How to Trade Red Sea Crisis - COSCO (HK: 1919) and Singamas (HK: 716) [January 26, 2024]

Key Highlights:

  • Attacks in the Red Sea by Houthis are linked to the Israel-Gaza conflict, and risk of future attacks likely persists.

  • Shipping lines are increasingly opting to go around South Africa instead of through the Red Sea and Suez Canal. This adds 7-12 days to the voyage.

  • Shipping ETFs benefiting from the higher freight fees and macro dynamics are BOAT, BDRY, and SEA.

  • Not all ETF holdings are seeing similar returns. Possible buy candidates include COSCO (HK:1919) and Singamas (HK:716)

  • COSCO has subsidiaries listed with strong returns, but its own listing has not performed as well. As a state owned enterprise, it will receive the mandate from Chinese Communist Party (CCP) to engage in share buybacks. It has ample cash on hand and generates meaningful cash flow.

  • Singamas trades at a negative enterprise value of (U$94.2M) with minimal debt and CAPEX commitments. It trades at a 32.7% dividend yield at HKD 0.55 as of January 26, 2024, and has another HKD 1.07 per share in cash reserves if we ignore effects from its nominal liabilities and dilutive instruments.

  • Singamas is controlled by Pacific International Lines, a private shipping company that potentially have legacy-related disputes as the founder passed away in 2020.

  • As a preliminary analysis, COSCO (HK:1919) and Singamas (HK:716) are interesting companies to further investigate.

On October 19, 2023, the geopolitical landscape in the Middle East took another surprising turn as the Houthis, a rebel group based in Yemen, launched a series of attacks on commercial cargo ships in the Red Sea as a direct response to Israel’s attack on Hamas. The Red Sea, for those geographically unfamiliar, is the body of water that connects Asia Pacific with Europe through the Suez Canal in Egypt. Yes, that Suez Canal that congested the global supply chain in March 2021. These attacks continue into 2024, and in this article, we will explore the significance of these events and some trading ideas based on these events.

To further appreciate the importance of the Suez Canal, it facilitates the transportation of critical goods including oil, natural gas, consumer goods, and various commodities. This facilitation generates Egypt billions in GDP from freight fees alone as it handles approximately 12% of global trade or 30% of global shipping container traffic carrying over U$1 trillion in value every year. To be more specific, it facilitates 7 to 10% of the world’s oil trade and 8% of the liquified natural gas (LNG) trade.

The Houthis seemingly is a distant group from Hamas, so why might Israel’s actions in Gaza trigger a response from the Houthis? While I’m by no means a geopolitical expert, potential reasons for the violent response include:

  1. Proxy Actions:

    The Middle East is rife with groups with varying interests, and each group may align with larger regional powers. The Houthis are said to receive support from Iran, and may view themselves as part of the larger battle against similar adversaries such as Israel and the United States.

  2. Solidarity with the Palestinian Cause:

    The Israeli conflict with Hamas in Gaza is a deeply sensitive and emotive issue in the Arab world, and actions taken by groups like the Houthis may be driven by a desire to demonstrate support for the Palestinian people.

  3. Expanding the Conflict Theater:

    By targeting commercial ships in the Red Sea, the Houthis may be attempting to expand the conflict theater and draw attention to the interconnectedness of regional issues. This tactic seeks to underscore the idea that conflicts in one part of the Middle East can have repercussions in seemingly unrelated areas, leveraging maritime security as a means of expressing discontent with broader regional dynamics.

  4. Response to Perceived Aggression:

    The Houthis may have interpreted Israel's military actions in Gaza as part of a broader strategy seen as threatening to their interests or those of their allies. In such a context, attacking commercial ships could be viewed as a way to retaliate and send a message against perceived aggression.

  5. Attracting Global Attention

    The international community relies heavily on the smooth operation of major waterways like the Red Sea and the Suez Canal for the uninterrupted flow of goods. Attacks on cargo ships using this route can have cascading effects on global supply chains and economies, amplifying the impact of regional conflicts. The magnitude of potential effects would garner further and continued international attention on the Israeli-Palestinian conflict.

