Sinotrans Shipping's net profit crashed 78% to USD20mn

Check out what to blame.

According to Nomura, Sinotrans Shipping’s FY12 net profit declined 78% y-y to only USD20mn while pre-exceptional profit declined 70% y-y to USD27mn. This is lower than consensus’ pre-exceptional estimates of USD45mn. 

Here's more:

The significant earnings decline was mainly due to deterioration in the drybulk shipping market as average 2012F BDI dropped 41% y-y to only 919 level. Its drybulk shipping business reported a FY12 segment loss of USD1.7mn given lower average bulk chartered rates (-29% y-y to USD11,050/day) and +43% increase in bunker costs. 

Despite a 7% h-h increase in 2H12 revenue (USD115mn), 2H12 preexceptional profit declined 67% h-h to only USD7mn. The decline is mainly due to higher operating costs incurred in 2H12 (+29% h-h), leading to a 2H12 segment loss of USD9mn.

While no breakdown is provided, management noted the higher costs were mainly driven by higher bunker costs incurred by the voyage chartering drybulk business.

Key takeaways from analyst briefing:
The company had forward covered 33% of 2013 drybulk revenue days at an average rate of USD12,400/day. This implied a profitable timecharter drybulk business as compared to our estimated operating costs of less than USD10,000/day.

As noted by management, the focus on voyage chartering is likely to continue given low spot rates. Currently, the voyage chartering business is still loss-making. 

Management remains cautious on the drybulk shipping sector noting that oversupply remains an issue while drybulk demand is likely to maintain a moderate growth. Management noted “the supply/demand imbalance will be easing gradually in the future years taken into account of the slowing tonnage growth”.

Given a total cash of USD917mn (no debt), management plans to expand its fleet. Currently the company operates a total of 52 ships (42 drybulks, 1 VLCC and 9 container carriers) with no newbuilding