China Shipping Container Lines (2866.HK)

Analyst Jay JH Ryu
852-3653-8628
jayryu@miraeasset.com
Rating Downgrade
China Shipping Container Lines (2866.HK)
Hong Kong / Shipping
Aug 29, 2008
Downgrade to Hold on More Uncertainties
Downgrade to Hold while lowering TP to HK$2.02
We downgrade our rating for CSCL to Hold while revising down TP to
HK$2.02. The new TP is equivalent to 0.63x FY08 forecast BPS (ROE=8.5%,
g=5.0%, COE=10.6%). The share price should not rebound significantly in the
near future as: 1) the company is expected to experience margin deterioration;
2) their contingency plans didn’t improve earnings in 1H08; 3) there are
increasing concerns over US routes.
1H08 results fail to meet our expectations
CSCL recorded 1H08 revenue of RMB18.2bn (up 4.8% YoY) and OP of
RMB878.7mn (down 44.7% YoY), both below our expectations. We revised
down the company’s EPS for FY08 by 57.0% and for FY09 by 51.3% on the
back of disappointing earnings results and slowing volume in the mainlane
market.
Loosing its foothold in the mainlane market
In 1H08, CSCL’s revenue growth slowed mainly due to volume growth in the
mainlane market. Even though the company’s total container volume grew
7.3%, its volume declined 11.8% YoY in Pacific routes and 2.1% YoY in Europe
routes (where most of its revenue is generated). As a result, its average freight
rate declined 2.3%. It appears that the company is losing market share in the
mainlane market.
Uncertainty continues as more vessels go to short-haul market
Even though the company’s share price is down almost 80% from its peak, we
do not foresee that there will be upward share price momentum in the near
term. We are concerned that the company’s margins continue to be low due to
plans to put more vessels into the short-haul market (where fiercer competition
is expected).
Forecast Earnings & Valuation
Fiscal year ending Dec 2006 2007 2008 2009E 2010E
Sales/Revenue (RMB mn) 30,502.4 38,825.6 39,635.3 43,558.8 48,657.0
OP (RMB mn) 1,553.0 4,044.0 2,353.0 3,060.1 4,000.9
EBITDA (RMB mn) 2,736.8 5,322.5 3,856.0 4,707.8 5,703.5
Pre-tax profit (RMB mn) 1,136.0 3,799.1 1,982.1 2,577.8 3,518.1
NP (RMB mn) 859.2 3,215.4 1,391.4 2,176.9 2,971.0
EPS (RMB) 0.09 0.34 0.12 0.19 0.25
YoY (%) (25.8) 274.2 (65.4) 56.4 36.5
P/E (x) 14.8 12.5 33.4 10.3 7.5
P/B (x) 0.8 1.2 1.4 0.6 0.6
EV/EBITDA (x) 7.4 6.7 10.3 3.4 2.4
ROE (%) 5.2 13.0 4.1 6.1 7.8
Note: OP is derived excluding other operating income
HOLD (Downgrade)
Rating within Industry: Overweight
Earnings Quality Score: Medium
Price Volatility: Low
Target Price & Expected Return
Target Price (6M) HK$2.02
Consensus Target Price HK$2.78
Current Price HK$1.97
Expected DPS (08E) RMB0.00
Expected Price Return (6M) 2.8%
Expected Dividend Yield (12M) NA
Fundamental Data
Expected EPS (08E/09E) RMB0.12 / RMB0.19
Consensus EPS (08E/09E) RMB0.24 / RMB0.25
Est. 3-Yr EPS Growth (CAGR) (9.6%)
Hist. 5-Yr EPS Growth (CAGR) (5.5%)
Net Debt / Equity (08E) (20.0%)
Trading Data
Market Cap. (HK$ bn / US$ bn) 39.5 / 5.1
Shares Outstanding 3751.0mn
Free Float 95.5%
Price Return Volatility 64.2%
52-Week Price High/Low HK$11.6 / HK$1.88
Daily Average Volume (3M) 52.1mn
Daily Average Turnover (3M) HK$143.5mn
Foreign Ownership NA
COMPANY ANALYSIS MIRAE ASSET RESEARCH
(HK$)
12
10
8
6
4
2
0
CSCL (LHS)
Relative to HSI (RHS)
Jan05 Jan06 Jan07 Jan08
300
250
200
150
100
50
0

China Shipping Container Lines (2866.HK) Analyst Jay JH Ryu 852-3653-8628 jayryu@miraeasset.com
Key Sales Contributors
As of end 1H08
Chartering
1%
Major Shareholders
Others
48%
As of Aug 28, 2008
P/B Valuation
(HK$)
12
10
8
6
4
2
JP
Morgan
4%
Liner
99%
China
Shipping
Group
48%
0
Jan 05 Jan 06 Jan 07 Jan 08
As of Aug 22, 2008
Price 1.0
1.5 2.0
3.0
Company Description
Brief History
China Shipping Container Lines (CSCL) was founded on April 5, 1997 in Shanghai,
China. By the end of 1997, the company was operating 15 ships, 5 of which the
company owned. CSCL went public in June 2004, raising HK$7.7bn to further
finance its growth. Currently, CSCL operates 151 vessels with a total operating
capacity of 446,037 TEU (64 ships have capacities over 4,000 TEU). The average
age of vessels with a capacity of more than 4,000 TEU is 3.42 years.
