NOL’s May operating numbers are encouraging, with flat rates and a pick-up in volumes MoM. This is in line with our expectation that more positive news flow will support the sector. That said, we think it is too early to conclude that blended rates have bottomed, given the lower CCFI rate in June, and weaker Transpacific contract rates have yet to be reflected. We think the outcome of July rate hike in Asia/Europe will be a key indicator to whether carriers’ pricing power is returning.

While the sector is still making losses, the sequential rate and demand improvement from very depressed levels are the key positive catalysts to share prices. With aggressive capacity cuts and a potential demand recovery, the new industry balance will allow rates to drift higher towards their break-even levels, in our view.

OOIL is a beneficiary of both shipping and Chinese property market’s recoveries, and remains our top pick. We also like NOL given its strong balance sheet to weather the current downturn post the rights issue. NOL is also leveraged to any US demand recovery given its higher exposure.