OOIL bounces back just as it bounces out

Announcing Orient Overseas (International) Ltd’s first half results, Group chairman C C Tung has offered his first comprehensive statement on the pending sale of Orient Overseas Container Line to China Cosco Shipping Holdings and Shanghai International Port Group.

“For years, we have achieved scale benefits by means of alliance membership and the deployment of the right, often the largest, vessels in each trade lane.  These techniques, alongside our highly skilled employees, our customer base, our IT system, our focus on cost efficiency and our robust balance sheet, go together to drive the success of our group.  However, as the industry consolidates at speed, with the largest players now having millions of teu in carrying capacity, the capital base necessary to operate successfully, and to establish a place among the leading industry participants, is becoming increasingly sizeable”, said Mr Tung.

“My view is that the offer provides an opportunity for OOIL to continue to operate the OOCL brand, but as part of the China Cosco Shipping Group, and to bring together our operating model and our corporate culture with the competitive advantages of COSCO, including its size and scale, capital base, growing fleet and extensive port investments, to name but a few.   This would create a combined group that would have a very strong chance of maintaining and building a status as one of the very best performers in an industry now entering a new phase”, he added.

There is an added note of poignancy in Mr Tung’s admission that the OOCL modus operandi, that placed such emphasis on alliance membership, may have run its course just when the company has returned to profitability, posting a net profit for the first six months of 2017 of $53.6m compared to a $57m loss during the same period in 2016. Revenue increased to $2.9bn compared to $2.56bn during the first half of 2016.

Container liftings were also up during the period under review. Overall the increase was 6.8%, as the Asia-Europe trade led the charge with growth of 22.2%. Box revenue showed strong increases wit the Asia-Europe trade being the strongest performer boosting revenue by 48% to $526m.

Commenting on the current market Mr Tung said: “In the first half of 2017, we have begun to see a slow and steady recovery from the tough market conditions that characterised 2016. “The results for the period reflect this.”

“It seems that healthier demand growth has reappeared, at least to some extent.  While we must wait to see how enduring this will be, this is a very welcome change from recent years.  Improving data, and moreover improving sentiment, in many of the large economies gives us some comfort as to the sustainability of this better environment.”

Mr Tung added: “In tandem with this gradual improvement in demand, we note the slowdown in supply side growth.  Scrapping occurred at a record rate in 2016, continuing at approximately the same pace in 2017 year to date.  Orders of newbuildings have been notably absent this year so far,” commented Mr. Tung.

“This steady improvement in the supply demand balance is not a sign of a booming market – we are far from that.  However, it does mean that for the first time since the onset of the global financial crisis, the supply demand balance is not worsening year on year.  This is a significant shift, and if it holds, then the industry will at least have the chance to start to absorb some of the excess capacity that exists”, he concluded.

At HK$78.67 per share the China Cosco Shipping offer for OOCL, represented a premium of 31.1% over the closing price on the Friday before the offer was made – and was thus an offer that must have been difficult to refuse. The timing of the deal would certainly suggest that China Cosco Shipping had indeed started its move on OOCL back when rumours began at the beginning of 2017, when there was little sign of an improvement in the market. Clearly the brighter prospects that exist today forced China Cosco to up the bid. Could OOCL have survived in more benign market conditions. Sadly, we’ll never know.

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