EUR 850.00 For Business Accounts Only

Morningstar | CSET’s 2018 Results Missed; Positive Outlook Ahead, Raising FVE to HKD 4.20. See Updated Analyst Note from 28 Mar 2019

No-moat Cosco Shipping Energy Transportation’s, or CSET’s, 2018 net profit of CNY 75 million was below our expectations. The significant fall in earnings from CNY 1.77 billion a year ago was largely due to weakening freight rates, increasing fuel costs and lower government subsidies. Despite that, CSET’s share price has risen close to 30% since September 2018 because of the recovery in freight rates in the fourth quarter of 2018. While we think the improvement in freight rates is partly because of seasonal strength, we believe it also reflects the market expectation of a better supply and demand condition in the long term. Although freight rates started to decline in early 2019, they are still stronger than rates in 2017 and 2018 over the same period. We therefore raise our fair value estimate to HKD 4.20, from HKD 3.42, after factoring in improving tanker market conditions with rising freight rates (a CAGR of 8% from 2018-23).

CSET’s 2018 revenue was up 27% year over year following a 34% increase in transportation volume, because of rising capacity. However, the oversupplied tanker market has caused the average daily income of vessels on major shipping routes to decrease by 40%-50%. Coupled with a 31% rise in fuel price, the firm’s gross margin dropped sharply to 15% from 24% a year ago.

On a positive note, we are seeing improvements in the supply and demand conditions in the tanker market. New tanker deliveries are expected to reach a peak in the first half of 2019 and should slow down thereafter. Meanwhile, the increasing demolition of tankers aged more than 15 years, more stringent environmental practices and higher prices of newly built vessels will constrain new supply growth in future. Together with healthy demand for international crude oil shipping, we expect freight rates to recover starting in the second half of 2019 onwards and this should lead to a sustainable recovery in earnings in the longer term.

In addition, we also expect fuel costs to be more manageable, given we do not expect a significant rise in oil price.

We anticipate earnings for CSET to be more stable in future, given the increasing contribution from LNG shipping business, which is usually based on long-term leases. Earnings from this segment grew 73% year over year due to expansion in capacity. The firm currently operates a total of 26 LNG vessels and another 12 vessels will be delivered by the end of 2020. Further, earnings for the firm’s domestic oil shipping business are also more resilient, underpinned by CSET’s dominant market share of over 55%.