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Hanjin Bankruptcy: What Does It Mean To The Global Containerized Shipping Industry?

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Includes: AMKAF, COIVF, EVGQF, HNJSF, HPGLY, LTM-OLD
by: Procyon Mukherjee
Summary

Hanjin bankruptcy is the largest shipping bankruptcy, which speaks volumes about a range of topics from shipping industry capacity over-hang to world trade dynamics.

Shifting of global trade epicenter to the Far East did not leave any winners in the shipping industry although global trade multiplied several times in the last decade.

The bankruptcy per se would have little impact on the overall container industry dynamics, but would leave some sobering thoughts for those who are embarking on restructuring.

Investors in containerized shipping industry must note that the journey to better margins would still take a while.

First about Hanjin, we have a short chronology of events, which is part of the global shipping story that is currently struggling in a down turn.

Hanjin Shipping (OTC:HNJSF) is the largest Korean Shipping line having a fleet strength of 99, out of which 62 are owned. It is part of the Hanjin groups that also owns Korean Air.

Hanjin Shipping is among the top ten global container carriers, which has APM Maersk (OTCPK:AMKAF) as the global leader, followed by CMA CGM, MCA, COSCO (OTC:COIVF), Evergreen (OTC:EVGQF), Hapag Lloyd (OTCPK:HPGLY) as the key players. Hanjin moves 2.9% of the global containerized cargo.

In April 2016, Hanjin applied to its creditors for debt restructuring, in order to avoid formal insolvency proceedings. On 13 th May Hanjin announced to create a new alliance with Hapag-Lloyd, "K"Line, Mitsui O.S.K. Lines, Nippon Yusen Kaisha and Yang Ming covering all East-West trade lanes.

On August 31, 2016, Hanjin filed for bankruptcy protection at the Seoul Central District Court and requested the court to freeze its assets, after losing support from its banks the previous day. The Korean Government is reported to have taken a decision to slowly move Hanjin towards liquidation. This would be the biggest bankruptcy in the shipping industry since its inception.

Those who were following the Shanghai Containerized Shipping Index (SCFI) would have noted a sharp uptick in the latter half of August as the index moved from 600 to 763. But still the current levels are a far cry from the levels of 1100 even two years back.

The global containerized shipping industry woes are well known. It is beset with over capacity and although the brakes were put on in terms of ordering new ships, the inventory in the pipeline were too many than the actual need.

Containerized Shipping Industry Analysis

The following data provides some insight on containerized shipping fleet size and the how the top ten orchestrate the bulk of the containerized trade.

Data as of End Aug 2016: No of Container ships (Own plus Chartered)
APM Maersk CMA CGM MSC COSCO Evergreen Hapag Lloyd PIL HSG Yang Ming Marine OOCL Hanjin
OWN 263 140 193 84 107 70 120 44 43 53 37
CHARTERED 363 379 300 200 79 93 18 76 61 48 62
TOTAL 626 519 493 284 186 163 138 120 104 101 99

Let us look at the BIFA Report of 2015 to see how 2015 looked like for the container shipping industry capacity 'over-hang'. Global Shipping Consultancy Drewry reported:

" The recent slowdown in world trade has forced Drewry to halve its forecast for container shipping growth for this year to just 2.2% and revise down estimates for future years. Meanwhile, an additional 1.6 million teu of new capacity is being added to the fleet this year, equating to a growth rate of 7.7%. As a result, Drewry's Global Supply/Demand Index, a measure of the relative balance of vessel capacity and cargo demand in the market where 100 equals equilibrium, has fallen to a reading of 91 in 2015."

Alix Partners in their 2016 Shipping Outlook have given the exact position of the shipping industry in terms of financial performance. Industry consolidation, powerful alliances and mergers and acquisition have been the order of the day, but the results have still been lackluster. The real issue has been the cost of consolidation fueled by debt.

The summary of this report for 2015 says, "Cash from operations fell 12%-almost twice as fast as the EBITDA decline of 7% (figure 1). Those figures suggest that carriers have to fund working capital at a greater rate than they have previously. Likely causes include tighter payment terms imposed by, for instance, fuel vendors and longer payment cycles from shippers. In fact, heading into 2016, the finances of those carriers are worse than the latest last-12-months (NYSE:LTM-OLD) period results."

The data speaks for itself.

Carrier Industry Financial Results $ Billion
All Companies 2011 2012 2013 2014 2015
Revenue 204 199 195 186 173
Total Debt 98 111 114 100 90
EBIDTA 21 18 20 21 20
EBIT 9 6 6 10 9
Capex 25 25 21 20 17
Cash from Op 12 10 15 20 18
Op Expenses 195 192 179 175 164
Ratio: Debt/EBIDTA 4.67 6.17 5.70 4.76 4.50

Creating a better supply demand balance is the need of the hour but the slate of vessel deliveries scheduled for 2016 and 2017 remains robust, and vessel scrapping activities remain muted. The woes of the industry are better reflected in the Altman Z Score.

Falling revenue, declining profit margins, and heavy debt loads have left the container carrier industry in distress, clearly indicated by the average Altman Z-score of 1.39. Any score less than 1.8 is considered as signs of financial distress.

Some of the leaders like Maersk have embarked on a cost cutting drive that leaves no stone unturned. But the cautionary public statement given by the new CEO Soren Skou on August 12, 2016 still says a lot,

"In a second quarter impacted by low growth and falling prices in nearly all our markets, the Maersk Group delivered an underlying profit of USD 134m. The result is unsatisfactory. Cost reductions and operational optimizations, however, made a significant contribution to mitigating the impact of the negative market conditions. The Group's expectation for 2016 of an underlying result significantly below last year is unchanged. To ensure the future strength, profitability and development of new growth opportunities of the company, the Board of Directors have initiated a strategic review of the company."

Hanjin bankruptcy therefore comes at a time that would aid the process of consolidation and alliances. But an industry that is trying to restructure, the looming bankruptcy of some of the others would weigh heavily in the debt markets.

But one has to go to the core of the problem. The problem is not containerized trade going down; in fact containerized trade has been doing moderately well going according to World Bank data.

What is strikingly different is the shifting of the epicenter of the global trade to the Far East as is evident in this data from Worldwide Shipping Reports.

57.6% of global trade through Exports happens from Far East as is shown in the pie chart attached. These far eastern ports import only a fraction of what they export. This means that world's center of gravity is located within few hundred square miles in the Far East. If there is such a mismatch between exports and imports, bulk of the containers move empty in the ocean between Atlantic and the Pacific. Only a fraction of this cost can be passed on by the shipping lines to the customers, such has been the problem of over-capacity. No wonder that most of the smaller shipping lines are operating at unsustainable margins.

The empty haulage syndrome and efficient use of traffic lanes through alliances would need new partnerships. This may not be happening overnight. But Hanjin bankruptcy would create new alliances and some of the current problems of ships stranded at sea would be only temporary.

Investors in the shipping industry must note that the journey to better margins would still take a while. In the meantime, the chartering lines and shipping lines would need to coordinate how the pie would be re-constructed that leaves better efficiencies in the lanes.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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