l Securities

23
Financial Summary

Income statement forecasts Balance sheet forecasts

FYE 31 Dec (RMB’mn) 2006 2007F 2008F 2009F FYE 31 Dec (RMB’mn) 2006 2007F 2008F 2009F
Total revenue 50,994 112,771 134,902 137,210 PP&E 26,401 31,991 44,129 55,959
- dry bulk shipping - 51,195 64,859 55,601 Intangible assets 129 242 268 295
- container shipping 40,033 47,069 53,365 62,654 Long-term investments 10,995 20,425 26,757 30,117
Other non-current assets 598 1,143 1,257 1,382
- container terminal 232 373 463 558
Total non-current assets 38,123 53,801 72,411 87,754
- container leasing 1,797 2,349 2,669 2,986
Inventories 602 736 920 1,030
- logistic & others 10,167 11,784 13,546 15,411 Trade receivables 8,924 12,500 10,625 10,838
Cost of services (46,020) (81,180) (93,729) (98,995) Other receivables 11 8 7 8
Gross profit 4,974 31,591 41,174 38,215 Derivative fin. instruments 5 1 1 1
Administrative expenses (2,910) (7,041) (7,888) (7,906) Cash and cash equivalents 7,796 28,129 36,462 38,341
Other income, net 1,732 879 300 346 Current assets 17,338 41,373 48,014 50,217
Share reform (440) 120 0 0 Total assets 55,460 95,174 120,425 137,971

Operating profit 3,356 25,548 33,586 30,654

Trade and others payable 11,370 14,045 16,573 19,059
Profit from JCEs/assos 1,450 1,610 1,719 1,884
Short-term borrowings 6,159 10,136 7,651 4,740
EBIT 4,806 27,158 35,305 32,538 Derivative fin. instruments 431 339 288 274
Finance costs, net (714) (1,429) (1,294) (499) Tax payable 235 278 300 322
Profit before tax 4,092 25,729 34,011 32,039 Current liabilities 18,195 24,798 24,813 24,396
Income tax expense (924) (4,631) (6,632) (6,728) LT borrowings 8,947 15,025 14,225 7,025
Net profit 3,168 21,098 27,379 25,311 Other LT liabilities 841 1,005 1,098 1,161
Minority interests (1,137) (1,080) (1,561) (1,164) Non-current liabilities 9,788 16,030 15,323 8,186
Total liabilities 27,983 40,828 40,135 32,581
Net attributable profit 2,031 20,018 25,818 24,146
Net assets 27,477 54,346 80,290 105,390
Dividends (1,489) (3,023) (4,647) (5,071)
EPS (RMB) 0.330 1.964 2.527 2.364
Shareholders' equity 18,935 44,756 68,823 92,172
DPS (RMB) 0.242 0.297 0.455 0.496 Minority interest 8,541 9,590 11,467 13,218
BVPS (RMB) 3.076 4.392 6.737 9.022 Net assets 27,477 54,346 80,290 105,390

Financial ratios Cash flow projections

FYE 31 Dec (%) 2006 2007F 2008F 2009F FYE 31 Dec (RMB’mn) 2006 2007F 2008F 2009F
Gross margin 9.8 28.0 30.5 27.9 Pretax Profits 4,092 25,729 34,011 32,039
Operating margin 6.6 22.7 24.9 22.3 Adj: non-cash items (864) 118 6,454 4,373
EBIT margin 9.4 24.1 26.2 23.7 Interest received 261 349 375 369
Pre-tax margin 8.0 22.8 25.2 23.4 Tax paid (1,843) (4,527) (6,575) (6,657)
Net margin 6.2 18.7 20.3 18.4 Net cash from operating 1,646 21,669 34,265 30,124
S&D/revenue 5.7 6.2 5.8 5.8
Effective tax rate 22.6 18.0 19.5 21.0 Capex & investment (5,859) (15,250) (18,731) (15,448)
Dividend payout ratio 73.3 15.1 18.0 21.0 Investment income & 7,890 1,995 177 349
ROAE 7.5 48.9 38.4 26.0 Net Cash from Investing 2,031 (13,255) (18,554) (15,099)
ROAA 3.6 26.6 24.0 18.7 Equity raised/ (repaid) 0 22,881 0 0
Current ratio (x) 1 1.7 1.9 2.1 Change in borrowings (1,826) (8,915) (3,284) (10,111)
Quick ratio (x) 0.4 1.1 1.5 1.6 Interest expense (881) (1,325) (1,225) (599)
Net debt/equity 26.6 Net cash Net cash Net cash Dividends & distributions (2,686) (2,740) (1,863) (1,220)
Interest coverage (x) 4.9 16.6 23.1 43.5 Others (383) (839) (931) (1,166)
Inventories days 4.8 3.3 3.6 3.8 Net Cash from Financing (5,775) 9,063 (7,303) (13,096)
Receivables days 63.9 46.7 32.5 32.4 Net change in cash (2,098) 17,477 8,408 1,929
Payable days 90.2 63.1 64.5 70.3

Source: Historical data from the company, others are CCB Int’l Securities’ estimates

24
 China Shipping China Shipping Development (1138 HK): Solid growth prospects

Better growth visibility. Relatively immune from US recession and global

Outperform (initiate) trade slowdown, CSD is nearly 70% exposed to buoyant domestic shipping
market. CSD is better sheltered from the volatile shipping cycle than its
domestic shipping peers, given that: (1) CSD has locked-in over 80% of its
Target price: HK$31.0 current capacity by COA contracts, mainly on a freight rate plus fuel charges
Upside: 25.3% basis, which could potentially protect its profit margins and earnings. We
expect COA contracts to generate 90% of its total revenue by FY09; (2)
Share data CSD has secured a 40% yoy rate improvement in its renewed 2008 coastal
Bloomberg code 1138.HK coal contracts to contribute 65% of its FY08 revenue; (3) occupying 70%
Share price (HK$)* 24.75 and 30% of China’s coastal oil and coal shipping market, CSD is likely to
Total issued shares (mn) 1,296 sustain its leadership in domestic market and continues to enjoy a stronger
Market cap. (HK$ mn) 113,663 pricing power as compared to its peers.
52-wk hi/lo 27.20/9.63

