 We revisit the sector’s fundamentals following a recent share price rally amidst a rebound in demand and freight rates  Peak season looking stronger than usual; capacity discipline continues; we forecast highest profits since 2010 in 2020e  Raise target prices by 0-33%; reiterate Buy ratings on Maersk, COSCO Shipping-H, Evergreen and SITC; upgrade Hapag-Lloyd to Hold (from Reduce) 

We revisit the sector’s fundamentals following the recent rally in share prices as demand recovery and fright rates surprised to the upside. After an average 29% gain in the container shipping stocks under our coverage from recent lows in late June (vs 8% for FTSE Global ex-US), we believe the rally still has legs and expect investors to start viewing this cycle as different from those in the past. Stronger than usual peak season with visibility beyond that emerging: What started as pent-up demand (post lockdown) in late 2Q20 is now driven by strong stay-at-home consumption stimulated by government subsidies, and reallocation of spending on travel to purchase of goods. Further, there are signs of restocking by retailers and importers against possible disruption amidst strong demand. Maersk has guided 3Q20 container volume growth of -4 to -6% vs -10% in 2Q20, while SITC expects double-digit volume growth y-o-y in 2H20, vs -2% in 1H20. Some of the NVOCCs have indicated the current peak season could spill-over to October courtesy of strong e-commerce demand. At the same time, despite a strong peak season and elevated freight rates, shipping lines have already announced blanked sailings for the Golden week period. This suggests the industry is finally turning the corner and indeed “moving out from its lost decade.” Raise global container trade, freight rates and liners profit forecasts: We now forecast a 4.1% fall in container demand in 2020 (from -6.7% previously) and an average 2% rise in the China Containerised Freight Index (from +1%). This leads to increases of 0-10% in sector (covered companies) EBITDA and 0-33% in recurring profit estimates in 2020e. Our 2020 EBITDA forecasts are 4-21% ahead of consensus.  Maintain Buy ratings; upgrade Hapag-Lloyd to Hold: We remain bullish on the sector, raising TPs 0-33% and reiterating Buy ratings on Maersk, COSCO Shipping-H, Evergreen and SITC, while we upgrade Hapag-Lloyd to Hold (from Reduce). A 1% change in average freight rates would lift covered companies EBITDA by 3-9% in 2020e. Lack of supply discipline going into 4Q20 is a key risk to sector profitability.