Neptune Orient Lines - Survivor of Deep Container Shipping Downturn, but Valuations Expensive

Downgrade NOL to Underweight from Equal-weight. We believe NOL is well positioned to weather the container shipping downturn thanks to a strong balance sheet (post rights issue) and experienced management team. Conversely, we believe that current valuations at above historical means and higher-than-industry average P/BV of 1.0x 2010E are factored into nearterm positives for the stock. We believe that 2H09-2010 earnings could disappoint as container shipping fundamentals remain extremely challenging.

Where we differ: Our 2009-10 earnings estimates are below than consensus expectations as we believe that the market is underestimating the magnitude of the deterioration in freight rates and the extent of losses for 2009-10. Fundamentals for the container shipping industry remain challenging, in our view, owing to a significant oversupply of ships and laid-up fleet capacity.

What’s next: Preliminary July port data to be released in early August, which are likely to show a seasonal rebound, and further announcements of peak season rate hikes could be near-term upside catalysts for NOL. We recommend investors sell into any potential rally, as we believe that the losses NOL is likely to report for 2H09 and 2010 are likely to disappoint. In addition, given the YTD price rally, should macroeconomic sentiment turn negative, NOL stock could be primed for a downside correction.

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