Business Operation
The company’s core business is carried out through owning, chartering, and
operating container ships to provide international and domestic shipping services.
The liner segment, which is the single largest revenue source for the company,
provides global shipping services with container ships in routes including Chinese
costal areas and major trade regions in Asia, Europe, America, Africa, and the
Persian Gulf. The chartering segment, which makes up less than 1% of total
revenue, provides chartering of vessels under operating leases.
Shareholder Structure
China Shipping Group is the largest shareholder with a 47.9% stake. JP Morgan
Chase is the second largest shareholder with a 3.9% stake.
Key Drivers
Freight rates for US routes continue to show signs of recovery. Shipment volume
for Europe routes remains strong along with its rising freight rates. Despite the
decreasing freight rates, CSCL managed to effectively generate revenue in the
transpacific route. Increasing demand within Asia for container shipments offers
another opportunity for the firm to grow.
Risks
A considerable portion of total revenue is generated from transpacific routes.
Declining container demand in the US could limit the firm’s earnings potential.
Efficient cost management amid rising fuel costs is vital for profitability in the long
run.
Aug 29, 2008 MIRAE ASSET RESEARCH 2

China Shipping Container Lines (2866.HK) Analyst Jay JH Ryu 852-3653-8628 jayryu@miraeasset.com
Downgrade to Hold while lowering TP to HK$2.02
We downgrade our rating for CSCL to Hold while revising down TP to HK$2.02.
The new TP is equivalent to 0.63x FY08 forecast BPS (ROE=8.5%, g=5.0%,
COE=10.6%).
The share price should not rebound significantly as: 1) the company is expected to
experience margin deterioration; 2) their contingency plans didn’t improve earnings
in 1H08; 3) there are increasing concerns over US routes.
Valuation
Item Figure Remarks
BPS (RMB, 08) 2.9
ROE (08~12) 8.5
G (%) 5.0
COE (%) 10.6
Risk Free Rate (%) 5.0 Up from 4.0%
Risk Premium (%) 7.0
Beta 1.80
Target PBR (x) 0.63
Target Price (RMB) 1.84
Target Price (HK$) 2.02
Source: CSCL, Mirae Asset Research
We revised down the company’s EPS for FY08 by 57.0% and for FY09 by 51.3%
on the back of the disappointing earnings results and slowing volume in the
mainlane market.
Revision of Annual Earnings Estimates
(RMB mn, %)
Before revision After revision Diff. (%,%p)
2008E 2009E 2008E 2009E 2008E 2009E
Revenue 46,921.2 51,708.8 39,635.3 43,558.8 (15.5) (15.8)
OP 6,057.1 7,178.6 2,353.0 3,060.1 (61.2) (57.4)
Pre-tax profit 5,396.7 6,503.2 1,982.1 2,577.8 (63.3) (60.4)
NP 4,076.5 4,912.4 1,391.4 2,176.9 (65.9) (55.7)
EPS (RMB) 0.43 0.52 0.19 0.25 (57.0) (51.3)
Operating margin 12.9 13.9 5.9 7.0 (7.0) (6.9)
Pre-tax margin 11.5 12.6 5.0 5.9 (6.5) (6.7)
Net margin 8.7 9.5 3.5 5.0 (5.2) (4.5)
Source: CSCL, Mirae Asset Research estimates
Aug 29, 2008 MIRAE ASSET RESEARCH 3

China Shipping Container Lines (2866.HK) Analyst Jay JH Ryu 852-3653-8628 jayryu@miraeasset.com
1H08 results: Failing to meet our expectations
In 1H08, CSCL saw revenue increase to RMB18.2bn (up 4.8% YoY). OP was
RMB878.7mn (down 44.7% YoY) and NP was RMB637mn (down 45.1% YoY), both
below our expectations.
