Wan Hai Lines Ltd.

The stable outlook reflects our expectation that Wan Hai will maintain better profitability than its peers' and generate improving cash flow in 2019 and 2020. This reflects good demand prospects for the intra-Asia market and more disciplined industry supply control, despite highly volatile fuel costs and lingering overcapacity. Our expectation is underpinned by Wan Hai's leading market position in intra-Asia routes and niche position in small and micro ports, which are less affected by long-haul carriers' capacity cascading. Strengthening cash flow should help Wan Hai to restore its ratio of funds from operations (FFO) to debt to 45%-55% over the next one to two years, despite likely higher capital expenditure over the period, mainly for 20 new vessels. We may

...Consolidation should lead to better profitability for the container shipping industry. After several rounds of consolidation in recent years in response to chronic oversupply and carriers' significant operating losses, the competitive landscape in the industry has changed with the top five players holding about 65% market share in 2018 compared with about 30%, 15 years ago. Although we believe the container shipping industry will remain volatile, better industry discipline should lift carriers' profitability with lower swings, particularly during industry downturns. Demand-supply balance is likely to improve over the next few quarters. Industry conditions are shifting in favor of container shipping operators after a tough 2018 in which carriers faced difficulties passing through sharply increased bunker costs to customers. With no incentive to place new orders, as demonstrated by the limited contracting activity since late 2015, the containership order book has reached its lowest level...

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