HMM's Strong 3Q24 Earnings Despite Freight Rate Decline

HMM is expected to report robust earnings for the third quarter of 2024, driven by surging freight rates. However, the company's valuation may be limited due to the conversion of convertible bonds. While container freight rates are projected to decrease over the mid to long term, HMM should still be able to generate profits thanks to shippers' supply adjustments.

Freight Rates to Remain Profitable Despite Supply Burden

The Shanghai Containerized Freight Index (SCFI) has been declining, influenced by the end of the third quarter's peak season and the early resolution of US east coast port strikes. As of October 18, the SCFI had dropped to 2,062.15 points, a 49% decrease from its peak. Nonetheless, it remains significantly higher than the break-even point (BEP) of 1,000 points. For HMM, profit generation should still be achievable for the year.

In the long term, the delivery of new container ships and the normalization of Suez Canal operations may lead to oversupply. However, global container shipping companies are expected to adjust their supply flexibly based on market conditions, limiting the possibility of drastic freight rate declines. Although downward pressures are anticipated in 2025 due to increased supply, steep freight rate decreases that could threaten the BEP seem unlikely. Overall, rates are projected to narrow gradually, with some volatility caused by geopolitical issues and port strikes.

3Q24 Preview: Rate Increase Effects Expected; Conversion of Perpetual CBs Imminent

We forecast consensus-topping 3Q24 sales of W3,573.6 billion (+68% year-on-year) and operating profit (OP) of W1,396.2 billion (+1,742% year-on-year; operating profit margin (OPM) of 39.1%). For 3Q24, the rates applied at HMM are estimated at $2,356 per TEU, a 149% year-on-year increase. The rate increases since April should be reflected in earnings with some time lag.

Regarding the perpetual convertible bonds (CBs) of W660 billion, maturity is set to arrive on October 28. Around the maturity, the CBs are to be converted to 132 million common stocks, boosting the number of stocks by 17.6%. In April 2025, perpetual CBs of W720 billion are to be converted to 144 million common stocks. Considering all these conversions, HMM shares are trading at a 2024E price-to-book (P/B) ratio of 0.75x, a level close to that seen at peers.