Freight rates may stop rising, but earnings growth will continue; optimism grows for HMM’s second half

[Financial News] Although the rise in global container freight rates has slowed, HMM is expected to continue benefiting from high rates in the second half. Analysts say earlier rate increases will boost earnings with a delay, as it takes time for changes in market freight rates to be reflected in actual shipping charges and revenue.
According to financial data provider FnGuide on the 12th, consensus estimates put HMM’s second-half operating profit at around 1.1457 trillion won, more than 80% above the first-half figure of 623.2 billion won. Although freight rates, which had been soaring, have eased somewhat, many expect earnings growth to continue in the second half.
According to the Shanghai Shipping Exchange, the Shanghai Containerized Freight Index (SCFI) stood at 3,662.30 as of the 30th of last month, after rising for eight consecutive weeks; it then fell for a second straight week. The figure was down 24.32 points, or 0.66%, from the previous reading. By contrast, the China Containerized Freight Index (CCFI) rose 0.3% to 1,923.93 that day, from 1,917.68 in the previous reading.
The two indices are moving in opposite directions because it takes time for changes in market freight rates to be reflected in the actual shipping charges paid to carriers, analysts say. The SCFI reflects spot rates for shipments from Shanghai, while the CCFI also includes contract rates at major Chinese ports. Contract rates do not change immediately when market prices fall, and revenue from cargo secured earlier at higher rates is recognized as the cargo is shipped. This means carriers can continue to benefit from high freight rates for some time even after spot rates begin to decline.
In fact, HMM’s freight rates in the second quarter of this year did not rise as quickly as market rates. During the period, the SCFI jumped 55% from the previous quarter, while the shipping charges HMM actually received rose 16% in dollar terms. That was similar to the CCFI’s 19% increase, which also reflects contract rates. As the effects of higher freight rates feed through with a delay, analysts expect HMM’s earnings improvement to continue for the time being, even though spot rates have recently turned downward.
FnGuide’s consensus estimates put HMM’s third-quarter consolidated operating profit at 686.5 billion won, up 131.2% from a year earlier. Revenue is expected to rise 35.7% to 3.6728 trillion won. That would bring operating profit to about twice the second-quarter figure of 354.1 billion won. In particular, some expect an earnings surprise in the third quarter, unlike in the second quarter, when only part of the impact of higher freight rates was reflected. Fourth-quarter revenue is also forecast at 3.2627 trillion won, with operating profit at 459.2 billion won. Those figures would be up 20.50% and 44.72%, respectively, from a year earlier.
An industry official said, “Even if spot rates fall, cargo secured earlier at higher rates can support second-half earnings as it is reflected in revenue. How long HMM will continue to benefit from high rates will likely depend on the actual rates applied and cargo volumes.”
[email protected] Jeong Won-il Reporter