ZHONGGU LOGISTICS(603565)：RESULTS IN LINE WITH EXPECTATIONS; DIVIDEND ATTRACTIVE-格隆汇

机构：中金公司
研究员：Gangxian LIU/Qibin FENG/Xin YANG

　　2Q24 results in line with our expectations
　　Zhonggu Logistics announced its 1H24 results: Revenue fell 6.6% YoY to Rmb5,739mn; attributable net profit was Rmb757mn, implying EPS of Rmb0.36 (-14.9% YoY). In 2Q24, revenue was Rmb2.95bn (-4.9% YoY and +6.0% QoQ), and attributable net profit stood at Rmb368mn (+31.8% YoY and -5.3% QoQ).
　　Excluding impact from asset disposal and delayed government subsidies, recurring attributable net profit in 2Q24 dropped 23.0% YoY and 50.7% QoQ. The company's earnings are in line with our expectations, and the earnings decline was mainly due to YoY and QoQ declines in freight rates.
　　Gross margin fell QoQ in 2Q24 due to falling freight rates; revenue from the land transportation business maintained stable growth in 1H24. In 2Q24, the traditional slack season, the average PDCI freight rate fell 14.4% YoY and 8.2% QoQ, and gross margin shrank 7.6ppt QoQ to 9.0% in 2Q24. In 1H24, revenue from the water transport business fell 9.61% YoY to Rmb4,548mn, and revenue from the land transport business rose 7.32% YoY to Rmb1,191mn.
　　Trends to watch
　　Upbeat on earnings growth in 2H24 driven by the nearing peak season for domestic container shipping and YoY improvement in foreign-trade vessel rents. Since the beginning of 3Q24, freight rates have risen from previous lows. In addition, domestic shipping capacity has gradually flowed out amid high freight rates for foreign trade. We expect domestic shipping capacity to decline further in 4Q24. We are upbeat on freight rates in the peak season, and expect domestic trading business earnings to improve HoH in 2H24.
　　In addition, as the firm's shipping capacity flows out to the foreign trade market, where freight rates have significantly improved YoY, we expect earnings of the foreign trade business to increase in 2H24, and full-year earnings to rise slightly YoY.
　　Limited increase in shipping capacity; shift from bulk shipping to container shipping to boost long-term demand. The domestic container shipping market has hardly seen any new shipping capacity YTD, and we think shipping capacity previously flowed to foreign trade is unlikely to return to domestic trade amid improving freight rates for foreign　trade. On the demand side, we expect the shift from bulk shipping to container shipping to boost demand in the long term.
　　According to the Port Statistical Yearbook, the containerization rate of cargo throughput at China's ports in 2021 (about 20.5% vs. over 50% in 2021) was still much lower than that in developed countries (more than 50% in 2021), and the proportion of containerized coal transport was even lower at a low single-digit rate. We believe containerized transport, as a standardized and intensive mode of transport, will continue to gain market share.
　　Financials and valuation
　　We keep our earnings forecasts unchanged. The stock is trading at 10.1x 2024e and 9.3x 2025e P/E. We maintain our OUTPERFORM rating and target price of Rmb11.5, implying 13.9x 2024e and 12.8x 2025e P/E, offering 38.2% upside.
　　The firm has ample cash on hand. As of2 June 30, it had cash of approximately Rmb10.87bn (including wealth management products and structured deposits), with net cash of nearly Rmb3.4bn. Assuming a 70% dividend ratio for 2024, the current stock price translates to dividend yield of 7.0% and 7.5%. If dividend payout ratio remains the same as in 2023 at 88%, the implied 2024e divided yield would be 8.8%.
　　Risks
　　Foreign trade transport capacity returns; domestic economic growth slows.