“Asian Shipper: the ALMOST Perfect Stock”

This is another one from Robert Hsu’s Asia Edge, which focuses on finding the best investments in China and throughout Asia … and costs $2,995 a year, more than I feel like spending at the moment.

So I’d like to find out what he considers to be the “almost perfect stock.”

The email is generally about the interconnectedness of asian markets, and the importance of getting in on the ground floor in China and the booming asian economies. That’s the premise of most of Hsu’s stuff, and it’s hard to argue that he’s wrong (at least lately — we’ll see how his service performs if China has some bad years).

And he cites one company in particular as the “CLOSE TO PERFECT WAY IN” for those who want to start investing in Asia.

In his words, “In the sometimes dizzying array of opportunities the U.S. investor faces in Asian markets, what’s the best first step?”

This is a shipping company based in Vancouver — and “it’s almost a crime that my subscribers are among the few that know about it.”

Some more from the email:

“This is the shipper that has really sewn up the Asia-South America trade routes. It runs 17 container ships into Hong Kong out of Santiago and San Paulo, laden down to the scuppers with wheat, corn, copper, nickel and timber. Then—in a 24-hour turnaround—these same ships are plowing back to the West Coast with Hyundai’s and Sony flat-panel TVs, plastic iPods and steel I-beams.”

And a few specific clues:

“It yields 8%.”

“only one lonesome analyst covers it.”

Has “17 (soon to be 41) hulls.”

So Hsu believes this is nearly a “slam dunk” investment … what is it?

A couple readers have written in with the solution as well … but for those of you who haven’t guessed it yet, I can tell you that this company is …

Seaspan Corporation (SSW)

This trades on the NYSE, so it’s nice and accessible. It’s not yielding 8% anymore, but it does yield a nice 6.5% or so (and it was yielding more like 8% back when the shares were in the mid-$20s a couple months ago). If you think that the yield is about to be bumped up, then you can go ahead and pretend that it yields 8% just like Robert Hsu.

Seaspan just today announced a big new deal, whereby it’s buying 8 new big container ships (about twice as big as the ones that fit through the Panama Canal) and leasing them to COSCON for 12 years, which will entirely pay off the ships and then some. This company actually acts more like a finance company than a shipping company, as they lease their container ships for extended periods (up to a dozen years or so) and, through a related company, provide ship management services. So while I think they may well be a successful investment, it might be that the potential for “shoot out the lights” returns is not what one might assume for a company connected to the trans-pacific container trade.

And by the way, this will bring their total number of ships up to 55, according to the announcement, 26 of which are currently operating and 29 that are on order and scheduled for delivery over the next few years. They’ve been a very active acquirer as they build up the company, so the “41 ships” info is roughly as dated as the 8% return, which makes me think we’re on the right track here.

This company actually looks to me like the container shipping version of Ship Finance Limited (SFL), a company I used to own which does financing primarily for oil tankers.

It works like this: the finance company borrows a bunch of money and/or issues a bunch of equity, buys the ships (either from the operators or from a shipyard), and leases the ships to the operator for very long time periods and fixed prices. This means the ship operator can take the value of those very expensive vessels off its books and free up cash for other needs, and the financier — in this case Seaspan — can borrow money at a relatively low rate, put together a portfolio of valuable ships, and lease them back for rates that ensure the purchase price will be paid off in a certain number of years.

In this case, permit me a little math exercise: for the new ships Seaspan is buying today they’re paying $132.5 million per vessel and chartering them each to COSCON for 12 years at a day rate of $42,900 per vessel (with a three year COSCON option after that).

If we take out the $6,000 per day in maintenance and operating expenses that Seaspan Management Services, Ltd. will charge Seaspan per day to run the ships, then we’ll see that after 12 years Seaspan will have received about $162 million per vessel. So that’s a “profit” projection of about $30 million per vessel. Not bad, I suppose, and after all those years you’ve still got a nice big boat that’s — market willing — worth some fraction of its purchase price. And to be clear, this is all back-of-the-napkin stuff, I haven’t looked into this in any detail to see how that management fee should be calculated, or whether it represents any profit beyond the actual cost of running the ships. From this thumbnail look, it appears that the first ten years pay back the capital costs of the ship. I have no idea how this might compare with Seaspan’s competitors, or what the useful life of a container ship is.

For a probably not-very-helpful comparison, SeaDrill, the offshore drilling company I own shares of, aims to sign initial contracts with oil explorers and producers that pay off the capital cost of a new drilling rig in 3-5 years.

So that’s kind of how the math works for these companies — the operators sign long term leases and take a lot of the risks, the financiers put up the cash and get a very steady cash flow for a long time in exchange.

Not all that sexy, but maybe it would make sense as a first investment in an asia-related company that’s not terribly volatile — my totally uninformed guess is that the shares should go up, along with the dividend, over time as they build their portfolio of vessels and their charters come due for renewal over the years at, one hopes, higher rates. I’ve looked at this one myself, but haven’t bought shares.


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May 16, 2007 3:28 pm

Intersting! And thanks for the financial analysis. Hsu had hinted that it was a Vancouver-based company, and I actually made a few phone calls to Vancouver (including the Port Authority and a tug operator, found them that way & bought 400 shares. Now just a little under water in it, but will hold for the div.
Don Cier

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