Falling Freight Rates: CIMB PM

Yesterday, insolvent dry bulk shipper Korea Line Corp filed for protective receivership in the midst of falling freight rates. Freight rates have seen better days. The Baltic Dry Index has fallen 43% since its last peak on 10 September 2010.
(Please see attached for Baltic Dry Index chart)
Our take on falling freight rates: In conventional wisdom, falling freight rates can only be caused by i) decrease in demand for freight or ii) excessive supply of vessels. The main culprit for existing freight environment can be attributed to the latter, and the resultant competition between ship owners led to the fall in freight rates.
Some will win, some will lose: In our view, falling freight rates could impact CWT, Goodpack and Cosco.
CWT: Around 40% of CWT’s revenues are derived from freight forwarding. A falling freight rate environment will help the company to boost its freight forwarding margins as CWT usually books freights after settling the contracts with its customers. As freight rate falls, CWT will be able to charge clients at rates higher than actual booked rates. This will positively impact CWT’s margins going forward. Outperform; TP S$1.72.
Goodpack: Similar to CWT, Goodpack, another logistics services company is also impacted by freight rates. A falling freight rate environment could also boost the company’s margins going forward. Neutral; TP S$2.20.
Cosco: The dry bulk container vessels operator tumbled 7 Scts or -3.1% to S$2.24 this morning, following reports of Korea Line Corp’s receivership filing. This recent development could put some selling pressure on Cosco in the near term. Outperform; TP S$2.63.