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DMER - Container leasing 2016 - Stocks down on gloomy industry outlook

Container leasing – 2016 Outlook remains placid
• Investors suffered massive wealth erosion in 2015, as share prices of container leasing companies tumbled through the year with stocks extending declines until the beginning of the new year. While the stocks of the three companies under our coverage – Textainer, TAL and CAI – more than halved, the two indices of S&P 500 and Dow Jones Transportation contracted by just 1% and 18%, respectively.

The China factor to be crucial; weakness to continue.
• The China factor to be a key driver: China’s containerships transport large amounts of imported and exported goods around the world, comprising about 30% of the total global container movement. With such a large piece of the pie, the Chinese economy has a huge bearing on the world port throughput. Due to its economic slowdown, the country’s imports and exports have declined. According to Bloomberg estimates, between March 2015 and November 2015, average exports declined 6% y/y while imports declined by a bigger margin of 14%. This is worrisome as the economic growth around the world will also slow down, posing significant risks to ocean freight shipping lines and leasing lines.

Lessors margin under pressure
• During the last two years, competition between lessors has intensified as the growth of world trade and therefore global container trade volume has slowed down. Newbuild prices have declined due to lower overall demand for new equipment by the lines.

Lessors opting for consolidation or business diversification

Investors are advised to wait and watch until macro factors improve: We believe that share prices of container leasing operators will remain under pressure in 2016 as we believe all public container lessors are in the same boat. Investors should not expect any improvement in steel prices or interest rates to fundamentally change the situation. As liner companies are key customers for container lessors, expected overcapacity combined with weak freight rates for liner industry will weaken the bargaining power of lessors with respect to lease rates. We recommend a Neutral stance on all the three container leasing stocks (Textainer, TAL and CAI) from our portfolio.

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