Favorable industry outlook. Strong electricity consumption and easing
Average turnover (mn share) 11.6
coal-rail bottleneck shall drive robust coastal coal shipping demand. We
Major shareholders % expect costal coal shipment to remain strong throughout 2010 and overall
China Shipping Group 47.5 costal shipping rate to grow at 10~15% yoy during 2008 to 2009. Further,
Davis Selected Ad# 7.2 the phasing-out of single-hulls during late 2008 to 2009 is likely to
JP Morgan# 4.9 accelerate, which may ease current tanker oversupply. We expect CSD’s
# H-share only VLCC rate to see a 5% yoy improvement in 2009.
* Closing price as of 3 March 2008
Source: Bloomberg
Robust earnings CAGR of 40.0% over FY06 to FY09F. We forecast
earnings to grow by 71.4% yoy in FY07 to be boosted by acquisition of 42
Market data bulkers and disposal gain from old tankers, and we forecast earnings to
maintain strong growth at 20~25% yoy over FY08 to FY09, on the back of:
HSI Index 23,584
(1) strong capacity expansion at 50% yoy for tanker and 10% yoy for
HSCEI Index 13,439
dry-bulk fleet in 2009, as 6 VLCCs and 1 VLOCs will be delivered; (2) strong
HSCCI Index 5,282
coal contract rate increment at 28.5% and 9.5% yoy during FY08 and FY09;
(3) Improving operating margins and fleet return, thanks to the rising freight
2008F 2009F
rate and efficient cost control. We expect CSD’s market share in coastal
BVPS consensus (RMB) 5.929 7.324
coal shipping market to improve from current 30% to 35% by FY09.
EPS consensus (RMB) 1.720 2.009
Source: Bloomberg
Target price at HK$31.0. Our valuation of CSD translates into a 15.0x 08F
PER, as compared to our valuation of Chinese bulk carriers at 11.0x 08F
Stock price performance
PER. The 35% premium is justified by its defensive business mix and
buoyant industry outlook. Our target price is also well supported by our DCF
valuation of CSD at HK$37.66.

Key risks factors to CSD include state government’s macro control to

slowdown energy demand, significant BDI correction and significant change
of current contract model.

Financial Summary
FYE Dec (RMB mn) FY06 FY07F FY08F FY09F
Source: Bloomberg
Turnover 9,575 12,658 16,490 20,883
EBIT 3,431 5,763 7,538 9,659
Wang Ren
wangren@ccbintl.com Net profit 2,759 4,752 6,068 7,602
(852) 2532 6749 EPS (RMB) 0.829 1.420 1.814 2.272
y-o-y chg (%) 2.4 71.4 27.7 25.3
PER (x) 27.3 15.9 12.5 9.9
Yield (%) 1.3 2.0 2.6 3.5
ROAE (%) 23.5 30.8 28.9 28.5
BVPS (RMB) 3.787 5.468 7.076 8.867
Source: Historical data from the company, others are CCB Int’l Securities’ estimates

25
 Strong organic growth

13.4% exposed to BDI index CSD, which has the highest exposure to domestic shipping market, is better
sheltered from global economic slowdown and the BDI cyclicity. Coastal shipping
continues to be a key driver of CSD, contributing 69.5% of CSD’s estimated FY08
revenue. Driven by a strong costal coal demand, 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. 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.

Revenue breakdown by shipping business (FY08F)

BDI-related int'l
bulk, 13.4%

Int'l oil shipping,

17.0%

Domestic
market, 69.5%

Source: Bloomberg, CCB Int’l Securities

Robust earnings momentum at CAGR of 40.0% between FY06 to FY09F

We forecast a 71.4% yoy earnings growth in FY07, thanks to full-year profit

contribution from its 42 bulkers acquired from its parent and disposal income from
old tankers. We expect earnings to maintain strong growth at 25~28% yoy over
FY08 and FY09 respectively, to be boosted by improving freight rate and aggressive
fleet expansion.

Strong VLCC delivery in 2009~2010 to ride Optimistic industry outlook. We expect CSD’s domestic coal shipment to rose
on tanker market turnaround 7.0~12.5% yoy with average contract rate up by 40~10% yoy between FY08 to
FY09, to be fueled by robust coastal coal demand and strong coal-rail expansion.
Further, the phasing-out of single-hulled tankers between late 2008 to 2009 is likely
to ease current oversupply. We expect CSD’s VLCC rate to see a 5% yoy
improvement in 2009.

Key performance statistics for CSD

Growth (yoy %) FY06 FY07F FY08F FY09F
Business volume
Domestic coal 4.7 69.3 7.0 12.5
International coal 4.8 36.1 15.0 12.5
Domestic oil 0.2 (20.7) 6.3 4.6
International oil 19.1 16.5 5.0 28.0

Average contract rate

Domestic coal 9.0 11.4 40.0 10.0
International coal 8.9 16.0 15.0 5.0
Domestic oil 4.0 13.9 6.3 10.5
International oil 3.7 (24.0) (2.5) 5.0
Source: Historical data from the company, others are CCB Int’l Securities’ estimates

26
 Market leadership to be strengthened. Currently, CSD occupies about 70% and
Expanding market share in coastal coal
shipping market 30% of China coastal oil and coastal coal shipping market respectively, in terms of
business volume. 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, given
its rapid fleet growth, close business tie with customers and strong government
support as witnessed by its recent strategic agreement with Guangdong Municipal
Government. Under the agreement, CSD will become a key shipper to transport
coastal coal to major power plants based in Guangdong during 2008 to 2010.
Currently, 80% of Guangdong’s coal trading are transported by sea.

Key beneficiary of China’s strategy to boost Fleet expansion to sustain growth. Based on current fleet expansion plan, CSD’s
domestic energy shippers tanker and bulk capacity is expected to grow at CAGR of 20% and 10% respectively
from 2007 to 2010, upon delivery of 8 VLCCs and 4 VLOCs during 2009 to 2010.
We estimate CSD to locked-in about 96% of its 2009 capacity by long-term contracts
with key oil and steel makers in China. We forecast a 25.3% yoy growth in FY09
earnings, to be driven by strong VLCC delivery in 2009 and the potential tanker rate
recovery.

Favorable contract terms to protect margins. CSD’s signed COA contracts were
mainly based on a freight rate plus fuel charges. Under such contract terms, CSD
shall protect itself from a significant freight rate and bunker volatility. We expect both
GPM and OPM to see good improvement over FY07 to FY09, on the back of rising
coal freight rate and efficient cost control, but ROE may decline slightly to 28.5% by
FY09 on rising capex. Net gearing is expected to maintain at low level of 5.3% as in
FY09, but we expect the company may gear up in FY10 and onwards, due to its
huge capex needs.

