Star Bulk Carriers Stock: China Is A Game Changer (NASDAQ:SBLK)

Star Bulk Carriers’ (NASDAQ:SBLK) stock has outperformed the S&P 500 markedly (SPY) since our previous update in November, as we gleaned its constructive consolidation.

However, dry bulk freight rates have continued to fall through January 2023, worrying investors that the malaise could worsen further. Moreover, the Fed could keep its rates higher for longer, threatening to push the US economy into a deeper-than-expected slowdown/recession.

The World Bank also didn’t help matters, as it downgraded its economic outlook, prognosticating worse headwinds for the global economy. As such, investors should expect weak results from Star Bulk Carriers in its upcoming Q4 release as it navigates a highly challenging normalization phase.

Strangely, investors must be wondering why SBLK has outperformed the SPX, despite the continued weakening in the market.

Investors are encouraged to remind themselves that the market is forward-looking. Just like how SBLK staged its 2022 highs in May/June before the massive collapse. We believe market operators are likely building up their positions through the consolidation zone in anticipation of a better H2’23. Why?

We discussed previously that investors should not understate the growth/recovery underpinning as China could reopen from its COVID lockdowns.

Since then, China has already reopened from its harsh COVID restrictions, with its COVID wave likely already peaking/peaked in major cities. Coupled with the government’s focus on driving growth in the Chinese economy in 2023, it should benefit trade flows in H2’23 after China recovers from the resurgence in COVID infections post-reopening.

China’s property market is also expected to receive significant support from policymakers, driving the iron ore trade once more. Accordingly, iron ore 62% Fe futures (TIOC:COM) have already recovered remarkably from their October/November lows, up nearly 55%.

China’s coal trade with Australia is also prognosticated to resume, even though the IEA highlighted that China “has enough options globally to meet its requirements.” Notwithstanding, geopolitical considerations should propel China to consider all options to bolster its energy security. Moreover, the Chinese Ambassador to Australia also provided positive commentary recently, suggesting that a resumption in the coal trade is looking increasingly likely.

As such, the prognosis of a recovery in the dry bulk market from China’s positive outlook should help Star Bulk and its peers anticipate a solid H2 recovery.

Xclusiv Shipbrokers also corroborates our thesis as it articulated:

China’s reopening to the world, cancelling the strict zero Covid policies has created an enthusiasm to the market but the massive Covid outbreak in China that followed created further concerns. But as the majority of analysts insist, China’s reopening will be a good omen for the shipping market in the long run. Especially for the dry bulk market, China’s come back may drive the traditional supply/demand levels to post-pandemic ones. Analysts noted that demand will play a major role in spot freight rates and China coming back as a protagonist and the dominant force of bulk imports may be the catalyst for a significant demand increase. – Hellenic Shipping News

With SBLK’s NTM dividend yields (16.5%) still perched well above its long-term average of 10.6%, the market has gotten it right for not re-rating SBLK. However, the market needs to reflect the potential for lower dividends in 2023 as Star Bulk undergoes a much-needed normalization phase in line with worsening macro headwinds.

Notwithstanding, we gleaned that SBLK’s constructive consolidation augurs well for a recovery of its medium-term uptrend, in line with our expectation of a more robust recovery of China’s GDP in H2’23.

Therefore, investors should consider adding in phases, with a price target of $24.

Rating: Buy (Reiterated)