Due to the sluggish global economy and world trade lanes, the growth of the
China’s exports slowed last year, resulting in a decline in the volume of loaded
cargoes to the European and American regions, thus hurting the container lines
business.
1H08 Earnings Review
(RMB mn, %) 1H08P 1H07 (YoY)
Revenue 18,231 17,389 4.8
OP 879 1,589 (44.7)
Pre-tax profit 748 1,374 (45.6)
NP 637 1,161 (45.1)
EPS (RMB) 0.05 0.12 (58.3)
Operating margin 4.8 9.1 (4.3)
Pre-tax margin 4.1 7.9 (3.8)
Net margin
Source: CSCL, Mirae Asset Research
3.5 6.7 (3.2)
CSCL’s 1H08 freight volume rose 7.3% YoY to 3,570,204 TEU. However, the
freight volume declined for Pacific routes by 11.8% and for Europe routes by 2.1%.
These routes are the largest revenue contributors for the company, amounting to
63.8% of revenue for the group in 1H08. It appears the company is losing market
share in the mainlane market.
The cost of services increased to RMB17.1bn, up 9.5% YoY in 1H08. This was
mainly driven by fuel costs which were 27% of total operating costs. The average
purchasing price of fuel in 1H08 was US$540.61 per ton, up 67.1% YoY. In addition,
CSCL incurred a significant F/X loss of RMB276mn for the full year ending Jun 30,
2008, down from a gain of RMB11mn the year before (revenue and operating
expenses are settled in US dollars and the dollar depreciated last year). In 1H08,
OP decreased 44.7%YoY and operating margin decreased 4.3% points YoY.
After experiencing deterioration in the US and Europe markets, CSCL wants to
focus more on the Asia Pacific market including the intra-Asia market. We are
concerned that the company’s margins continue to be low due to plans to put more
vessels into the short-haul market (where fiercer competition is expected).
Aug 29, 2008 MIRAE ASSET RESEARCH 4

China Shipping Container Lines (2866.HK) Analyst Jay JH Ryu 852-3653-8628 jayryu@miraeasset.com
Container Operating Data by Year
2006 2007 2008E 2009E 2010E
Freight volume (1,000 TEU) 5,658 7,299 7,868 8,449 9,104
Transpacific 1,433 1,628 1,498 1,543 1,620
Asia-Europe 1,352 1,458 1,400 1,428 1,499
Asia-Pacific 1,022 1,233 1,418 1,517 1,639
China Domestic 1,713 2,749 3,299 3,695 4,064
Others 139 231 254 266 282
Freight rate (RMB/TEU) 676 703 700 735 782
Transpacific 1,182 1,141 1,084 1,138 1,229
Asia-Europe 798 1,161 1,253 1,354 1,462
Asia-Pacific 488 593 641 673 707
China Domestic 177 207 269 301 326
Source: CSCL, Mirae Asset Research estimates
1H08 Container Operating Results
1H08P 2H07 HoH (%,%p) 1H07 YoY (%,%p)
Freight volume (1,000 TEU) 3,570 3,970 (10.1) 3,328 7.3
Transpacific 681 857 (20.6) 771 (11.8)
Asia-Europe 701 742 (5.5) 716 (2.1)
Asia-Pacific 834 605 37.8 628 32.8
China Domestic 1,258 1,639 (23.3) 1,110 13.4
Freight rate (RMB/TEU) 5,106 5,399 (5.4) 5,224 (2.3)
Transpacific 8,315 8,465 (1.8) 8,826 (5.8)
Asia-Europe 8,522 10,002 (14.8) 7,531 13.2
Asia-Pacific 3,384 5,209 (35.0) 3,803 (11.0)
China Domestic 2,179 1,479 47.3 1,699 28.2
Source: CSCL, Mirae Asset Research
Aug 29, 2008 MIRAE ASSET RESEARCH 5

China Shipping Container Lines (2866.HK) Analyst Jay JH Ryu 852-3653-8628 jayryu@miraeasset.com
