Morningstar | CSET Issues Negative Profit Warning on Weak Freight Rates and Rising Costs; FVE Cut to HKD 3.58
No-moat Cosco Shipping Energy Transportation, or CSET, guided that the firm will record a net loss of CNY 235 million-CNY 305 million for first-half 2018, versus net profit of CNY 865 million a year ago. Although our earnings forecasts are below consensus estimates, the guidance remains disappointing and we are cutting our 2018-19 earnings forecast by 11%-19% to factor in the falling freight rates and rising costs. With the addition of the depreciation of the Chinese yuan, we reduce our fair value estimate to HKD 3.58 per share from HKD 4.00. We will issue an update pending more detailed information from the firm’s final results in late August. We still see risks of more downward revisions for consensus estimates.CSET attributed the net loss to a few factors. First, the decline in crude oil inventory and slower crude oil imports from China have led to weak demand for the international crude oil shipping market. Meanwhile, despite the demolition of aged vessels, freight rates continued to stay at a low level, as the market remains oversupplied. As such, the daily revenue of major international crude oil shipping vessels fell to a historic low and the average daily revenue of the very large crude carrier decreased by about 78% year on year. On the other hand, operating costs were rising due to higher fuel oil prices, but CSET was unable to pass this on to customers. As a result, the firm’s net loss has widened to CNY 150 million-CNY 220 million in the second-quarter, from a net loss of CNY 85 million in the first quarter. We think freight rates will improve only gradually, as it will take time for the market to digest the substantial new supply added over the past few years.
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