Inside Orient Overseas (International) Ltd

Orient Overseas is rather like DHL: it delivers door-to-door and enables customers to track packages in its care. For OOIL, however, the packages are dirty great containers - or 20ft equivalent units (TEUs) as they're known in the trade - rather than cardboard boxes and envelopes and these are moved a few thousand at a time on 300m long ships.

Boats this big don't come cheap and OOIL has 37 at its disposal, 18 of which are owned and the remainder leased, typically on six- to eight-year contracts. The company plans to add a further five newly built vessels this year; two of these are being bought and the remainder leased.

Last year, OOIL reported a net profit of $61.88 million on revenues of $2.14 billion, compared with a loss of $303,000 and turnover of $1.83 billion in 1998. Group borrowings at end-1999 totalled $725 million and it had a net debt to equity ratio of 40% - very conservative relative to its peers. The new ships on order will increase OOIL's level of net gearing, though it will remain within the company's stated ceiling of 100%.

Charles de Trenck, analyst at Salomon Smith Barney, says OOIL's gross gearing is in the region of 80%, but one should take into account the fact it has strong cashflow and around $450 million in cash and liquid investments.

"That is why OOIL got through the Asian financial crisis in probably the best shape among its competitors," he says.

Chief financial officer Harry Wilkinson says: "We're very, very prudent in that area, but part of that policy of maintaining a very high level of liquidity and low leverage is you don't always optimize your investment opportunities ... Our view is we always need to be in a position to get ourselves through three difficult years back-to-back."

No plain sailing

This cautious attitude reflects the fact OOIL's past has not been plain sailing. The slide in shipping rates in the mid-1980s led to the company having to be restructured; something the Tung family, who own just over 60% of OOIL's shares, don't want to go through again.

Although container transportation is a global industry, OOIL is well protected against exchange rate movements since all of its revenues and borrowings are denominated in US dollars.

"One of the really good things about this industry is minimal currency exposure," says Wilkinson. "So the kind of stuff we saw create monster problems for a lot of companies in Asia during the financial crisis doesn't affect us.

"The other good thing about the industry is it's a very positive cashflow industry. You don't have to give credit to anyone you don't want to."

Wilkinson says the company has a "very limited amount of currency exposure", because it has local costs, for example, in places like Japan "when you have to pay for trucking and rail and all the rest of that stuff".

"So, on the payable side we do have some exposure and we hedge that through the normal type of hedging instruments."

Getting the funds

In the main, Orient Overseas has turned to the banks to finance its fleet.

"For the last few years, it has tended to be syndicated bank loans, simply because that has been the most competitive market. It's been cheaper than going to the bond market.

"We are totally open-minded. We will go to the bond market if that offers cheaper funds," Wilkinson says.

Shadow credit ratings commissioned by Orient Overseas suggest the company would be BB on the Standard & Poor's scale.

"In today's environment, if you're capital intensive and highly cyclical, your odds of getting an investment grade rating are not too good. Therefore for us, the syndicated loan market has tended to be very attractive," the CFO adds.

Operationally, the two key parameters that affect Orient Overseas are the growth in containerized trade and the supply of new vessels.

Containerized trade has grown by around 8% a year for the last 15 years, though this expansion rate is seen falling to just below 7% for the next five years or so. The world container fleet is likely to grow 6% this year, but this should be higher in 2001 and 2002 given the level of activity and order backlog at shipyards around the planet.

Source of revenue

Around 40% of Orient Overseas' revenues are attributable to trans-Pacific trade and the remainder is fairly evenly split between Asia-Europe, intra-Asia and trans-Atlantic routes. With the exception of trans-Atlantic routes, freight rates rose significantly in 1999 and further, albeit more modest hikes, are likely this year. On trans-Pacific routes, the price per container shipped jumped to around $2,000 from $1,100 in 1999, while for Asia-Europe trade the rate rose to about $1,650 from $1,000.

Despite the company's growth plans, risk-averse profile and improved conditions in the container shipping market, Orient Overseas' shares trade at a rather lowly 4.4 times historic earnings. This reflects corporate governance concerns, with the bulk of the shares still in family hands, and the fact the free float is too small.

"Institutional investors' perception is that liquidity is too low and they can't take positions of satisfactory size," says de Trenck.

Chairman and chief executive Tung Chee-chen has so far shown few signs of addressing this issue, though, according to Wilkinson, an employee share option scheme is under consideration.

Some might argue that Orient Overseas should trade at a premium to its rivals given the enviable connections it enjoys: CC Tung's brother, Tung Chee-hwa, is chief executive of the Hong Kong Special Administrative Region.

"Certainly it opens doors to potential customers," Wilkinson says.

"It's like anything else, it can get you in the door, but then it becomes price and service. This is particularly true in China. People have a strange idea that we can get any business we want in China - we can't. It is a very important market for us and we work very hard at it, but we don't get anything for free," he says.