Even worse than our estimates.

　　Our 4Q FY3/16 recurring profit (RP) estimates were below both consensusforecasts and company guidance. However, with the exception of MOL, theactual numbers for NYK and K-Line came in even worse than our estimates,largely driven by the record-low container and dry bulk rates in 4Q. While yoydecline in RP (28-93%) looks substantial, the worst has yet to come, in ourview. NYK and MOL both guided another 42% and 45% yoy drop in RP inFY3/17. We also anticipate downgrades in earnings by the Street, which couldtrigger further de-rating of the stocks ahead, in our view; Sell MOL and K-Line.

　　Container and dry bulk drove 4Q downside.

　　NYK - RP fell 28% yoy to JPY60bn. 4Q RP of JPY4bn was much lower than itsguidance of JPY10bn and DBe of JPY7bn. While container loss in factnarrowed in 4Q (JPY-1.1bn vs. JPY-6.9bn in 3Q), PR for the bulk segmentplunged 59% qoq to JPY5.6bn largely on record-low dry bulk rates. MOL - RPof JPY36bn (-29% yoy) implied a recurring loss of JPY2.5bn in 4Q, which wasslightly better than DBe (JPY6bn recurring loss) and company guidance(JPY7bn recurring loss). While earnings deteriorated qoq across all the majorsegments, it was less severe than we had anticipated. We think stronger-thanexpectedtanker rates probably contributed to this better-than-expected 4Q. KLine- RP was JPY3.3bn (vs. JPY48.9bn last year). 4Q recurring loss wasJPY8.4bn, or 2x 3Q’s. Container losses fell slightly in 4Q (JPY-5.8bn vs. JPY-7.4bn), but the bulk segment turned to recurring loss of JPY1.6bn (from RP ofJPY7.5bn in 3Q) as dry bulk rates hit an all-time low during the period. Half ofits Panamax and Handy vessels operated on the spot market.

　　FY3/17 is likely to be even worse.

　　Both NYK and MOL guided for lower earnings in FY3/17 (NYK: JPY35bn, -42%yoy; MOL: JPY20bn, -45% yoy). We were not surprised as the numbers were inline with our expectations although substantially lower than consensusforecasts (NKY: JPY61bn; MOL: JPY43bn). However, we are struggling with KLine’sguidance. For FY3/17, it expects RP to rise 349% yoy to JPY15bn. Thecompany made recurring losses across all segments in 4Q. More importantly,the outlook for container shipping remains highly challenging and K-Line hasgreater exposure to this space than its JP peers (50% of its revenue vs. 20%).

　　While further cost reduction is possible (JPY17bn expected by K-Line forFY3/17), container rates are likely to disappoint. K-Line assumes a 23% yoyrebound in Asia-Europe rates and flattish transpacific rates in FY3/17. We seesubstantial downside risk to both assumptions. Even in late April, Asia-Europerates remained below USD300/TEU and YTD average of USD385/TEU was 53%lower than last year. As Transpacific spot rates also remained depressed atUSD700/FEU, we expect contract rates to be renewed at lower levels in May.

　　More than half of K-Line’s transpacific cargoes are under annual contracts.

　　Valuation and risk.

　　At 0.48x P/B, we think NYK is fairly valued considering its robust operations.

　　We maintain Sell on MOL and K-Line. At 0.51x and 0.52x PB, stocks have notfully incorporated in the earnings downside ahead. NYK’s macro risk: stronger-/weaker-than-expected trade. Specific risk: stronger-/weaker-than-expectedYen. Key macro risk for MOL and K-Line: stronger-than-expected globalgrowth. Key company risk for MOL and K-Line: weaker-than-expected Yen.