Broker: UOB Kay Hian
Date of Report: Monday, 25 August 2025

Orient Overseas International (OOIL) Faces Choppy Waters Ahead: Weaker Outlook Prompts Downgrade to SELL

Overview and Investment Summary

Orient Overseas International Ltd (OOIL), a leading global container shipping operator and a subsidiary of COSCO SHIPPING Holdings, has reported solid first-half 2025 results but is facing increasing headwinds. UOB Kay Hian has downgraded OOIL to a SELL with a revised target price of HK\$135.00, reflecting mounting industry uncertainties, likely softening freight rates, and regulatory risk in key markets.

Company Snapshot: Key Metrics and Performance

1H25 Results: In Line, But Storm Clouds Gather

OOIL delivered a 1H25 core net profit of US\$910 million, up 4.4% year-on-year and representing 60% of the full-year estimate. Revenue grew 5.0% year-on-year to US\$4.88 billion, driven by a healthy 6.8% lift in container volume, though this was partly offset by a 2.2% decline in average selling price (ASP) per TEU. The company declared an interim dividend of US\$0.72 per share, representing a 50% payout ratio with an ex-dividend date of 4 September 2025 and payment on 15 October 2025.

1H25 revenue supported by strong 1Q25 (+16.8% YoY), but offset by a sharp 2Q25 decline (-6.5% YoY), reflecting volatility from the US-China tariff war.
Gross profit margin (GPM) edged up to 19.9% (+0.2ppt YoY).
Operating and net margins improved to 20.1% and 19.6% respectively.

Balance Sheet Strength and Dividend Policy

OOIL boasts a robust balance sheet with a net cash position of US\$7.0 billion as of end-1H25, representing 56% of its market capitalization. This ample cash reserve comfortably covers its US\$4.4 billion capital commitment for new vessels over the next five years.

Management Outlook: Caution Amid Industry Turbulence

OOIL management flagged several risks that could weigh on performance in the near-to-medium term:

• Policy uncertainty and developments in the Red Sea
• Continued influx of new vessels and expanding industry capacity
• Additional US port charges on Chinese carriers from 17 October 2025, likely to erode competitiveness on US-bound routes
• Potential for further escalation in US-China tensions
• Gradual tightening of environmental regulations

Management highlighted that while global trade is becoming more regionalized—offering selective opportunities—overall risks are skewed to the downside.

Freight Rate Dynamics: Brief Rebound, Now Moderating

– Freight rates rebounded in May-June 2025 due to frontloading ahead of tariff changes but have since moderated. – Industry-wide supply is projected to grow 4.1–6.9% annually in 2025–2027, likely outpacing demand growth, which is expected to remain in the low single digits. – Easing of the Red Sea crisis could further boost effective supply, keeping rates under pressure. – Accelerated scrapping of older vessels may offer partial relief on capacity, but the supply-demand balance will remain loose.

Financial Forecast and Valuation

Earnings are forecast to weaken sharply in 2H25 and into 2026, driven by lower freight rates and rising cost pressures from new regulatory regimes.

Net margin expected to decline from 24.1% (2024) to 7.2% (2027F)
2025F dividend yield forecast at 6.1%, dropping to 2.7% in 2026F
Net cash-to-equity remains robust at -49% through 2027F
Return on equity (ROE) expected to fall from 21.1% in 2024 to 4.3% by 2027F

Valuation and Recommendation: Downside Risks Dominate

UOB Kay Hian’s revised target price of HK\$135.00 for OOIL is based on 0.85x 2025F price-to-book, or one standard deviation below the historical mean. This lower valuation reflects heightened downside risks—especially for 2H25—driven by excess industry capacity, regulatory headwinds, and volatile freight rate conditions.

Key Risks to Watch

• Stabilization of the Red Sea crisis, leading to a rapid increase in effective shipping capacity and steeper rate declines
• Implementation of new US port charges on Chinese vessels, pressuring margins for OOIL
• Potential for further escalation in US-China trade tensions

Conclusion: Take Profit, Reassess When Risks Subside

With mounting downside risks, UOB Kay Hian recommends investors take profit on OOIL at current levels and revisit the stock only when the risk environment improves or valuations become more attractive. The next several quarters are likely to bring fresh challenges, and caution is warranted for those seeking exposure to the container shipping sector.