This article first appeared in The Edge Financial Daily, on June 10, 2016.

Westports Holdings Bhd
(June 9, RM4.35)
Maintain hold with an unchanged target price (TP) of RM4.45: CMA CGM recently launched a general offer for all of Neptune Orient Lines at S$1.30 (RM3.89)per share, and the Singapore government is known to be keen to ensure that American President Line (APL)’s shipping volumes stay in Singapore. To this end, Alphaliner reported that PSA Singapore Terminals will sell a 49% stake in four berths to CMA CGM with a capacity of three million twenty foot equivalent units (TEUs) per year.

Alphaliner described the deal as a “major coup for Singapore that could finally reverse a long-term structural decline” at the port of Singapore, and “wrest back some of the trans-shipment volumes that have been lost to Port Klang and Tanjung Pelepas”. Singapore’s port throughput fell 8.7% in 2015, and fell by a further 7.8% year-on-year (y-o-y) in four months calendar year 2016 (4MCY16). While the deal is indeed important for Singapore, we do not think that the Malaysian ports will be seriously impacted.

First, the three million TEUs per year capacity of the new joint-venture (JV) berths is only a small portion of the estimated trans-shipment volumes of the entire Ocean alliance. The alliance, which is targeted to be in place by April 2017, include members like APL, Coscon and OOCL which traditionally trans-ship at Singapore anyway, while CMA CGM uses Westports and Evergreen uses Tanjung Pelepas. So, a dual-hubbing strategy will still be in place, and CMA CGM is likely to stay at Westports.

Second, the trans-shipment tariff differential is too great for it to be sensible to increase the proportion of the Ocean alliance’s trans-shipment done in Singapore. Malaysian ports offer tariffs that are half of that charged in Singapore, according to Alphaliner. Singapore may have offered preferential tariffs to CMA CGM and its alliance partners in conjunction with the JV, but is unlikely to be permanent.

Finally, we think that PSA’s move to sign a terminal JV with CMA CGM is a defensive move to protect whatever trans-shipment cargoes that are still being handled in Singapore, rather than an aggressive move to wrest back trans-shipment volumes from Westports. PSA already has JV terminals with Cosco, MSC and PIL, so CMA CGM may be using the current low tide in PSA’s fortunes by extracting concessions like the JV.  — CIMB Research, June 9