Macro-economic factors play a big role in every company’s financial performance, as well as the valuation of their stocks globally, and China is no different.Improved economic data and company ‘valuation gaps’ has helped Chinese port stocks analysed by Drewry Maritime Equity Research to rally in the second half of the year.  Shares in Tianjin Port Development Holdings (TPD, 3382 HK) and China Merchant Holdings International (CMHI, 144 HK) gained most, providing capital appreciation of close to 20% year-to-date. Since closing at lows of HKD 0.95 and HKD21.40 respectively on 25 June, they galloped to HKD1.30 and HKD29.65 on 11 October, representing massive gains of 37% and 39%. This compares well with a 12% increase in the broader market Hang Sang Index in 2H 13.

The key driver for TPD is its container handling business, which has high domestic and intra-Asia exposure, as well as limited competition from nearby ports. For CMHI, continued focus on emerging markets and execution of projects, such as Terminal Link and CICT, has been the key catalysts.

China’s economy has reacted well to the mini-stimulus announced by its Government at the end of the second quarter, which focusses on improving small businesses, exporters and railway development plans. Though small, it underlines China’s intention to support its slowing economy through policy moves, thereby creating a more balanced and sustainable growth path. The consequence is that China’s official Purchasing Managers Index (PMI) already recovered from a low of 50.1 in June to 51.1 in September. The PMI had slid from 50.9 in March to its June low of 50.1, suggesting weak economic sentiment in 2Q 13. GDP growth slipped from 7.7% in 1Q 13 to 7.5% in 2Q 13. China’s monthly import y-on-y growth also followed a similar trend to PMI, increasing from the end of 1H 13.

On the external front, improved economic conditions in the US have also helped Chinese stocks to rally, with the prospect of better times ahead. China’s exports recovered from a year-on-year decline of 3% in June to growth of 7% in August, although this was followed by a flat September.  Another factor that has helped Chinese stock prices rally is the US Federal Reserve’s announcement that its bond buying program (Quantitative Easing) is to be maintained for the time being. The market had earlier expected a sudden brake on the programme, which would have resulted in money flowing out of emerging markets.

DMER never-the-less believes that it is too early to describe the encouraging numbers emanating from China in 3Q as an indicator of economic revival, or an end to slowing growth. The global economy has to come to the terms with the fact that China’s economic growth has come off peaks for both cyclical and structural reasons. The IMF only forecasts real GDP growth of 7.6% and 7.3% for the Chinese economy in 2013 and 2014 respectively, for example.

What is more important right now, therefore, is growth revival in Europe, and more positive growth signals from the US, as these are China’s major export markets.
Our View

As China’s port volume growth remains largely dependent on economic conditions in the US and Europe, those gateways focused on domestic and intra-Asia trade, such as Dalian and Tianjin, will continue to perform better than ports more interested in the deep-sea sector.
Source: Drewry Maritime Research