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Will Taiwan's Evergreen Keep Flying High?


These are heady times for Taiwan's Evergreen Group. The company's two airlines have just gotten permission to operate nonstop charter flights to mainland China for the Lunar New Year. Its ocean-shipping business, Evergreen Marine Corp., is booming because of China's export machine. The company is taking a 50% stake in the Chinese port of Ningbo. And relations with Beijing, strained because of Chinese suspicions that Evergreen's chairman was too close to Taiwanese President Chen Shui-bian, are warming. "There was a big misunderstanding," says Chang Kuo-cheng, the group's vice-chairman. "Now it is back to business."

There's no misunderstanding Evergreen's profits. With ocean freight rates up by as much as 60% since 2002, Evergreen Marine is expected to report earnings of $334 million for 2004 -- triple what it made in 2003 -- on sales of $3.8 billion, according to a survey of analysts by market researcher I/B/E/S (TOC).

"PRETTY BIG MESS"

So why is Evergreen Marine's stock price off by 30% since last spring? For one thing, the outlook isn't so bright. Analysts expect its earnings to grow just 7% this year. And next year, Evergreen and the rest of the industry are expected to go into a downturn as shippers add too many new vessels. Shipping capacity is likely to grow by some 14%, while demand will bump up by just 8%, according to brokerage Credit Suisse First Boston (CSR).

Another concern is the company's leadership. Chang ran EVA Airways, one of Evergreen's two carriers, for three years before his father -- Evergreen founder Chang Yung-fa -- promoted him last June to Evergreen Marine. But Chang Kuo-cheng takes pains to deny that his 78-year-old father (whom he refers to as "the chairman") is stepping aside. "I am assisting the chairman to manage the group," he says. That's just the problem, say some investors who would like to see radical change at Evergreen. One issue is that the company's complicated ownership structure -- with British, Italian, and Panamanian affiliates -- lacks transparency. "They've created a pretty big mess," says Charles de Trenck, an analyst for Citigroup (C) in Hong Kong, who wants Evergreen Marine to consolidate its various units.

Others are worried about EVA and its sister carrier, Uniair. The two are among the airlines that will be allowed to operate nonstop charters to the mainland in the next three weeks -- the first such flights since 1949. Normally, Taiwanese traveling to China must stop in Hong Kong or Macao and switch carriers, adding many hours and dollars to the journey. But even the New Year flights will have to pass through Hong Kong airspace, and Chang doesn't believe the brief détente will lead to more frequent flights anytime soon. "Of course we hope for a breakthrough," he says. "But [this] is not a breakthrough. It's an isolated case."

That's too bad, because EVA could use a boost. The airline faces big competition from upstart discount carriers as well as more established rivals such as Cathay Pacific Airways Ltd. That's especially true for EVA's lucrative air cargo business, which gets 37% of its revenues from carrying Chinese goods abroad. "If there is no breakthrough in direct links, the [air cargo business] will come under more pressure," says Teddy Tsai, a Merrill Lynch & Co. (MER) analyst in Taipei.

Chang says he isn't worried. Evergreen Marine is adding just enough capacity to remain competitive, he says. It may invest in other Chinese ports, warehouses, and land transport as well. "We are still small scale" in China, says Chang. "We need much more." And he says that if Taiwan and China finally agree to allow both direct ocean routes and direct flights, the company will really take off. Direct shipping could reduce costs by as much as 50%, and direct air routes by two-thirds, says Chang. If that happens, Evergreen Marine will celebrate future New Years with gusto.

By Bruce Einhorn and Matt Kovac in Taipei


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