Key contracts to sustain growth

Key customer Segment Contract term Volume
Shougang (000959 CH) Int’l iron ore 2H09~2019 37mn tons
Baosteel (600019 CH) Int’l iron ore 2010~2020 37mn tons
Wuhan Steel (600005 CH) Int’l iron ore 15~20 years 170mn tons
Sinopec (0386 HK) Int’l oil 2H06~1H16 10~12mn tons by 2010
Shenhua (1088 HK) Coastal coal Set up a 50/50 JV 1mn tons by 2010
Guangdong provincial gov. Coastal coal 2008~2010 Volume not specified
Source: Company data, CCB Int’l Securities

CSD’s capacity expansion Improving profitability

(mn DWTs)
Total capacity to grow at 16.6% CAGR 25% 46.2% 50.0%
21.7% 43.8% 47.2%
15
over FY06 to FY10F
20% 35.3% 37.5% 36.8% 40.0%
12 36.4%
28.8% 30.8%
6.52 15% 30.0%
9 5.64 28.9% 28.5%
23.5% 15.5%
6 5.16 5.22 10% 20.0%
3.55 10.8%
3 5.67 6.31 5.3%
3.40 3.69 3.73 5% 10.0%

0
2006 2007F 2008F 2009F 2010F 0% 0.0%
2006 2007F 2008F 2009F
Tanker capacity Dry-bulk capacity Net gearing GPM NPM ROE

Source: Company data, CCB Int’l Securities

27
 Premium valuation warranted

Premium valuation supported by DCF model We value China dry-bulk carriers at 12.0x 08F PER, which represents a 20%
premium to Asian dry-bulk carriers trading at an average10.0x 08F forward PER as
we believe domestic players have a huge room to expand their market share in
dry-bulk imports the industry policy. We believe CSD deserves a premium valuation
at HK$31.1, or 15x 08F forward PER, given its higher earnings visibility as
compared to peers.

We also used DCF model to underpin our valuation as we believe CSD’s COA
contracts shall continue to provide stable cash flow, visible business growth and
relatively sustainable profit margins for the next few years. Our DCF model valued
CSD at HK$37.66 based on the following key assumptions: (1) company beta of
1.4x; (2) we expect the company to maintain debt-to-equity ratio at 25% going
forward; (3) terminal growth of 2.5%.

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;
(2) a collapse in BDI index to hurt market sentiment; (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.

Sensitivity analysis
Change in assumptions Change in EPS
Corresponding year FY08F FY09F
Freight volume
-5% in domestic coal -3.1% -3.0%
-5% in domestic oil -0.5% -0.5%
-5% in other bulks -0.8% -0.7%

Freight rate
-5% in int’l tanker rate -0.6% -0.8%
-5% in annual average BDI -0.9% -0.8%

Operating costs
+5% in bunker costs -3.8% -3.0%
Source: CCB Int’l Securities

28
DCF valuation - 2008
(R M B m n ) FY 07F FY 08F FY09F FY10F FY 11F FY 12F T e rm in a l v a lu e

E B IT 5 ,7 6 3 7 ,5 3 8 9 ,6 5 9 1 0 ,5 7 0 1 1 ,7 3 3 1 2 ,6 1 3
T a x ra te 1 4 .2 % 1 7 .0 % 1 9 .0 % 2 1 .0 % 2 3 .0 % 2 5 .0 %
D e p re cia tio n 998 1 ,1 2 2 1 ,2 9 1 1 ,4 8 4 1 ,7 4 8 1 ,9 8 3
C apex 6 ,6 7 0 4 ,4 7 3 5 ,0 3 0 5 ,4 1 0 6 ,1 1 4 5 ,1 9 7
In cre a se in n e t w o rkin g ca p ita l 520 975 1 ,0 8 8 707 460 391
F re e ca sh flo w 1 0 ,0 9 8 8 ,6 3 2 1 0 ,4 7 4 1 1 ,5 6 9 1 2 ,9 4 0 1 2 ,2 8 2 1 1 5 ,2 8 8
P re se n t va lu e N /A 8 ,6 3 2 9 ,2 3 5 8 ,9 9 3 8 ,8 6 9 7 ,4 2 2 6 9 ,6 6 7

D isco u n t fa cto r N /A 1 .0 0 0 0 .8 8 2 0 .7 7 7 0 .6 8 5 0 .6 0 4 0 .6 0 4
T im e fa cto r N /A 0 .0 0 1 .0 0 2 .0 0 3 .0 0 4 .0 0 4 .0 0

R isk-fre e ra te 5 .0 % S e n s itiv ity a n a ly s is o n ta rg e t p ric e (H K $ )

B e ta 1 .4 L T g ro w th W ACC
E q u ity risk p re m iu m 7 .5 % 1 2 .0 % 1 3 .0 % 1 3 .4 % 1 4 .0 % 1 5 .0 %
C o st o f e q u ity 1 5 .5 % 1 .5 % 3 9 .1 0 3 5 .8 6 3 4 .7 1 3 3 .1 4 3 0 .8 2
C o st o f d e b t 6 .8 % 2 .0 % 4 0 .4 8 3 6 .9 8 3 5 .7 5 3 4 .0 6 3 1 .5 8
E ffe ctive ta x ra te 2 5 .0 % 2 .5 % 4 2 .0 1 3 8 .2 0 3 7 .6 6 3 5 .0 6 3 2 .4 1
A fte r ta x co st o f d e b t 5 .1 % 3 .0 % 4 3 .7 2 3 9 .5 5 3 8 .1 1 3 6 .1 5 3 3 .3 1
C a p ita l stru ctu re 3 .5 % 4 5 .6 2 4 1 .0 4 3 9 .4 7 3 7 .3 4 3 4 .2 8
D ebt % 2 0 .0 %
E q u ity % 8 0 .0 %
W ACC 1 3 .4 %
L o n g -te rm g ro w th 2 .5 %

NPV 1 1 2 ,8 1 9
C a sh a t h a n d 1 ,6 4 3
T o ta l d e b t 4 ,2 0 0
C o m p a n y va lu a tio n 1 1 0 ,2 6 1
N u m b e r o f sh a re s 3 ,3 4 6
F a ir va lu e (R M B ) 3 2 .9 5
E xch a n g e 1 .1 4
F a ir va lu e (H K $ ) 3 7 .6 6

Source: CCB Int’l Securities

29
Financial Summary

Income statement forecasts Balance sheet forecasts

FYE 31 Dec (RMB’mn) 2006 2007F 2008F 2009F FYE 31 Dec (RMB’mn) 2006 2007F 2008F 2009F
Total revenue 9,575 12,658 16,490 20,883 PP&E 15,079 21,749 26,223 31,252
- Oil shipping 5,280 4,713 5,034 6,346 Intangible assets 20 7 5 5
- Coal shipping 3,415 6,317 9,352 11,526 Long-term investments 5 4 4 3
Other non-current assets 45 39 35 33
- Other dry-bulk shipping 880 1,628 2,104 3,011
Total non-current assets 15,149 21,799 26,267 31,294
Operating costs (6,194) (7,111) (8,879) (11,028)
Bunker inventories 202 180 180 125
Gross profit 3,381 5,547 7,611 9,855 Trade receivables 428 566 737 934
Other income, net 273 473 215 137 Other receivables 620 270 200 150
Administrative expenses (224) (257) (289) (333) ST investments 160 220 180 150
Operating profit 3,431 5,763 7,538 9,659 Cash and cash equivalents 664 1,514 1,643 2,792
Profit from JCEs/assos 0 0 0 0 Current assets 2,074 2,750 2,940 4,151
EBIT 3,431 5,763 7,538 9,659 Total assets 17,224 24,549 29,207 35,445

