Abaci's Common Sense Investing

The FY results were more or less in-line with expectations and that of the 1st half. Segmental profit of the shipping division in the 2nd half showed some 10% improvement, although I had hoped for a higher figure with the sharp drop in crude oil price.

Management cited the cause of the sluggishness was other ship-liners being far too eager to reduce freight in the 1st half to secure orders, for fear of over-capacity in the industry (which did not materialize), and hence OOIL was reluctantly dragged into this price war. And the damage done to the freight, which were contracted months ahead, will take time to recover. There may be some truth in the statement as both China COSCO and CSCL did so much worse in the interim (with shipping profit dropped by 75% and 99%!). So don't expect their full year results will bring much surprise. And salute to the OOIL management for riding out this very tough year.

Going forward management's tone is positive and expansion of fleet is still going strong with about all free cashflow (shipping) reinvested. There was mentioning of a drop in shipping volume of furniture and housing related goods due to the softening of the US housing market, but that was well compensated by increase in goods of other categories. This is pretty much what I have thought, as more of everything is now made in China and people just can't buy it elsewhere. For 2007 so far the freight has increased by an average of 10% though the crude oil price has also climbed back to the level of US$60 a barrel. My optimistic view is the shipping division will earn about HK$3b net each year and be worth HK$24b.

There wasn't much contained about the property division in the press release, other than the old news that property income will be kicking in starting 2008. The Wall Street Plaza though could be sold to provide further funding to the China property projects, as it's another piece of non-core asset.

The port business was classified as discontinued operation so maybe the California and Taiwan ports are now included in the shipping and logistics division.

The biggest disappointment came from the size of the special dividend (80 US cents), which was only a quarter of proceeds from the sale of the North American ports. The official reason was that completion will take place in 1st half of 2007, not 2nd half of 2006, and therefore there's still the possibility of further special dividends down the road. But I guess the real reason is management is either not willing to let go of the money yet, or they have something cooking in the kitchen. This will probably trigger some profit-taking when the trading resumes on Monday. But to me a dollar is still worth a dollar, in my hand or not, as I have confidence in OOIL's management and their execution ability.

So my rough estimate of the company's worth is HK$24b for the shipping business plus HK$18b cash plus say HK$10b on the properties, or HK$52b in total. This is about HK$82 a share. I'd say the current price while still has some attraction isn't the tremendous buy as it once was. I'd hang on to my holding but wouldn't add more.

DISCLOSURE: I hold 316 at time of writing.