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Morningstar | CSET’s Strong 1Q Results Underpinned by Higher Freight Rates; FVE Unchanged at HKD 4.20

Despite a strong start for no-moat Cosco Shipping Energy Transportation’s, or CSET’s, first-quarter 2019 results, we think the firm is fairly valued and we keep our fair value estimate of HKD 4.20. First-quarter 2019 net profit of CNY 428.1 million under PRC GAAP was a sharp turnaround from a net loss of CNY 86.5 million a year ago. The results beat our expectation largely on the back of higher freight rates, accounting for 40% of our full-year estimate, but we maintain our earnings forecasts given that tanker rates are weakening while rising oil prices should pressure margins.

CSET’s revenue was 60% higher year over year, underpinned by a 7.3% growth in turnover to 136 billion tonne-nautical miles and increase in shipping rates. According to management, the average daily earnings of tankers on major shipping routes surged by 50%-243% year over year in the first quarter. As a result, gross margin for the firm improved to 24% from 9%, a year ago.

Nevertheless, we think the strength in freight rates may not be sustainable, as witnessed in the recent fall. In addition, a large number of tanker orders are expected to be delivered in 2019, exerting further pressures on shipping rates. We also expect stronger oil prices in subsequent quarters to raise bunker costs. On a positive note, 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. Pretax earnings from this segment grew 90% year over year to CNY 138 million due to expansion in capacity.