COSCO SHIPPING ENERGY TRANSPORTATION(600026)：UPTREND IN OIL SHIPPING INDUSTRY TO CONTINUE;WATCH FREIGHT RATE UPSIDE IN PEAK SEASON-格隆汇

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

　　1H24 results in line with our expectations
　　COSCO SHIPPING Energy Transportation announced its 1H24 results: Revenue rose 0.65% YoY to Rmb11.65bn; attributable net profit declined 7.11% to Rmb2.61bn, implying EPS of Rmb0.55. In 2Q24, revenue declined 2.2% YoY and 0.4% QoQ to Rmb5.81bn, and net profit declined 19.8% YoY and rose 10.9% QoQ to Rmb1.37bn, largely in line with the firm’s preannouncement.
　　In 2Q24, the firm's GM improved QoQ but fell YoY, with gross profit and GM rising QoQ for the foreign trade oil shipping business and falling QoQ for the domestic oil shipping business; the LNG business is expanding with stable earnings contribution.
　　Foreign trade oil shipping business: In 2Q24, gross profit reached
　　Rmb1.32bn, down 15.2% YoY and up 8.3% QoQ, and GM fell 6.4ppt YoY and rose 1.5ppt QoQ. We believe the change in gross profit of the foreign trade business was mainly affected by foreign trade freight rates.
　　According to Baltic Exchange, freight rates of VLCC-TD3C over March- May 2024 fell 12.1% YoY and rose 6.7% QoQ.
　　Domestic oil shipping business: Gross profit fell 17.9% YoY and 6.9% QoQ to Rmb342mn in 2Q24, with GM falling 3.0% YoY or 1.8% QoQ, which we attribute to weakening demand for domestic shipping and oil product consumption in 2Q24.
　　Liquefied natural gas (LNG) business: The firm continues to expand its
　　LNG business. In 2Q24, CLNG, a company in which the firm holds a stake, signed contracts for two super-large LNG shipping vessels. Gross profit from the LNG business reached Rmb243mn in 2Q24. In 1H24, the LNG business contributed net profit of Rmb400mn, flat YoY.
　　Trends to watch The industry uptrend will continue; fluctuations in freight rates in the off-season reflect tightening supply and demand; freight rates should see a high upside in peak season in 4Q24. Data from Clarksons
　　shows that the order backlog for oil tankers accounted for 8.9% of shipping capacity as of August, with 7.2% for very large crude carriers (VLCCs). However, VLCCs over 20 years of age accounted for 16% of the total capacity. As new shipping capacity cannot offset future demand for scrapping of old ships, we expect the industry's cyclical strength to　　increase year by year in the next three years amid tight supply of new ships. The 2-3Q is the traditional off-season for the oil shipping market.
　　However, freight rates have fluctuated during the recent off-season, which reflects further tightening of supply and demand. With the upcoming peak season in 4Q24, we see further upside in freight rates. In addition, we suggest watching changes in the output of OPEC+ countries in 4Q24.
　　Financials and valuation
　　As freight rates in the off-season are lower than expected, we cut our 2024 and 2025 net profit forecasts 7.8% and 3.7% to Rmb6.00bn and Rmb7.11bn. A-shares are trading at 11.5x 2024e and 9.7x 2025e P/E, and H-shares are trading at 6.2x 2024e and 5.1x 2025e P/E. Maintain OUTPERFORM. Given the rising sector risk appetite, we maintain our target price of Rmb18.2/sh for A-shares, implying 14.5x 2024e and 12.2x 2025e P/E, offering 26.2% upside, and HK$12.3/sh for H-shares, implying 8.8x 2024e and 7.2x 2025e P/E, offering 41.7% upside.
　　Risks
　　Large-scale shipbuilding by global oil tanker owners; slowing growth of oil product demand; geopolitical changes.