Uni-Asia Group Limited - NRA Capital Research 2017-06-21: Dry Bulk Shipping To Gain From One Belt One Road Policy

UNI-ASIA GROUP LIMITED SGX: CHJ

Uni-Asia Group Limited - Dry Bulk Shipping To Gain From One Belt One Road Policy

We see heightened global infrastructure spending under China’s one belt one road (OBOR) policy as a potential catalyst that will support the ongoing recovery in the dry bulk sector. According to the China Development Bank, some 900 projects worth US$890 billion are currently under way or planned.
While the opening of land routes under the OBOR initiative will pose competition to sea routes, dry bulk shippers will benefit in the interim owing to demand for resources such as iron ore to support China’s production of infrastructure related goods and machinery and to support construction in participating countries.

Conversely, dry bulk shippers have been careful to expand their fleets, only taking delivery of previously ordered vessels. As of 9 June, the number of bulk carriers on order has halved from a year ago, dropping from 490 to 257 vessels. The cautious build-up in vessels suggests that shippers remain wary of previous excess capacity in the industry and are unprepared for any uptick in demand in the future, which should provide a floor to shipping rates.
World trade volume probably grew by about 5.6% year-on-year in March. However, dry bulk capacity has expanded only by 3.4%. World trade volume growth has exceeded dry bulk capacity growth for the past three years with trade growth outpacing capacity growth the most in 1Q 2017.

Unfortunately, the Baltic Dry Index may take time to return to the end March high of 1,282, having retreated by 34% to 848 currently. The current weakness is due to slower demand as iron ore inventory in China have climbed to levels exceeding that of 2010. Given the steep correction in dry bulk rates in the last 2.5 months, we can expect rates to rise gradually in 2H17.
Overall, the longer-term drivers remain intact and the Baltic Dry Index is still 46.5% higher in 2017 year-to-date compared to the whole of 2016, based on average daily data. That said, Uni-Asia is not subjected to daily fluctuations in charter rates as most of its vessels are chartered out on long term contracts.

Uni-Asia reported a positive set of results for 1Q17, swinging from a net loss of US$0.73m to a net profit attributable to shareholders of US$2.1m. Gains were driven by the shipping business which reported a net profit of US$2.4m from a loss of US$0.3m a year ago.
The property and hotels business reported a net profit of US$0.9m, before unallocated overheads. We expect Uni-Asia to remain profitable in 2Q17. Previously, Uni-Asia’s profitability was affected by losses from its ship investments.
Potential catalysts include any further corporate actions after Uni-Asia’s recent move to incorporate itself in Singapore rather than in the Cayman Islands. In this update, we peg our valuation of Uni-Asia at the peer average of 0.5x P/B or S$1.85 from S$1.615 previously.

Our updated peer set trades at 0.01x to 1.07x P/BV. Based on the peer average of 0.5x book value, we value Uni-Asia at S$1.845 per share.
Previously, we have valued Uni-Asia at 0.4x P/BV or S$1.615 per share. Implicitly, we are valuing Uni-Asia’s business at the same P/B multiple as the shipping business. Based on a USDSGD rate of 1.39, our valuation of S$1.845 and projected EPS of 14.22 cents for FY17, a reasonable earnings yield of 10.7% is derived. Therefore, the ability of Uni-Asia to meet earnings forecasts will be crucial towards the upside presented by us.
On balance, we remain bullish on Uni-Asia and maintain our Overweight rating with a high-average return and low-average risk classification.
We have previously deemed Uni-Asia as an average risk prospect. However, the improvement in profitability in 1Q17 has given us comfort to lower the “risk” classification. Our view is further supported by prices for 5-year old handy bulkers, which have remained stable at around US$11m despite the recent drop in dry bulk rates.
We also highlight that the average dry bulk shipping company in our peer set has seen its market capitalisation grow by 124% over the past year. Conversely, Uni-Asia remains a laggard, appreciating by just 16.3% during the same period.

Liu Jinshu NRA Capital Research | http://www.nracapital.com/ 2017-06-21

SGX Stock Analyst Report OVERWEIGHT Maintain OVERWEIGHT 1.85 Same 1.85