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Cheap Shippers No Bargain in Japan on Capacity: Chart

Japan’s shipping lines, the cheapest shares among the Topix Index’s 33 industry groups, aren’t yet a good buy because overcapacity concurrent with a slowdown in the Chinese economy will damp earnings, according to Daiwa SB Investments Ltd. and Diam Co.

The CHART OF THE DAY compares the price-to-book ratios of the 1,672-member Topix Index, the broadest measure of Japanese shares, and Topix Marine Transportation Index. The lower panel shows that the number of bulk and container vessels worldwide expanded by about 33 percent since 2007 while the Baltic Dry Index, a gauge of bulk-shipping rates, has dropped to near a four-year low, according to data compiled by Bloomberg.

The nine-company shipping measure, which includes Nippon Yusen K.K. and Mitsui O.S.K. Lines Ltd., closed at 185.32 yesterday, down more than 90 percent since Oct. 15, 2007, when near-record transport rates prompted a surge of new-vessel orders. That’s more than double the decline of an equivalent gauge in South Korea. With most of those ships having entered service, fees and earnings will stay low, said Daiwa SB Investments’ Masayuki Kubota.

“I don’t deny the possibility of a technical rebound, but because of the global vessel oversupply, I don’t think investors should aggressively buy Japanese shipping shares,” said Kubota, who manages about $1.8 billion. “Even if China’s economy gets better, the shipping lines will be the last to benefit.”

Slowing economic expansion in China and the U.S. as well as a deepening debt crisis in Europe have reduced cargo demand. The Baltic Dry Index has plunged by half this year as China’s economic growth fell to a three-year low, prompting fewer iron-ore and coal shipments.

“Stay away from shipping shares for a while as there’s a risk companies will cut their earnings projections,” said Kuninobu Takeuchi, Tokyo-based executive portfolio manager at Diam Co., which manages about 10 trillion yen ($128 billion). “China’s economy is basically bearish and shipping shares are closely related to indexes affected by that country. Shipping companies may perform well in three to four years, but for the next six months, it’s a different story.”

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