It’s unprecedented. After a record year in terms of profitability and share price performance (20-228% in 2020), we argue that 2021 could be even better for the sector’s profitability. We analyse the prevailing trends for restocking, congestion, and contract rates, alongside risks from bunker fuel, rising charter rates in the near term,and new building orders in the long term.

Plain sailing at least until mid-2021. Everything that possibly could go right has gone phenomenally well for the sector over the past year or so. Freight rates – both SCFI spot and CCFI – are at all-time highs as we enter 2021. This is being driven by demand from e-commerce, restocking, and congestion along the entire supply chain. Given the recent rise in COVID-19 cases in many parts of the world, we expect this trend to continue at least until mid-2021. All drivers point to a strong start to 2021 as we expect the record spot rates to set the scene for strong contract rates in the transpacific (from USD1,400-1,500/FEU in 2020 to over USD2,500/FEU in 2021e) and Asia-Europe routes (from USD1,100-1,200/TEU in 2020 to nearly USD2,000/TEU in 2021e). We believe 2021 will be a year of two halves, with container demand growing by double-digits in 1H and stabilising in 2H.

2021e profits to exceed all-time highs in 2020; raise our 2020-21e forecasts yet again. We once again lift our estimate for average freight rates (CCFI) in 2021e, to 5% from 2%, after a 19% increase in 2020. As a result, we raise our 2020-22e EBITDA forecasts for the companies we cover by 2-26%. This leads to 3-63% higher net profit forecasts given the high operating and financial leverage. We are 12-16% above consensus on EBITDA in 4Q20e (4% below for Evergreen) and 1-21% ahead in 2021e. Evergreen’s ad hoc November profit announcement points to a much stronger 4Q20e, even better than the record 3Q20. All-time high charter rates mean that freight rates are unlikely to collapse in the near term and shipping lines with higher ownership (SITC) should gain the most.

Buy ratings on all except COSCO Shipping-A (Hold) as further rerating is likely.Our revised target prices are based primarily on a price-to-book approach, taking into account the potential returns on equity (ROE). In terms of potential warning signals, we will keep a close eye on capacity discipline in the seasonally weak period following the Lunar New Year holidays, as well as the trajectory of consensus earnings momentum.Catalysts include better-than-expected dividends, share buybacks, consensus earnings upgrade, and news flow around annual contracts negotiations.