Summary Financial Statements
Balance Sheet
(RMB mn) 2006 2007 2008E 2009E 2010E
Current assets 7,139.7 21,422.3 21,450.8 22,186.8 24,641.2
Cash and equivalents 2,915.5 16,312.1 16,521.7 16,851.2 18,779.9
Receivables 3,588.4 4,205.6 3,257.7 3,580.2 3,999.2
Inventories 674.8 809.7 757.7 832.7 930.2
Non-Current assets 23,604.4 26,112.5 27,711.6 30,370.2 31,378.7
Investment assets 80.8 87.9 87.9 87.9 87.9
Tangible assets 23,463.9 25,955.0 27,546.5 30,199.3 31,203.3
Intangible assets 59.8 69.6 77.2 83.0 87.5
Total assets 30,744.1 47,534.8 49,162.4 52,557.0 56,020.0
Current liabilities 4,593.2 6,648.6 6,494.4 7,302.4 8,092.4
Payables 2,205.1 3,208.0 2,763.0 3,036.5 3,391.9
ST debt 1,803.3 1,501.5 1,501.5 1,701.5 1,751.5
Other Current liabilities 584.8 1,939.0 2,229.9 2,564.3 2,949.0
Non-Current liabilities 9,574.7 7,943.0 8,333.2 8,743.0 8,444.7
LT debt 8,737.4 7,771.0 8,159.5 8,567.5 8,267.5
Total liabilities 14,167.9 14,591.6 14,827.6 16,045.3 16,537.1
Shareholders' equity 16,533.2 32,941.3 34,332.7 36,509.6 39,480.6
Minorities 43.0 1.9 2.0 2.1 2.2
Shareholders' equity 16,576.2 32,943.2 34,334.7 36,511.7 39,482.8
Total debt 10,540.7 9,272.5 9,661.0 10,269.0 10,019.0
Net debt 7,625.2 (7,039.6) (6,860.7) (6,582.2) (8,760.9)
Cashflow Statement
(RMB mn) 2006 2007 2008E 2009E 2010E
Oprerating cash flow 2,210.4 5,167.6 1,531.7 3,850.8 2,918.6
Net income 859.2 3,806.1 1,391.4 2,176.9 2,971.0
Non-cash flow expenditure 866.7 1,113.0 (696.4) 1,472.6 (266.7)
Depreciation & Amortization 1,183.8 1,278.5 1,503.0 1,647.7 1,702.5
Net working capital 201.2 248.5 836.7 201.4 214.3
Chg in receivables 688.2 (495.3) 947.9 (322.5) (419.0)
Chg in inventories (121.7) (135.0) 52.0 (75.0) (97.5)
Chg in payables (577.2) 1,013.7 (445.1) 273.5 355.4
Investing Cash flow (3,766.9) (4,913.2) (3,102.1) (4,306.4) (2,711.0)
Capital expenditure (3,671.9) (4,874.9) (3,093.7) (4,299.6) (2,705.6)
Tangible asset disposal 15.5 6.1 0.0 0.0 0.0
Intangible asset disposal (purchase) (78.5) (44.4) (8.4) (6.7) (5.4)
Sale of investment securities quisition) (32.0) 0.0 0.0 0.0 0.0
Financial Cash flow 1,048.6 13,120.4 1,780.0 2,784.9 2,721.1
Debt raised (repaid) 422.6 (1,324.9) 388.5 608.0 (250.0)
Capital raised (repaid) (723.6) 13,431.0 1,391.5 2,177.0 2,971.1
* Cash Dividends Paid 723.6 1,790.9 0.0 0.0 0.0
Net cash flow (507.8) 13,374.9 209.6 329.4 1,928.7
Beginning cash 3,423.4 2,915.5 16,312.1 16,521.7 16,851.2
Ending cash 2,915.5 16,312.1 16,521.7 16,851.2 18,779.9
Gross cash flow 1,725.9 4,919.1 695.0 3,649.5 2,704.3
Investment cash flow 3,565.7 4,664.6 2,265.4 4,105.0 2,496.7
Free cash flow (1,839.8) 254.4 (1,570.4) (455.5) 207.6
Source: FactSet, Mirae Asset estimates
Income Statement
(RMB mn, %) 2006 2007 2008E 2009E 2010E
Net Sales 30,502.4 38,825.6 39,635.3 43,558.8 48,657.0
growth, % 7.5 27.3 2.1 9.9 11.7
Cost of sales 27,207.8 32,812.9 36,577.6 39,724.3 43,791.1
Depreciation & Amortization 1,183.8 1,278.5 1,503.0 1,647.7 1,702.5
Gross profit 2,110.8 4,734.2 3,057.6 3,834.5 4,866.0
Gross margin, % 6.9 12.2 7.7 8.8 10.0
