Morgan Stanley: COSCO Shipping Holdings: Improving outlook for US and European routes, but costs and supply-demand conditions weigh on rating

Why could the trans-Pacific route remain resilient in the low season?

Company management expects demand on trans-Pacific routes to remain relatively resilient during the seasonal low in the fourth quarter of 2026: US retail inventories are low, leaving room for restocking.
Demand on US East Coast routes has weakened somewhat, but management does not expect a sharp decline in cargo volumes; congestion at ports and on inland railways continues to constrain effective available capacity.

Asia-Europe spot freight rates began to recover in late October 2026. Management attributes this to seasonal demand and resilient Chinese exports, including automobiles and high-end manufactured goods, and expects rates to continue recovering in the fourth quarter.
Management expects long-term contract rates to rise year on year in 2027, partly because of higher fuel surcharges; floating fuel surcharges enable carriers to pass on higher fuel costs.
Long-term contracts cover approximately 50% of cargo volumes on trans-Pacific and Asia-Europe routes. Some of these contracts allow rates to float, so long-term contract prices and spot prices do not move entirely in sync.

Unit costs rose in the third quarter of 2026, including fuel, inland transportation, container repositioning and charter rates; increased owned and long-term chartered capacity also pushed up vessel costs. Improvements in freight rates therefore need to be assessed alongside changes in costs.
The company is considering a gradual resumption of Suez Canal transits, prioritizing return voyages on European routes and round trips on Mediterranean routes. Further resumption depends on security conditions and whether shorter voyages can improve schedule reliability amid congestion at European ports.
Management believes port congestion is partly due to insufficient infrastructure investment; the company's scale and port network help strengthen its bargaining power over port charges.

Morgan Stanley assigns an Underweight rating to the company's Hong Kong-listed shares, with a target price of 13.20 Hong Kong dollars. The bank believes a recovery in global trade and prolonged supply-chain disruptions could provide upside support, but the current industry supply-demand outlook is unfavorable.
The bank notes that a decline in global trade amid macroeconomic pressures and potential additional US tariffs, a sharp rise in fuel prices, and a breakdown in industry capacity discipline could all pose downside risks.