Finance costs, net (129) (224) (226) (274)

Trade payables 227 318 365 435
Profit before tax 3,302 5,539 7,311 9,385
Short-term borrowings 1,507 1,050 850 850
Income tax expense (543) (787) (1,243) (1,783) Other payables 869 1,387 750 788
Net profit 2,759 4,752 6,068 7,602 Tax payables 56 60 65 80
Minority interests (3) 0 0 0 Current liabilities 2,658 2,815 2,030 2,153
Net attributable profit 2,756 4,752 6,068 7,602 LT borrowings 1,888 3,300 3,350 3,500
Dividends 998 1,521 1,942 2,661 Other LT liabilities 80 138 150 125
EPS (RMB) 0.829 1.420 1.814 2.272 Non-current liabilities 1,968 3,438 3,500 3,625
Total liabilities 4,627 6,253 5,530 5,778
DPS (RMB) 0.300 0.455 0.580 0.795
Net assets 12,597 18,296 23,677 29,667
BVPS (RMB) 3.787 5.468 7.076 8.867

Shareholders' equity 12,597 18,296 23,677 29,667

Minority interest 0 0 0 0
Net assets 12,597 18,296 23,677 29,667

Financial ratios Cash flow projections

FYE 31 Dec (%) 2006 2007F 2008F 2009F FYE 31 Dec (RMB’mn) 2006 2007F 2008F 2009F
Gross margin 35.3 43.8 46.2 47.2 Pretax Profits 3,302 5,539 7,311 9,385
Operating margin 35.8 45.5 45.7 46.3 Adj: non-cash items 384 1,123 (44) 960
EBIT margin 35.8 45.5 45.7 46.3 Interest received 129 224 226 274
Pre-tax margin 34.5 43.8 44.3 44.9 Tax paid (448) (804) (1,249) (1,799)
Net margin 28.8 37.5 36.8 36.4 Net cash from operating 3,367 6,082 6,244 8,820
Bunker/operating costs 41.8 41.9 41.9 42.2
S&D/revenue 2.3 2.0 1.8 1.6 Capex & investment (4,588) (6,719) (4,473) (5,029)
Effective tax rate 16.4 14.2 17.0 19.0 Investment income 142 285 190 142
Dividend payout ratio 36.2 32.0 32.0 35.0 Net Cash from Investing (4,446) (6,434) (4,283) (4,887)
ROAE 23.5 30.8 28.9 28.5 Equity raised/ (repaid) 0 0 506 0
ROAA 18.0 22.8 22.6 23.5 Change in borrowings 1,719 2,955 (150) 150
Current ratio (x) 0.78 0.98 1.45 1.93 Interest expense (185) (207) (232) (260)
Quick ratio (x) 0.25 0.54 0.81 1.30 Dividends & distributions (998) (1,521) (1,942) (2,661)
Net debt/equity 21.7 15.5 10.8 5.3 Others 0 0 0 0
Interest coverage (x) 26.7 25.7 33.3 35.3 Net Cash from Financing 537 1,228 (1,818) (2,770)
Inventories days 11.9 9.2 7.4 4.1 Net change in cash (543) 876 143 1,163
Receivables days 16.3 16.3 16.3 16.3
Payable days 13.4 16.3 15.0 14.4
Source: Historical data from the company, others are CCB Int’l Securities’ estimates

30
 China Shipping China Shipping Container Lines (2866 HK): Vulnerable industry outlook

Weak global demand. Container market outlook is likely to deteriorate

Neutral (initiate) triggered by the weakening global trade demand. 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
Target price: HK$3.68 route. We are cautious with CSCL given its high leverage to China’s export
Upside: 6.1% to US and Europe and increasing exposure to spot market, i.e. 90% of its
FY08 Asia/Europe capacity shall be on spot market.
Share data

Flat container rate. We forecast CSCL’s overall container rate to remain
Bloomberg code 2866.HK
flat in FY08 and grow by 5% yoy in FY09, based on: (1) transpacific rate to
Share price (HK$)* 3.47
decline by 7.5% yoy in FY08 despite regional liners’ effort to introduce new
Total issued shares (mn) 3,751
bunker surcharge program and raise transpacific rate. We question the
Market cap. (HK$ mn) 92,628
effectiveness of possible rate hike due to the potential declining load factor;
52-wk hi/lo 10.88/1.57
(2) A/E rate to drop by 2.5% in 2008 and pick up by 2.5% yoy in FY09.
Average turnover (mn share) 79.9
strong A/E rate recovery during 2007 could be short-lived as increasing
Major shareholders % capacity reallocation from transpacific route to A/E route may lead to
China Shipping Group 47.9 oversupply; (3) robust demand in domestic container market to drive
Baring Asset Mgmt# 4.8 domestic container rate up by 12~10% yoy over FY08 to FY09. We expect
Cheung Kong (0001 HK)# 4.1 CSCL to maintain its leadership in domestic market with a share of
# H-share only approximately 45%.
* Closing price as of 3 March 2008
Source: Bloomberg
Vulnerable earnings outlook over FY08~09. We forecast FY07 earnings
to grow at 142% yoy on the back of strong A/E rate recovery and improving
Market data margins, but we are cautious with its FY08~FY09 earnings prospects. We
HSI Index 23,584 expect FY08~09 earnings to grow at CAGR of 13.6%, mainly driven by new
HSCEI Index 13,439 vessel deliveries. Furthermore, increasing operating costs, mainly bunkers,
HSCCI Index 5,282 port and railroad charges, could further undermine its earnings outlook.

Fair valuation at HK$3.68. We valued CSCL at 1.0x 08F PBR, which

2008F 2009F
represents a 10% discount to Asian liners given its increasing exposure to
BVPS consensus (RMB) 2.419 2.936
spot market. We believe CSCL is fairly valued at current price level and
EPS consensus (RMB) 0.317 0.362
Source: Bloomberg
further upside may come from acquisition of container-related assets from
its parent.
Stock price performance

Key risks to our valuation includes: (1) high volatility in container rate in
transpacific and A/E line; (2) compared to other Chinese shipping counters,
CSCL is the most sensitive to bunker costs which accounts for about 25% of
its total operating costs; (3) accelerating RMB appreciation to undermine
CSCL’s earnings prospects as it has the largest currency mismatch
compared to domestic peers.