Now that we know the possible motivations behind the attacks, it could be fundamentally viewed as ideologically driven and tactical to attract attention to the Gaza War. If the reason is more driven by the latter, the attacks could subside if a temporary resolution or ceasefire is arranged between Israel and Hamas. However given this conflict’s decades long history, it would be reasonable to assume the risks of future attacks will persist.

You may also be asking “What about pirates in Somalia?”. Although the passage through the Suez Canal is also around Somalia - the Horn of Africa, the risk of piracy has declined signfiicantly in recent years as there has only been eight attacks from 2016 to 2022 compared to 160 attacks in 2011 alone.

Regardless, the decision to avoid the Red Sea and Suez Canal seems to be gaining traction amongst shipping lines very quickly. The alternatives include going around Cape of Good Hope in South Africa and air cargo. There are significant economic implications with these alternatives.

  1. Increased Shipping Costs:

    Sailing around the Cape of Good Hope adds significant distance to a vessel's journey. This increased distance results in higher fuel consumption, longer travel times, and elevated operational costs for shipping companies. As a consequence, shipping rates may rise, contributing to increased costs throughout the supply chain.

  2. Extended Transit Times:

    The longer route around the Cape of Good Hope leads to extended transit times for goods. Delays in the delivery of products can disrupt supply chains, impacting businesses and consumers who rely on timely shipments. Industries with time-sensitive products, such as perishable goods or just-in-time manufacturing, may be particularly affected.

  3. Impact on Global Trade Routes:

    The diversion of ships around the Cape of Good Hope alters established global trade routes. This can influence the dynamics of trade between regions and nations, potentially reshaping supply chain strategies and trade patterns. Some industries may need to reassess their logistics and distribution networks.

  4. Shipping Industry Capacity and Congestion:

    The increased demand for the longer route may strain the capacity of shipping companies and port facilities around the Cape of Good Hope. This surge in traffic could lead to congestion at ports and heightened competition for available resources, potentially affecting the overall efficiency of the maritime transportation system.

  5. Environmental Considerations:

    Longer routes mean increased fuel consumption and, consequently, a higher carbon footprint for shipping operations. This may draw attention to environmental sustainability concerns, especially as the shipping industry faces pressure to reduce greenhouse gas emissions.

  6. Impact on the Suez Canal's Revenue:

    The diversion of ships away from the Suez Canal has financial implications for Egypt, which generates significant revenue from tolls and fees charged for canal usage. A decrease in traffic through the canal may affect its revenue stream, potentially impacting the canal's maintenance and expansion projects.

  7. Insurance and Risk Considerations:

    Longer voyages can increase the exposure to various risks, such as adverse weather conditions and piracy. Shipping companies may need to reassess their insurance coverage and risk management strategies, potentially leading to adjustments in insurance premiums.

Given the global economic implications of the events happening at the Red Sea, what trading opportunities exist here?


Trading Idea #1: Shipping ETFs and Shipping Stocks

With the increased shipping freight costs, the obvious beneficiaries are the shipping companies themselves. Relevant shipping ETFs that have already been identified by investors including SonicShares Global Shipping ETF (Ticker: BOAT), Breakwave Dry Bulk Shipping ETF(Ticker: BDRY), and U.S. Global Sea to Sky Cargo ETF (Ticker: SEA).

As a significant portion of shipping-related companies are headquartered and publicly listed in Asia, these ETFs are an efficient way to get exposure to the shipping industry if you are based in the United States. These ETFs hold companies such as COSCO Shipping (Ticker: 1919:HKG), SITC International Holdings (Ticker: 1308:HKG), or Mitsui O.S.K.Lines (Ticker: 9104:TKS). As with the obvious opportunities, these ETFs have already produced significant returns since October 19, 2023, where BDRY is up 94.94%, BOAT is up 16.17%, and SEA is up 9.41% as of January 25, 2024.

However, when we review the top holdings of BOAT as an example, you’ll see that not all holdings have generated similar returns.

It’s particularly interesting that the returns are not distributed evenly with underperformers such as A.P. Moller-Maersk, Frontline, SITC, and COSCO. This suggests that there are potentially other market dynamics and inefficiencies at play. For example, a quick search shows that Nikkei 225 rallied 16.16% during the same period, and there are talks of BOJ ending their ultra-loose monetary policy, which may have contributed to the more substantial rally of Kawasaki Kisen Kai and Mitsui O.S.K. Lines.

