Saturday, April 1, 2017

Pacific Basin Shipping (HK:2343)

Pacific Basin shipping is a bulk carrier, operating Handysize and Supramax ships.  These ships carry minor bulk cargo (e.g.: logs, steel products, cement, grains), are smaller, and often have their own cranes, allowing them to dock at small ports that do not have loading or unloading facilities.  So they operate in a different market from the major bulk carriers (iron ore, coal, and sometimes grains), which form the majority of bulk shipped materials.  Despite being in different markets, the Baltic Dry Index (BDI) and Baltic Handysize Index (BHSI) follow each other:


Pacific Basin has the largest market share in the handysize segment, but is still a price taker in a fragmented market:

Pacific Basin has 111 Handymax ships (75 owned) and 34 Supramax ships (20 owned).  To get an idea of the market, some competitors are:
  • Western Bulk: 3rd largest owner of Supramaxes in the world.  Private company, releases short annual reports.  126 vessels in 3Q16.
  • Navibulgar: Privately owned Bulgarian shipper, expanding rapidly (1), (2).  20 Handymaxes and 9 Supramaxes.
  • Maybulk (KLSE: MAYBULK): 7 Supramax and 7 Handymax.
  • The rest seem to be small, private companies.  eg: Falcon Marine (17 Handymax),  Apex Marine (5 Handysize), MT Marine (13 Handysize).
Dry bulk shipping is highly cyclical.  In February last year, the BDI & BHSI dropped to there lowest levels in 15 years.  Every player in the industry was losing money.  

The key for future profitability is in these numbers.  All are from Pacific Basin's annual report:

  • New supply of ships.  New supply is still coming online as orders places several years ago are fulfilled.  The bulk of these orders are expected to be delivered this year (9.2% fleet growth), then dropping off sharply next year:

  • No new dry bulk ship orders have been placed this year (except for 31 Valemax iron ore carriers, which serve a different market).  A five year old second-hand Handysize is benchmarked at USD 13.5m, far below the estimated USD 19m for a new one.  This excess of second hand vessels on the market means new ones are unlikely to be ordered soon.
  • Scrapping: Last year, 3.6% of global dry bulk capacity and 3.1% of Handysize capacity was scrapped. New ballast water treatment regulations from September this year (requiring the costly retrofit of ballast water treatment systems) may encourage ship scrapping.
  • Demand: Demand is unpredictable, and depends on global growth and industry specific factors.  No point trying.
A bet in this company is a bet on the industry.  I'm hoping that the industry will continue to improve, and stock prices have not yet taken it into account.  Bought 62000 shares on 29th Mar at HKD 1.69, for a cost of SGD 19,076.

Of course, it would have been better to buy in Feb last year.