EUR 850.00 For Business Accounts Only

Morningstar | CSET’s First-Half Results Hit by Lower Freight Rates; Cutting FVE to HKD 3.42

No-moat-rated Cosco Shipping Energy Transportation’s, or CSET’s, first-half 2018 net loss of CNY 237 million was in line with the negative profit warning announced in July. Nonetheless, given that current tanker rates remain weak with no visible signs of improvement, we reduce our 2018-19 earnings forecasts by 22%-43%. As a result, our fair value estimate is cut to HKD 3.42 from HKD 3.58. We think upside for CSET’s share price is limited in the near term, as tanker rates are likely to remain pressured in the near term.

The poor results were mainly attributed to a few factors. First, weak demand for the international crude oil shipping market has led to a more than 60% drop in tanker rates (time charter equivalent, or TCE) for major crude oil transportation routes. On the other hand, operating costs are rising due to higher fuel oil prices, which increased by about 28% year over year.

On a positive note, the demolition of aged vessels soared to a record high in first half of the year, and OPEC has decided to increase crude oil production from July 2018 by about 1 million barrels per day. This should help to stimulate shipping demand and rebalance the market.

We think tanker 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. However, we are glad that CSET’s overall TCE level for its very large crude carrier, or VLCC, fleet was higher than the market due to route optimization. We think the firm’s earnings will be supported by its domestic business, which remains profitable due to CSET’s 56% market share in the domestic crude oil shipping sector. In the longer term, we also expect the firm’s earnings to be less volatile on the back of increasing contribution from the stable LNG shipping business. We note that the LNG sector reported 54% year-on-year growth in pretax profit to CNY 206 million in first-half 2018.

With another 16 LNG vessels scheduled to be delivered by year-end 2020, CSET should continue to see robust earnings growth from this segment.