For COSCO, its underperformance may have been caused by the shadows of China’s economic backdrop. Firstly, let’s take a look at the publicly listed entities of COSCO.

Out of the 300 plus subsidiaries under COSCO, below are some of its listed entities:

  • China COSCO Holdings (SEHK: 1919; SSE: 601919). This is the flagship listed subsidiary, also known as "China COSCO" or "COSCO Holdings"

    • COSCO Pacific (SEHK: 1199) - port operator and investor. Significantly (43.63%) owned by China COSCO Holdings as of 31 December 2015.

  • COSCO International (SEHK: 517)

  • COSCO Shipping Co., Ltd. (SSE:600428). It is engaged in specialized carriers. COSCO owned 50.58% shares directly.

  • COSCO Corporation (Singapore) (SGX:F83)

    Moreover, China International Marine Containers (CIMC) (HK:2039) is an associate company of the group, which COSCO indirectly owned 22.77% shares of that listed company as of December 2015.

    As of 2000, COSCO also owned a 30% stake of China Cargo Airlines, giving it exposure to air cargo demand should businesses decide to ship via air instead of ocean.


The chart above illustrates that several COSCO’s subsidiaries have experienced magnificent runs up in share price, but its holding company rose only a meager 9.03%.

If we take a look at the price ratios of COSCO Holdings (HK: 1919), you’ll see that it’s trading a low P/E (LTM) of 4.5x and P/E (NTM) of 10.4x. It also generated a free cash flow to firm of ¥38.3B, ¥161.5B, and ¥186.3B in FY2020, FY2021, and FY2022 respectively. It has has a cash balance of ¥198.96B, which puts it in a good position to support the share buyback mandate set by the Chinese Communist Party (CCP) on state owned enterprises (SOE) 3 days ago as a measure to support the stock market free fall.

It will be important to obtain a deeper understanding of COSCO Holdings’ financial position and performance in relation to its peers, the corporate structure, the operations, evaluate if there are other reasons to its current share price underperformance, and understand its actual responsibilities under the CCP’s mandate to engage in share buybacks. However, with the apparent relative value and macro events happening, COSCO Holdings seems to be undervalued.

Trade Idea #2: Container Stocks

After further investigation, an industry operator advised that the price of shipping containers are also skyrocketing in similar fashion to when the Suez Canal was blocked in 2021. As shipping lines are detouring around the Cape of Good Hope instead of going through the Red Sea, containers are out on the water significantly longer as the detour adds on average 7-10 days to the voyage according to Flexport.

Below lists the top 10 container manufacturers in the world.

Of the few publicly traded container manufacturers in the world, all have rallied since October 2023 except Singamas (HK: 716) – one of the world’s largest container manufacturers. One might think that with the increased demand and prices of containers, Singamas should have benefited from such dynamics.

Upon closer inspection, I learned that it trades at a market capitalization of U$164.5M with only U$5.1M in debt, and U$330.1M in cash. This means that it trades at a negative enterprise value, or in other words, there is more cash within the company than what it cost to buy the equity of the company. To make things rosier, Singamas also generated (U$20.5M), U$212.2M, and U$64.4M in operating cash flow in FY2020, FY2021, and FY2022 respectively. During the same time, it paid off the majority of its long term debt, and issued significant dividends to its shareholders. With how good the numbers look, it’s important to remember the old adage – “If it’s too good to be true, it probably is”.

If you only review Yahoo Finance or other popular financial information websites, you’ll typically only find the most recent 3 years of information data. The problem here is that the limited 3 years of data provides a very skewed perspective of companies’ actual performance. Singamas, as an example, performed substantially better recently than their average years. So when we pull up its cash flows from prior years from their annual reports, their performance seems more tepid with hints of managed earnings as their cash flow from operations fluctuates in and out of profitable status.

As a refresher, below is a summary of the 3 cash flow items above:

  1. Cash from Operations:

    • This section represents the cash generated or used by a company's core operating activities.

    • It includes cash receipts and payments related to day-to-day business operations, such as sales, purchases, and operating expenses.