SG&A 557.8 690.2 704.6 774.4 865.0
Other Operating Expenses 0.0 0.0 0.0 0.0 0.0
Op income 1,553.0 4,044.0 2,353.0 3,060.1 4,000.9
EBITDA 2,736.8 5,322.5 3,856.0 4,707.8 5,703.5
Non-opr income (540.7) (343.8) (370.9) (482.3) (482.9)
Net financial income (582.9) (481.3) (543.0) (636.6) (655.2)
Associate gain 0.0 0.0 0.0 0.0 0.0
Others 42.2 137.5 172.2 154.2 172.3
Pre-tax Income 1,136.0 3,799.1 1,982.1 2,577.8 3,518.1
Tax 277.8 590.5 590.5 400.6 546.8
Net income after tax 858.2 3,208.6 1,391.7 2,177.1 2,971.3
Abnormal items 6.5 7.0 0.0 0.0 0.0
Discontinued Operations 0.0 0.0 0.0 0.0 0.0
Minorities / Pref dividends 5.5 0.2 0.2 0.3 0.3
Net Income 859.2 3,215.4 1,391.4 2,176.9 2,971.0
Key investment index
(L/C, %, x) 2006 2007 2008E 2009E 2010E
Per share data
EPS 0.09 0.34 0.12 0.19 0.25
BPS 1.77 3.52 2.93 3.12 3.37
EBITDA per share 0.29 0.57 0.33 0.40 0.49
DPS 0.03 0.21 0.00 0.00 0.00
PER 14.8 12.5 33.4 10.3 7.5
PBR 0.8 1.2 1.4 0.6 0.6
EV/EBITDA 7.4 6.7 10.3 3.4 2.4
Dividend Yield,%
Profitability %
1.9 4.8 0.0 0.0 0.0
Operating margin 5.1 10.4 5.9 7.0 8.2
EBITDA margin 9.0 13.7 9.7 10.8 11.7
Net income margin 2.8 8.3 3.5 5.0 6.1
ROE 5.2 13.0 4.1 6.1 7.8
ROIC
Stability %
3.6 10.8 3.7 7.5 9.3
Debt ratio 85.5 44.3 43.2 43.9 41.9
Net debt ratio 46.0 (21.4) (20.0) (18.0) (22.2)
Interest cover(x)
Activity ratio(Turnover)
2.7 8.4 4.3 4.8 6.1
Receivables (x) 7.8 10.0 10.6 12.7 12.8
Inventories (x) 49.7 52.3 50.6 54.8 55.2
Payables (x) 12.3 14.3 13.3 15.0 15.1
Source: FactSet, Mirae Asset estimates
Aug 29, 2008 MIRAE ASSET RESEARCH 6

China Shipping Container Lines (2866.HK) Analyst Jay JH Ryu 852-3653-8628 jayryu@miraeasset.com
Contact
K. Y. Lee – Chief Executive Officer kyleehk@miraeasset.com
Jung Ho Rhee – Managing Director jungho.rhee@miraeasset.com
Ajay Singh Kapur – Chief Global and Asia Strategist ajay.kapur@miraeasset.com
Rohan John Dalziell – Head of Research rohan.daiziell@miraeasset.com
Priscilla Luk - Senior Anaylst priscilla.luk@miraeasset.com
Ritesh Samadhiya - Research Analyst ritesh@miraeasset.com
Jay JH Ryu - Senior Analyst jayryu@miraeasset.com
Young Jean Hwang -Senior Analyst youngjean@miraeasset.com
Il Hwa Lee -Research Associate ilhwa.lee@miraeasset.com
Ji Hye Yoo -Research Associate jihye.yoo@miraeasset.com
Kwan Hoi Cheung – Director kwanhc@miraeasset.com
Kaiser Choi - Research Analyst kaiser.choi@miraeasset.com
Patrick Pong - Senior Analyst patrick.pong@miraeasset.com
Anita Hwang - Senior Analyst anita.hwang@miraeasset.com
Edwin Lee - Research Associate edwin.lee@miraeasset.com
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ANALYST CERTIFICATION
THE RESEARCH ANALYST WHO IS PRIMARILY RESPONSIBLE FOR THE CONTENT OF THIS RESEARCH REPORT, IN WHOLE OR IN
PART, CERTIFIES THAT WITH RESPECT TO THE SECURITIES OR ISSUER THAT THE ANALYST COVERED IN THIS REPORT: (1) ALL OF
THE VIEWS EXPRESSED ACCURATELY REFLECT HIS OR HER PERSONAL VIEWS ABOUT THE SUBJECT SECURITIES OR ISSUER;
AND (2) NO PART OF HIS OR HER COMPENSATION WAS, IS, OR WILL BE, DIRECTLY OR INDIRECTLY, RELATED TO THE SPECIFIC
VIEWS EXPRESSED BY THE ANALYST IN THIS REPORT.