Financial Summary
FYE Dec (RMB mn) FY06 FY07F FY08F FY09F
Source: Bloomberg Turnover 30,502 39,003 43,659 51,019
EBIT 1,677 4,447 4,702 5,600
Wang Ren Net profit 859 3,364 3,729 4,342
wangren@ccbintl.com
EPS (RMB) 0.119 0.288 0.319 0.372
(852) 2532 6749
y-o-y chg (%) (80.0) 142.4 10.8 16.4
PER (x) 27.0 11.1 10.0 8.6
Yield (%) 1.0 11.6 2.6 3.2
ROAE (%) 5.2 13.0 9.9 10.3
BVPS (RMB) 2.290 2.219 3.215 3.622
Source: Historical data from the company, others are CCB Int’l Securities’ estimates

31
 Vulnerable earnings outlook over FY08~09

Further downside risks in freight rate Global container rate continued to rebound since 2H06, largely triggered by a
lower-than-expected supply. Particularly in Asia/Europe route, CSCL enjoyed a
37.7% yoy rate hike during FY07 in its Asia/Europe route, while increasing load
factor and effective cost control may lead to a significant margin improvement. 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.

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. 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.

Based on the company’s expansion plan, total container capacity will increase by
40% to reach 630,000 TEUs by 2012, mainly to be delivered in 2008 and 2011. The
volume-driven earnings expansion is susceptible to major US or Europe downturn,
particularly due given its relatively high exposure in spot market, i.e. we expect 90%
of CSCL’s A/E capacity to be on spot market.

CSCL will renew its service contracts with major railroads in US in 1Q08 and we
expect a 15~20% yoy increase in service charges. During FY07, 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 FY06 to an estimated 12.9% in FY07. We expect CSCL to see
significant bunker costs hike of 25% yoy in FY08 and GPM shall decline from 12.9%
in FY07 to 12.3% in FY08.

Key operating statistics over 2006 to 2009F

2006 2007F 2008F 2009F
Volume growth (yoy %)
Transpacific 27.4 18.2 5.6 7.5
Asia/Europe 10.8 8.1 15.0 15.0
Asia Pacific 2.5 (2.7) 2.5 4.3
China domestic 22.1 49.6 10.0 10.0
Others 344.4 101.5 36.9 19.2
Total 23.1 27.9 12.0 11.1

Effective freight rate growth (yoy %)

Transpacific (6.6) (8.4) (7.0) 5.0
Asia/Europe (25.2) 37.7 (2.5) 2.5
Asia Pacific (10.6) (5.8) 2.5 1.1
China domestic 2.2 23.8 12.5 10.0
Others (55.7) (28.7) 8.3 4.5
Total (12.7) (0.0) (0.1) 5.2

Revenue growth (yoy %)

Transpacific 18.9 8.2 (1.8) 12.9
Asia/Europe (17.1) 48.9 12.1 17.9
Asia Pacific (8.4) (8.3) 5.1 5.5
China domestic 24.8 85.3 23.8 21.0
Others 96.7 43.6 48.3 24.5
Total 7.5 27.9 11.9 16.9
Source: Historical data from the company, others are CCB Int’l Securities’ estimates

32
Revenue breakdown by market (FY08F) Strong capacity delivery in 2008 and 2011
(TEU)
Others, 15.2%
80,000
Transpacific, 69,697
66,500
China domestic, 32.9%
12.7% 60,000
47,444

40,000
26,600
Asia Pacific,
6.3% 20,000 13,300
9,250

0
Asia/Europe,
2H07 2008 2009 2010 2011 2012
32.9% New deliv ery

Source: Company data, CCB Int’l Securities

Key rerating catalyst – terminal acquisitions

Acquisition to comprehend business mix According to the CSCL’s A share IPO prospectus, CSCL targets to acquire all
container-related assets from its parent, China Shipping Group, for the next few
years. Major assets likely to be acquired by CSCL include 13 container terminals
with a total throughput capacity of 20mn TEUs and container manufacturing, leasing
business. 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.

Key terminal assets at China Shipping Group

Container terminals CSCL’s stake No of berth Throughput capacity
(%) (TEU)
Domestic terminals
Dalian Dagang 35 1 177,000
Dalian Int’l III 30 5 3,000,000
Jinzhou New Century 51 2 310,800
Qinhuangdao Port CT 30 2 1,000,000
Tianjin Five Continents Int’l 14 4 1,500,000
DP World Yantai 35 2 1,000,000
Lianyungang New Oriental Int’l 55 4 1,302,000
Lianyungang new Oriental CT 55 5 Est. 2,000,000
Shanghai China Shipping CT 50 1 400,000
GZ Nansha Terminal Phase I 40 7 3,500,000
Zhanjiang Port China Shipping CT 50 2 400,000
Overseas terminals
US Western Coast CT 40 4 2,500,000
Egypt Damietta Int’l 20 6 2,500,000
Total 45 19,589,800

Container manufacturing Production centers Production capacity

(TEU)
China Shipping Investment Lianyungang, Jinzhou, Guangzhou 450,000
Source: China Shipping Group

33
Fair valuation

We valued CSCL at 1.0x 08F PBR, or HK$3.68 per share, representing a 10%
discount compared to its Asian peers trading at 1.1x 08F PBR, to highlight our
concern of its increasing exposure to spot market. We believe CSCL is fairly valued
at current price level. Further rerating catalyst include better-than-expected results,
strong recovery in US demand and potential terminal acquisition.

Asian containers are currently trading at fair value of 1.0~1.3x 08F PBR

(x 08F PBR)
2.5
Dananos (16.2, 2.1)

2.0
Seaspan (7.9, 1.9)

1.5 NOL (14.9, 1.3)

Ev ergreen (6.8, 1.1) Yang Ming (8.9, 1.0)
1.0
CSCL (9.9, 1.0)
OOCL (13.3, 0.9)
0.5

(% 08F ROE)
0.0
0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0

Source: Bloomberg, CCB Int’l Securities

Key risks to our valuation are: (1) high volatility in freight rate in transpacific and
Asia/Europe container market; (2) hiking bunker costs to trim CSCL’s profit margins.
Bunker costs is estimated to account for about 25% of CSCL’s total operating costs
as in FY08; (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. CSCL
has the largest currency mismatch compared to its domestic peers, as over 85% of
CSCL’s revenue is settled in foreign currency while 60% of its expenses paid in
foreign currency.