    • Positive cash from operations indicates the company is generating cash from its primary business activities.

  2. Cash from Investing:

    • This section reflects cash flows related to the purchase and sale of long-term assets, such as property, equipment, and investments.

    • Negative cash from investing may indicate the company is investing in growth opportunities, while positive cash may suggest divestment or capital expenditures.

  3. Cash from Financing:

    • This section details cash transactions with the company's owners and creditors.

    • Sources include issuing or repurchasing stock, issuing or repaying debt, and payment of dividends.

    • Positive cash from financing may result from borrowing or issuing stock, while negative cash may occur when repurchasing stock, paying dividends, or paying off debt.

To calculate the intrinsic valuation of the company, we need to take the present value of all projected Free Cash Flow to Firm (FCFF). Since Singamas now has nominal debt and spends relatively little on CAPEX, I think we can focus on the cash flow from operations (CFO) for our preliminary analysis. It is also important to note that in its annual reports, it states that:

Singamas Container Holdings Limited (the “Company”) is a public limited company incorporated in Hong Kong and its shares are listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”). Pacific International Lines (Private) Limited (“PIL”) is the controlling shareholder of the Company that directly holds 993,825,345 shares, representing 41.12% of the total issued shares capital of the Company as at 31 December 2021 and it is considered as the immediate holding company of the Company.

Having the controlling shareholder as one of the largest shipping lines in the world likely ensures a consistent demand for containers, but it also introduces additional risks to minority shareholders such as intercompany expenses that might not be at market value and inefficient management of excess cash. On the other hand, the company has consistently distributed dividends to the shareholders likely due to its stable position in the market and limited capacity for growth.

Source: https://www.singamas.com/en-us/shareholder_returns/index

As of January 26, 2024, it trades at HKD 0.55, which offers a 32.7% dividend yield based on dividends received in 2023, and it still has U$330,127 in the bank as of June 2023 reported in its interim report. If 993,825,345 shares represents 41.12% of the total issued shares capital, then this indicates there are approximately 2,416,890,431 shares outstanding. This means that there is roughly HKD 1.07 of cash on hand per share. This is on the basis of an USD/HKD exchange rate of 7.81, and ignoring outstanding liabilities and any dilutive shares outstanding. As a preliminary analysis, there is enough upside buffer to warrant a deeper dive.

I would still be cautiously optimistic about Singamas. On the one hand, it could distribute a very attractive special dividend to bring the enterprise value back into positive territory, and the company likely isn’t going away given it’s one the largest container companies and controlled by one of the largest shipping companies in the world. On the other hand, because there is a controlling shareholder, outside investors have little control and visibility over inter-company expenses such as raw goods, director fees, management fees, and other miscellaneous fees charged from PIL to Singamas.

In summary, both COSCO (HK:1919) and Singamas (HK:716) seem to have outperform potential relative to its peers, and warrant a deeper analysis. I would argue that COSCO is more predictable in its future performance as 1) we can already see its listed subsidiaries outperform, and 2) it has the sovereign support as its a Chinese state owned enterprise.

Singamas seem to be more risky as it's controlled by a private company in Singapore, whose founder passed away in 2020. This also introduces the risk of intra-family disputes and conflicts especially with an enterprise of this size. Additionally, the financial metrics have indications that its profitability is being managed as it hovers between positive and negative territory in normal years. The dividends will also be at the discretion of the controlling shareholder. However, given its share price is trading well below the cash value on hand and generates positive cash flow on average, there is potentially significant upside through dividend yield only.

Other items not covered in this article include the underperformance of A.P. MOLLER-MAERSK, Frontline, and SITC International, which are worth looking into. It is also worth to investigate:

  • Why is the Egypt Country ETF (Ticker: EGPT) rallying despite the lost revenue directly and indirectly from the Suez Canal? The canal contributes billions each year to Egypt’s GDP.

  • What is the percentage of operating expenses do freight fees take up in companies shipping through the canal?

  • Will the extended shipping times and increased freight fees have passthrough effects to consumer prices? If so, how would inflation be affected in different countries, and will this contribute to persisting high interest rates?

  • We should also test for any anomalies in price, volume, and correlations in fund flows of ETFs and the underlying stocks prior to October 19, 2023.

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