Why Container Shipping ROE’s Will Surprise Positively

Mikey 'the moat' Maloney on COSCO SHIPPING Holdings Co., Ltd. Class H (1919-HKG | coscoshippin), A.P. Moller - Maersk A/S Class B (MAERSK.B-CSE | apmollermaer), Hapag-Lloyd AG (HLAG-ETR | hapaglloydag), Nippon Yusen Kabushiki Kaisha (9101-TKS | nipponyusenk), Evergreen Marine Corp. (Taiwan) Ltd. (2603-TAI | evergreenmar), Mitsui O.S.K.Lines,Ltd. (9104-TKS | mitsuiosklin), Orient Overseas (International) Limited (316-HKG | orientoverse), Kawasaki Kisen Kaisha, Ltd. (9107-TKS | kawasakikise), Yang Ming Marine Transport Corp. (2609-TAI | yangmingmari), SITC International Holdings Co., Ltd. (1308-HKG | sitcinternat), Wan Hai Lines Ltd. (2615-TAI | wanhailinesl)

5/21/2025

Summary

Container shipping stocks remain hated and undervalued — trading below book value and offering dividend yields of 6–13% — despite printing 5-year average ROEs of 30–50%. Investor scepticism is understandable: the industry has long been viewed as the epitome of boom-and-bust cycles. Every time shipping companies make money they add too much capacity and kill the cycle. Investors assume the next bust is inevitable. But what if that assumption is wrong? What if container shipping is undergoing a structural transformation? We present three contrarian arguments for why container shipping ROE's will surprise positively in the years ahead — high scrapping rates, structural route complexity from deglobalization, and smarter capital allocation — plus a bonus thesis: that global instability itself may be bullish for shippers. If even half of these are true, container shipping may be quietly transforming from a capital destroyer into a capital compounder.