Sensitivity analysis
Change in assumptions Change in EPS
Corresponding year FY08F FY09F
-1% in contract rate -3.3% -3.8%
-1% in transpacific volume -3.0% -3.5%
-1% in A/E rate -3.1% -3.3%
-1% in A/E volume -2.8% -3.1%
+1% in bunker cots -2.5% -2.7%
+1% in RMB application forecast -2.9% -2.3%
Source: CCB Int’l Securities

34
Financial Summary

Income statement forecasts Balance sheet forecasts

FYE 31 Dec (RMB’mn) 2006 2007F 2008F 2009F FYE 31 Dec (RMB’mn) 2006 2007F 2008F 2009F
Total revenue 30,502 39,003 43,659 51,019 PP&E 23,464 26,014 30,764 33,264
- Transpacific 13,490 13,490 13,490 13,490 Intangible assets 60 60 60 61
- Asia/Europe 9,698 10,411 10,920 11,334 Long-term investments 81 91 97 100
Total non-current assets 23,604 26,164 30,921 33,425
- Asia-pacific 2,875 2,875 2,875 2,875
- other markets 2,020 7,743 10,824 16,604
Bunker inventories 636 707 815 850
- China domestic 2,420 4,485 5,550 6,715 Trade receivables 3,490 4,368 4,390 5,214
Operating costs (28,392) (33,982) (38,309) (44,577) Other receivables 98 191 193 156
Gross profit 2,111 5,021 5,349 6,442 Cash and cash equivalents 2,916 17,115 15,577 16,868
Other income, net 133 182 214 181 Current assets 7,140 22,381 20,975 23,089
Administrative expenses (574) (763) (872) (1,034) Total assets 30,744 48,546 51,896 56,514
Operating profit 1,670 4,440 4,692 5,590
Trade payables 2,205 2,922 3,182 3,519
Profit from JCEs/assos 7 7 9 10
Short-term borrowings 1,108 963 614 572
EBIT 1,677 4,447 4,702 5,600
Other payables 1,211 1,145 1,101 1,139
Finance costs, net (534) (446) (159) (212) Tax payables 70 81 95 125
Profit before tax 1,143 4,001 4,542 5,387 Current liabilities 4,593 5,111 4,993 5,355
Income tax expense (278) (620) (795) (1,024)
Net profit 865 3,381 3,748 4,364 LT borrowings 5,538 4,335 3,805 3,455
Minority interests (6) (17) (19) (22) Other LT liabilities 4,036 3,752 3,230 2,850
Net attributable profit 859 3,364 3,729 4,342 Non-current liabilities 9,575 8,087 7,035 6,305
Total liabilities 14,168 13,198 12,028 11,661
Dividends 241 1,009 969 1,216
Net assets 16,576 35,347 39,868 44,853
EPS (RMB) 0.119 0.288 0.319 0.372
DPS (RMB) 0.033 0.370 0.083 0.104
Shareholders' equity 16,533 35,310 39,824 44,804
BVPS (RMB) 2.290 2.219 3.215 3.622 Minority interest 43 37 44 49
Net assets 16,576 35,347 39,868 44,853

Financial ratios Cash flow projections

FYE 31 Dec (%) 2006 2007F 2008F 2009F FYE 31 Dec (RMB’mn) 2006 2007F 2008F 2009F
Gross margin 6.9 12.9 12.3 12.6 Pretax Profits 1,143 4,001 4,542 5,387
Operating margin 5.5 11.4 10.7 11.0 Adj: non-cash items 1,833 1,275 1,689 1,253
EBIT margin 5.5 11.4 10.8 11.0 Interest received (210) (606) (765) (1,014)
Pre-tax margin 3.7 10.3 10.4 10.6 Tax paid 2,766 4,670 5,467 5,627
Net margin 2.8 8.7 8.6 8.6 Net cash from operating
Bunker/operating costs 22.2 23.4 25.9 24.5 (3,782) (2,550) (4,750) (2,500)
S&D/revenue 1.9 2.0 2.0 2.0 Capex & investment 96 128 159 125
Effective tax rate 24.3 15.5 17.5 19.0 Investment income (3,687) (2,422) (4,591) (2,375)
Dividend payout ratio 28.1 30.0 26.0 28.0 Net Cash from Investing 0 15,222 0 0
ROAE 5.2 13.0 9.9 10.3
ROAA 2.9 8.5 7.4 8.0 Equity raised/ (repaid) 1,038 (1,347) (879) (393)
Current ratio (x) 1.6 4.4 4.2 4.3 Change in borrowings (363) (290) (103) (138)
Quick ratio (x) 0.9 1.0 1.1 1.2 Interest expense (724) (1,014) (969) (1,218)
Net debt/equity 22.5 Net cash Net cash Net cash Dividends & distributions 462 (619) (462) (213)
Interest coverage (x) 3.1 10.0 29.5 26.4 Others 413 11,951 (2,414) (1,961)
Inventories days 8.2 7.6 7.8 7.0 Net Cash from Financing 1,143 4,001 4,542 5,387
Receivables days 41.8 40.9 36.7 37.3
Payable days 28.3 31.4 30.3 28.8 Net change in cash (508) 14,200 (1,538) 1,291
Bunker/TEU (RMB) 1,115 1,099 1,226 1,214
Operating costs/TEU (RMB) 5,018 4,695 4,726 4,949
Source: Historical data from the company, others are CCB Int’l Securities’ estimates

35
 China Shipping Sinotrans Shipping Ltd (368 HK): Improving growth visibility

High leverage to dry-bulk shipping boom. SSL is the third largest

Outperform (initiate) dry-bulk vessel owner in China, operating a total dry-bulk capacity of
1.33mn DWTs as in 2007. Unlike its major bulk peers CCH or CSD
operating voyage-charter under COA contracts, SSL is strategically
focusing on time-charter, in which it does need to bear heavy bunker costs
Target price: HK$6.35 or vessel leasing expenses. Under the model, SSL yielded high margins,
Upside: 25.5% i.e. GPM of 48~64% between FY04 to FY06. Driven by a robust demand on
dry-bulk vessels to meet China’s growing material imports, SSL targets to
Share data focus on dry-bulk time-charter, which shall generate 80~86% of its revenue
Bloomberg code 368.HK over FY07 to FY09.
Share price (HK$)* 5.06

Fleet expansion to sustain growth. Funded by IPO proceeds, SSL has
Total issued shares (mn) 4,000
outlined an aggressive fleet expansion plan to reach dry-bulk capacity of
Market cap. (HK$ mn) 20,240
5mn DWTs and tanker capacity of 1.8mn DWTs by 2012, representing a
52-wk hi/lo 8.18/4.14
capacity growth of 18~35% p.a. Other than its planned new-buildings, we
Average turnover (mn share) 27.3
forecast SSL to acquire another 15 vessels, including 13 dry-bulk carriers
Major shareholders % and 2 VLCC tankers during 2008~2009 to achieve its capacity target. Based
Sinotrans Group 66.1 on the fleet expansion, we estimate 70% of SSL’s FY08 capacity and 35%
* Closing price as of 3 March 2008 of its FY09 capacity will be exposed to spot market.
Source: Bloomberg

Visible rate improvement. SSL will renew about 70% of its existing vessel
contracts by 2009 and reset the contract rates to reflect the updated BDI.
Market data Most of SSL’s existing charters were signed during 2005 with average BDI
HSI Index 23,584 trading low at 3,300. We expect SSL’s daily TCE (time charter rental) to
HSCEI Index 13,439 improve by 55% yoy in FY08 but decline by 8% yoy in FY09 on potential
HSCCI Index 5,282
retrenchment in BDI.

