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Morningstar | CSET’s Preliminary 2018 Results Trail Expectations on Weak Freight Rates, Shares Overvalued

No-moat Cosco Shipping Energy Transportation, or CSET, guided that 2018 net profit will decline by 92%-97% year over year to CNY 50 million to CNY 150 million. The results were below our earnings forecast of CNY 327 million. That said, we think the results were still commendable given that it has reversed from first nine-month’s net loss of CNY 268 million, implying a fourth-quarter 2018 net profit of CNY 318 million to CNY 418 million. We have already factored in stronger fourth quarter results due to the recovery in tanker freight rates, although the magnitude is below our expectations. We keep our fair value estimate of HKD 3.42 per share and we will provide an update pending the announcement of CSET’s final full-year results in late March. We think the firm is still overvalued as we do not expect a sharp increase in freight rates going forward due to supply of new capacity.

Management attributed the weak full-year results to higher fuel costs and falling freight rates in the first three quarters of 2018 on the back of lower crude oil trade and transportation demands. Although the firm has benefited from a recovery in freight rates in the seasonally strong fourth quarter, we are seeing some correction in freight rates lately. Nonetheless, we believe the rates are still above breakeven levels and CSET should be profitable in 2019 given the improved supply and demand condition in the international crude oil transportation market.