Thesis

Valuation Disconnect: High ROEs with a Price/Book < 1. The shipping sector today is cheap. COSCO, Orient Overseas, Evergreen Marine, Maersk, Hapag-Lloyd, Nippon Yusen — many of these stocks trade below book value, with single-digit P/E ratios and 5-10% dividend yields. Current valuations imply these businesses are not covering their cost of capital, yet their recent return profiles tell a different story with 30–50% average ROEs over the last five years, including 2023–2024. So why the discount? Because everyone “knows” the story: COVID was a fluke, the Suez Canal blockage an anomaly, and the next glut of new vessels will kill margins again by 2027. The market has PTSD from decades of capital destruction and assumes that supernormal profits will be arbitraged away the moment the new tonnage hits water. But what if that mental model is outdated? What if something has changed? Contrarian Reason #1: Scrapping Rates Will Surprise to the Upside Yes, the order book is heavy — 29% of the current fleet is set to be delivered between 2026 and 2028. But shipping is not a static pie. One key variable that most bearish models underestimate is scrapping — the removal of old, inefficient ships from the system. After a decade of razor-thin margins (2010–2020), shippers finally hit a jackpot during COVID. With that cash, many ordered new vessels — partly due to regulation (IMO 2023 emissions rules), and partly to modernize fleets. But the future scrapping rates may also surprise positively and limit overall fleet growth. Scrapping could hit 1 million tons per year, offsetting half of the expected new capacity. Why? Because these firms are not eager to flood the market with old ships and crush freight rates. They’ve seen that movie before — and don’t want a sequel. Plus, the older ships will not comply with more stringent emissions regulations. This is the first pillar of the thesis: the net capacity increase will be lower than feared because the market is underestimating future scrapping rates, which are currently depressed. Contrarian Reason #2: China + 1 = More Complexity = More Ships The reshaping of global supply chains — often called “China + 1” — is another underappreciated trend that may structurally elevate shipping demand. Instead of one dominant hub (China), production is being spread across Vietnam, India, Mexico, Indonesia, etc. This decentralization doesn’t reduce trade — it multiplies routes. The logistical complexity grows combinatorially. The number of required node connections expands roughly with the formula N(N–1)/2. More factories in more countries = more links = more demand for ships. For example, a triangle with 3 nodes has 3 routes. A square with 4 nodes has 6 potential connecting routes. A pentagon with 5 nodes has 10 potential connecting routes. The result is a more fragmented, less efficient network. But for shippers, inefficiency is a positive, not a negative. More routes = more ton-miles = tighter capacity = more earnings power. Even better: this trend won’t reverse. National security, tariffs, and geopolitics will ensure China + 1 persists through the decade. Contrarian Reason #3: Capital Discipline Is Real This Time Shipping executives know the risks and are already demonstrating better capital discipline. Many used the windfall profits of 2021–2023 to pay down debt, buy back shares, and pay record dividends. Some capex went into fleet renewal — largely driven by ESG compliance — but not all of it. Many are actually showing restraint. Moreover, operators are vertically integrating. COSCO, Maersk, and Hapag-Lloyd now own port terminals and logistics companies. They’re morphing from commoditized box-movers into full-service freight operators. This increases the moat. The more terminals a company owns, the more pricing power and operational leverage it gains across the logistics chain. The makes the customer offering stickier and higher margin. Put differently, shippers are starting to look more like railroads than like airlines. Bonus Contrarian Reason: Chaos Is the New Normal — and That’s Good for Shippers Let’s map the past five years: • 2020: COVID lockdowns + stimulus checks => Container rates spike • 2021–22: Port congestion, labor shortages => Shippers mint money • 2024: Red Sea attacks by Houthis => Global rerouting via Cape of Good Hope • 2025: Trade war stop-starts => Inventory spikes => Rates rebound again? Are these anomalies? Or the new baseline? If global trade is increasingly defined by disruption, political risk, and redundancy, then container shipping becomes a structural winner. Why? Because chaos stretches out supply lines and increases logistics complexity. The existing routes were becoming commoditised. The current change in logistics patters offers the shipping companies ways to add more value through their integrated logistics offerings, plus new terminals in new markets You could call this the “deglobalization premium.” Paradoxically, it raises shipping profitability. Valuation Math Let’s take a simplified model: • Dividend today: 7% yield • No growth in the dividend • Exit yield: 5% Over 3 years, you collect ~21% in dividends, and your capital appreciates 40%. That’s a 61% total return. If ROEs stay at even 12–15% (half their recent average), shipping stocks today are incredibly cheap on any long-term normalized basis. And if rates spike again due to the next unexpected disruption the upside could be explosive.

Risks

1. Overdelivery of New Ships (2026–2028) The biggest risk is the current order book: ~29% of existing fleet is under construction. If scrapping is lower than expected — or if demand weakens — rates could plummet. That would crash profits and crush sentiment. Even though this risk is well known and likely priced in it can still happen. The contrarian view is that net additions (deliveries – scrapping) will be manageable. 2. China Growth Disappointment A significant share of global container volume depends on Chinese exports. If China enters a prolonged slowdown, or if trade wars escalate, overall shipping demand could stall. This would hurt the top line. Still, the diversification of supply chains (India, Vietnam, Mexico) provides a cushion. 3. Tariffs on non-US ships delivering to US ports. Beginning October 2025, a fee will be charged on Chinese-owned or -operated vessels entering US ports. The fee starts at $50 per net ton, with the rate increasing over time, reaching $140 per net ton by April 2028. Service Fees on Foreign-Built Vessels. There are separate fees for Chinese-built vessels not owned or operated by Chinese entities and for foreign-built vehicle carriers. Chinese-built vessels will be charged a fee of $18 per net ton (or $120 per container, whichever is higher) in October 2025, increasing annually. Foreign-built vehicle carriers will be charged a fee of $150 per Car Equivalent Unit (CEU). There are no US built container ships, so these fees will disadvantage all the container shipping companies. It means the industry will likely pass the new fees on to the customer. Even with these fees, it may still be more economical to pay the fee rather than build new ships in the US, especially since the industry already has 29% of the fleet on order. There will be no need for new US ships until well past 2030.

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