Strong earnings CAGR at 22.8% over FY06 to FY09. We project the

2008F 2009F
growth to be driven by: (1) rapid fleet expansion. we expect SSL’s dry-bulk
BVPS consensus (US$) 0.514 0.570
capacity to rise 36~22% yoy over FY08~09; (2) strong rental improvement
EPS consensus (US$) 0.075 0.078
to sustain high margins; (3) effective tax rate to remain low at 0.2~0.3% over
Source: Bloomberg
FY07 to FY09 as a majority of SSL’s rental income is generated offshore
and largely borne by charterees.

Stock price performance
Target price at HK$6.35 We valued SSL at 10.0x 08F PER, representing
10% discount compared to our valuation of Chinese’s dry-bulk carriers.
Further rerating catalysts may come from acquisition of other vessel
chartering business from its parent.

Key risk factors include a sharp correction of BDI during 2009 and rising
vessel price to undermine SSL’s fleet expansion plan.

Financial Summary
FYE Dec (US$000) FY06 FY07F FY08F FY09F
Source: Bloomberg Turnover 247,515 254,561 501,541 581,657
EBIT 243,420 265,713 615,487 714,367
Wang Ren
Net profit 237,788 262,075 647,200 710,045
wangren@ccbintl.com
EPS (US$) 0.046 0.047 0.081 0.085
(852) 2532 6749
y-o-y chg (%) (30.9) 2.2 74.1 4.0
PER (x) 14.3 14.0 8.0 7.7
Yield (%) 0.1 1.4 3.1 3.2
ROAE (%) 33.9 11.8 16.9 15.8
BVPS (US$) 0.158 0.648 0.532 0.543
Source: Historical data from the company, others are CCB Int’l Securities’ estimates

36
SSL’s revenue breakdown (FY08F)

Dry -bulk time

charter, Oil v oy age
86.7% charter, 8.9%

Container time
charter, 4.1%

Others, 0.2%

Source: Company data, CCB Int’l Securities

Key chartering assumption

2006 2007F 2008F 2009F
Chartering revenue (US$)
Dry-bulk vessel 190 205 435 477
Oil tanker 44 36 45 79
Container 12 12 21 24
Total revenue 246 253 500 580
yoy change (%) (18.8) 2.8 97.4 16.0

Average TCE (US$’000)

Dry-bulk vessel 16.5 18.2 28.2 25.9
yoy change (%) (26.4) 10.1 55.2 (8.4)
Oil tanker 45.5 37.1 35.5 37.1
yoy change (%) (4.1) (18.3) (4.3) 4.5
Container 6.6 6.5 7.1 7.4
yoy change (%) (14.6) (0.3) 9.1 4.2
Total revenue 19.1 19.9 28.2 26.7
yoy change (%) (17.6) 4.4 41.5 (5.2)

Utilization rate (%)

Dry-bulk vessel 97.3 97.3 97.3 97.3
Oil tanker 94.5 95.0 95.5 95.5
Container 97.2 97.5 95.5 98.0
Total 97.0 97.1 97.3 97.2

Vessel available days

Dry-bulk 9,688 9,490 12,958 15,513
- Capesize 0 0 548 1,278
- Panamax 4,015 4,015 4,745 5,840
- Handymax 2,190 2,190 2,920 3,650
- Handysize 2,753 2,555 4,015 4,015
- Other dry-bulk vessel 730 730 730 730
Oil tanker/VLCC 1,095 1,095 1,399 2,373
Container 1,825 1,825 2,935 3,285
Total 12,608 12,410 17,292 21,170
Source: Historical data from the company, others are CCB Int’l Securities’ estimates

37
Discounted valuation vs. good growth

We valued SSL at 10.0x 08F PER or HK$6.35, which represents 10% discount to
our valuation of Chinese dry-bulk carriers. 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. Further price catalysts could come from its acquisition of intra-group
company, Sinochart which performs similar chartering business in both PRC and
overseas market.

SSL represents the largest discount to earnings growth among HK-listed shipping peers
(% C AGR 07~09F )
40.0
SSL (14.0, 34.5)
30.0 C SD (15.9, 26.5)

20.0 C SC L (11.1, 13.7)

10.0
C C H (11.0, 9.7)
Pacific Basin (4.7, 5.8) (x 07F PER )
0.0
0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0
(10.0)

(20.0)

(30.0)

(40.0)
OOC L(1.5, -46.7)
(50.0)

Note: Data for Pacific Basin and OOIL are sourced from Bloomberg consensus
Source: Bloomberg, 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; (2) SSL’s FY08~09 fleet expansion is only
based on our forecast and is subject to execution risk; (3) hiking vessel price could
undermine SSL’s fleet expansion plan.

Sensitivity analysis
Change in assumptions Change in EPS
Corresponding year FY08F FY09F
-5% in bulk TCE -3.7% -4.1%
-5% in tanker TCE -1.1% -1.3%
-5% in dry-bulk capacity -4.1% -4.3%
-5% in tanker capacity -0.5% -0.5%
-3% in utilization rate -2.8% -3.1%
Source: CCB Int’l Securities

38
Financial Summary

Income statement forecasts Balance sheet forecasts

FYE 31 Dec (US$’000) 2006 2007F 2008F 2009F FYE 31 Dec (US$’000) 2006 2007F 2008F 2009F
Total revenue 247,515 254,561 501,541 581,657 PP&E 467,093 577,052 1,663,337 2,216,023
- Dry-bulk shipping 190,330 205,274 434,875 476,960 Long-term investments 33,222 33,272 33,347 33,427
- Crude oil shipping 44,365 36,409 44,763 79,301 Total non-current assets 500,315 610,324 1,696,684 2,249,450

