China Securities Co., Ltd. Shipping 2025 Investment Outlook: The shipping supply and demand gap will exceed 8%. Next year, the average freight rate will increase.

China Securities Co., Ltd. released a research report stating that the global reconstruction of routes brought about by China-led re-globalization and U.S.-led de-globalization. Currently, the world is in the midst of the fifth global industrial transfer, and after Trump's return to office, globalization has faced even greater challenges. The global industrial transfer is stimulating the rise of intermediate goods trade, reshaping route structure, and lengthening transport distances. However, the effective supply of maritime transport is significantly lower than the nominal supply growth rate, with a supply-demand gap of 8%. It is expected that the average actual freight rates in 2025 will be better than the level in 2023, and there is still room for profit in the shipping industry. Key points of China Securities Co., Ltd. are as follows: Changing perception of the world view: From One world to Parallel world Since the 1960s, global trade trends have experienced processes of globalization and de-globalization. The core support behind global trade trends includes the General Agreement on Tariffs and Trade, the International Monetary Fund, the World Bank, and the collapse of the Bretton Woods system. After Trump's return to office, globalization has faced even greater challenges. Traditional world view: One world. Originally, the world was considered as one world with no significant arbitrage mechanism, as arbitrage mechanisms were balanced during the process of globalization. Regardless of goods or capital, markets operated according to the rules of globalization and arbitrage mechanisms were stable. Current world view: Parallel world. Following the Russia-Ukraine war, the U.S.-China trade war, and the Red Sea crisis, the world is now in a divided parallel world where the linkages are arbitrage mechanisms of trade. Currently, the world is in the midst of the fifth global industrial transfer, where industries are moving from China to developed countries and regions such as the U.S., Europe, Japan, and Southeast Asia, as well as underdeveloped countries in Africa. This industrial transfer differs from previous ones as it presents two-way changes, with labor-intensive industries shifting to China's central and western regions, Southeast Asia, and Africa; while some high-tech enterprises and high-end segments of the industrial chain are returning to developed regions like the U.S. and Europe, leading to a potential further extension of the shipping industry's prosperous period. Demand: The global industrial transfer is stimulating the rise of intermediate goods trade, reshaping route structures, and lengthening transport distances. According to customs statistics, China's share of the global intermediate goods market has grown from 8.8% in 2013 to 12% in 2023. In 2023, China's imports and exports of intermediate goods reached 25.53 trillion yuan, accounting for 61.1% of the total import and export value. China's exports of intermediate goods amounted to 1.124 trillion yuan in 2023, accounting for 47.3% of exports, of which 637 billion yuan were machinery and electronics intermediate goods. While most people believe that de-globalization has had a very negative impact on the total volume of global trade, the global trade structure has also changed. Due to the impact of U.S. tariffs, many of China's industries have begun to shift to Southeast Asian countries, mostly intermediate goods. These intermediate goods did not need to be transported by sea, but due to changes in tariff policies, they had to switch from domestic transport to maritime transport, which made a significant contribution to trade volume. The disruption in the supply chain of intermediate goods has made the global supply chain network more chaotic, shifting from an efficiency- and cost-based supply chain to a self-controlled supply chain. Global shipping routes are also being reshaped during this disruption. Supply: Effective supply is significantly lower than the nominal supply growth rate, with a supply-demand gap of 8%. Although global liner fleet nominal capacity increased by 10.5% in 2024, the Red Sea crisis resulted in ships diverting routes, losing more than 12% of capacity. In addition, port congestion has added about 3% more capacity compared to before the Red Sea crisis. With global trade volume increasing by about 3%, the actual supply-demand gap exceeds 8%, which is also the reason why freight rates show such high elasticity in the background of low demand. Looking ahead to 2025, trade wars continue to be one of the core disrupting factors for the industry. Although nominal capacity is expected to increase by about 6% next year, with the ongoing supply-demand gap and the volatility in freight rates caused by tariffs, the average actual freight rates are expected to be better than the level in 2023, leaving room for profitability in the shipping industry. Significant changes in valuation: Industry volatility asymmetry, operational strategic transformation, and strong cash value per share The volatility of the shipping industry's value is very apparent, but this volatility has shown strong asymmetry in recent years. The volatility in profits is much greater than the market's expected volatility in losses. Risks: 1) Global macroeconomic recovery falls short of expectations, geopolitical conflicts escalate, supply chain challenges worsen, and inflation pressures continue to rise, among other factors. Uncertainties still exist in the global economic recovery, and if the macroeconomic recovery falls seriously short of expectations, global logistic transportation demand may sharply decline. 2) International route opening falls short of expectations; 3) Intensifying price wars in the express delivery industry; 4) Logistics resource cost increases exceed expectations; 5) High-speed rail construction falls short of expectations.