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[Analyst: Jay JH Ryu]
Aug 29, 2008 MIRAE ASSET RESEARCH 7

China Shipping Container Lines (2866.HK) Analyst Jay JH Ryu 852-3653-8628 jayryu@miraeasset.com
Recommendation
By item (six months)
Buy: A target price of over + 20% of the current price,
Hold: A target price of - 10% to +10% of the current price
Reduce: A target price of –20% or less than the current price
* Note: Correction of –10% to +10% is possible based on the
investment recommendations by industry.
Earnings Quality Score
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all reasonable care to ensure its reliability, we do not guarantee that it is accurate or complete. Therefore, Mirae Asset shall not be liable for any
result from the use of this report. This report has never been provided to any institutional investor or third party. This report has been prepared
without any undue external influence or interference, and accurately reflects the personal views of the analyst on the company herein.
[Analyst: Jay JH Ryu]
Item Analyst Type
Securities Held by the Analyst
Number of
Shares
Purchasing
Price
By industry
Attractive: over +10% of the current industry index
Neutral: -10% to +10% of the current industry index
Cautious: -10% or less than the current industry index
Terminology of Investment recommendation by industry has changed
since August 3, 2005 as follows: Overweight Attractive /
Underweight Cautious.
Earnings Quality Score = 0.70*(Historical Earnings Stability) + 0.15*(Consensus Forecast Certainty) + 0.15*(Consensus Forecast
Accuracy)
1. Historical Earnings Stability
- The variability of the net profit growth rate (YOY) over the last 20 quarters was translated into percentage terms.
- Earnings growth variability was calculated based on MAD (Median Absolute Deviation), rather than SD (Standard Deviation) in order to
minimize distortion from outliers.
- The lower the earnings growth variability, the higher this indicator.
2. Consensus Forecast Certainty
- The gap between analysts' views on 12-month forward EPS was translated into percentage terms.
- The gap is calculated by dividing the SD of 12-month forward EPS with the average value.
- The narrower the gap is, the higher the indicator’s reliability.
3. Consensus Forecast Accuracy
- The median value of absolute EPS surprise over the last 3-year was translated into percentage terms.
- EPS surprise was calculated based on 'the actual figure at the end of the year / the consensus estimate at the beginning of the year - 1'.
- The lower the absolute EPS surprise, the higher this indicator.
* Reference
1) Consensus Forecast Certainty and Consensus Forecast Accuracy were applied only to companies with more than 5 years of EPS
estimates.
2) We gave the average score of 50 to cases in which the aforementioned indicators could not be produced.
Compliance Notice
Purchasing
Date
N/A
Holdings of
Shares over1%
Participation in
the Issuance of
Securities
Involvement
with the
Affiliates
Treasury
Stock
Acquired
Aug 29, 2008 MIRAE ASSET RESEARCH 8