- Container shipping 11,739 11,744 20,711 24,145

Bunker inventories 1,490 1,677 1,929 2,025
- Others 1,081 1,135 1,192 1,251
Trade receivables 457,679 117,677 150,702 166,036
Operating costs (129,968) (120,917) (190,585) (219,866) Other receivables 2,080 2,130 2,205 2,285
Gross profit 117,547 133,645 310,955 361,790 Cash and cash equivalents 23,841 1,260,342 603,245 96,990
Other income, net 11,779 6,961 5,350 3,850 Current assets 485,090 1,381,826 758,080 267,336
Administrative expenses (10,490) (10,595) (11,919) (12,217) Total assets 985,405 1,992,151 2,454,765 2,516,786
Operating profit 118,836 130,011 304,386 353,423
Profit from JCEs/assos 124,584 135,702 311,101 360,944 Trade payables 478,559 111,308 166,668 182,661
Short-term borrowings 34,500 16,185 16,150 15,500
EBIT 243,420 265,713 615,487 714,367
Tax payables 143 213 150 120
Finance costs, net (5,466) (3,400) 32,400 (3,500)
Current liabilities 513,202 127,706 182,968 198,281
Profit before tax 237,954 262,313 647,887 710,867
Income tax expense (166) (238) (687) (822) LT borrowings 62,354 35,150 33,500 32,000
Net profit 237,788 262,075 647,200 710,045 Other LT liabilities 41 52 50 50
Minority interests 0 0 0 0 Non-current liabilities 62,395 35,202 33,550 32,050
Net attributable profit 237,788 262,075 647,200 710,045 Total liabilities 575,597 162,908 216,518 230,331
Dividends 2,162 26,413 85,703 89,155 Net assets 409,808 1,829,243 2,238,247 2,286,455
EPS (US$) 0.046 0.047 0.081 0.085
Shareholders' equity 409,808 1,829,243 2,238,247 2,286,455
DPS (US$, cents) 0.083 0.935 2.036 2.118
Minority interest 0 0 0 0
BVPS (US$) 0.158 0.648 0.532 0.543
Net assets 409,808 1,829,243 2,238,247 2,286,455

Financial ratios Cash flow projections

FYE 31 Dec (%) 2006 2007F 2008F 2009F FYE 31 Dec (US$’000) 2006 2007F 2008F 2009F
Gross margin 47.5 52.5 62.0 62.2 Pretax Profits 119,118 132,302 343,501 357,444
Operating margin 48.0 51.1 60.7 60.8 Adj: non-cash items (7,192) 13,161 161,776 71,739
EBIT margin 50.3 53.3 62.0 62.1 Interest received 1,238 1,661 35,350 2,750
Pre-tax margin 48.1 52.0 68.5 61.5 Tax paid (223) (227) (689) (822)
Net margin 48.1 51.9 68.4 61.3 Net cash from operating 112,941 146,897 539,937 431,110
Bunker/operating costs 14.3 15.7 11.3 9.3
S&D/revenue 4.2 4.2 2.4 2.1 Capex & investment (2,658) (109,959) (1,086,285) (850,285)
Effective tax rate 0.1 0.2 0.2 0.2 Investment income 18,782 (50) (75) (80)
Dividend payout ratio 1.8 20.0 25.0 25.0 Net Cash from Investing 16,124 (110,009) (1,086,360) (850,365)
ROAE 33.9 11.8 16.9 15.8
ROAA 12.5 8.9 15.4 14.3 Equity raised/ (repaid) 0 1,444,000 0 0
Current ratio (x) 0.9 10.8 4.1 1.3 Change in borrowings (124,057) (217,999) (24,981) 2,150
Quick ratio (x) 0.9 1.0 0.8 0.9 Dividends & distributions (2,162) (26,413) (85,703) (89,155)
Net debt/equity 17.8 Net cash Net cash Net cash Net Cash from Financing (126,219) 1,199,588 (110,684) (87,005)
Interest coverage (x) 20.4 29.5 119.7 60.2
Inventories days 4 5 4 3 Net change in cash 2,846 1,236,476 (657,107) (506,260)
Receivables days 675 169 110 104
Payable days 1,344 336 319 303
Source: Historical data from the company, others are CCB Int’l Securities’ estimates

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 Appendix

Organization chart of listed shipping companies

CCH’s organization chart

A-share holders COSCO Group H-share holders

53.57%

CCH

 Container shipping;  Dry-bulk shipping  Third-party logistics;  Container terminals;

 Freight forwarding  Shipping agency  Container leasing and manufacturing

100%
COSCO Bulk 51% 51.34%
100%
49%
COSCON 100% COSCO Logistics COSCO Pacific
COSCO HK Shipping

100%
COSCO Qingdao

100%
COSCON

Source: Company data, CCB Int’l Securities

SSL’s organization chart

Sinotrans Group
H-share holders

66.05% 100% 100% 100% 100% 100%

SSL Sinochart Sinotrans Ltd Sinotrans-MOL Sinotrans Shipping Sinotrans (Germany)

 Dry-bulk vessel  Freight forwarding, Shipping Co Ltd (Shenzhen) Ltd  Freight forwarding;

voyage charter; express services,  Car carrier  Car carrier business;  Container trade;

 Dry-bulk vessel shipping agency;  Domestic trade shipping  Dry-bulk cargo voyage

time chartering  Storage and charter;

(third party-owned terminal services,  Dry-bulk vessel time

vessels) trucking; chartering (third

 container vessel party-owned vessels)

liner shipping

Source: Company data, CCB Int’l Securities

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Organization chart of CSD and CSCL

China Shipping Group

H-share holders A-share holders H-share holders A-share holders

47.46% 47.89%

CSD 100% China shipping 100% China Shipping CSCL

LNG investment Terminal Development

 LNG shipping  Container terminals

100%
China Shipping China Shipping Investment Co
100%
Car Carrier Co  Container manufacturing

 Car carrier business

Source: Company data, CCB Int’l Securities

Fleet summary of listed shipping companies

Fleet summary as of Dec 2007

Owned Chartered-in Total

CCH
Dry-bulk vessels Number DWT Number DWT Number DWT
Capesize 21 3,490,000 62 10,350,000 83 13,840,000
Panamax 65 4,550,000 81 5,990,000 146 10,540,000
Handymax 80 3,710,000 53 2,780,000 133 6,490,000
Handysize 36 1,240,000 25 1,110,000 61 2,350,000
Total 202 12,990,000 221 20,230,000 423 33,220,000

Container shipping Number TEU Number TEU Number TEU

Containerships 88 206,708 56 222,929 144 429,637

CSCL
Container vessels Number TEU Number TEU Number TEU
Containerships 80 231,608 74 214,810 154 446,418

SSL
Dry-bulk vessels Number DWT Number DWT Number DWT
Multipurpose vessels 2 64,994 - - 2 64,994
Handymax/ Handysize 13 457,241 - - 13 457,241
Panamax 11 807,754 - - 11 807,754

Oil tanker
VLCC 3 832,453 - - 3 832,453

Container vessels
Containerships 5 38,981 - - 5 38,981

Total 34 2,201,423 - - 34 2,201,423

Source: Company data; CCB Int’l Securities

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 Disclaimer

Rating definitions
Outperform - 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, the author of this report, 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; (ii) no part of any of their compensation was, is, or will be directly or indirectly related to the specific
recommendations or views expressed in this report; 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. 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; (ii)) neither he nor his respective associates
serve as an officer of any of the Hong Kong listed companies covered in this report; and (iii) neither he nor his respective associates have any financial
interests in the stock(s) covered in this report.

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