Let’s start with headline net profit
The company gave a range of RMB1.8-2.1bn for 2016. 9M net profit alreadyreached RMB2.2bn. Consensus forecasts RMB2.3bn and DBe is RMB2.7bn.However, adding back provisions for long-term charter contracts (i.e.RMB230m) and scrapping loss for one VLCC (i.e. RMB340m; note acorresponding scrapping subsidy of RMB350-400m will be booked in 2017), itscore earnings are likely to hit RMB2.6-2.7bn (we expect its headline earningsto be close to the high-end of the range eventually). This implies its coreoperations generated RMB400-500m net profit in 4Q on pick-up in VLCC ratesand stable contribution from domestic crude oil and LNG business.
Multiple catalysts approaching
1) We expect CSD to raise its dividend payout ratio to 50% for 2016 (vs. avg32% historically). This should offer investors 6.4% yield. 2) We expect both itsparent and listco to buy H shares potentially post annual results, withmagnitude possibly surprising the market on the upside. 3) We expect itsmanagement incentive plan to roll out possibly in 1H, with KPI not only linkingto earnings but also to share price performance. This exactly explains why thecompany made aggressive provisions for 2016 and intends to raise dividendpayout and conduct share buybacks.
Tanker cycle may surprise on the upside
True, newbuild deliveries remain large and fleets tied up floating storage is alsoan overhang. However, we strongly believe that market has not paid enoughattention to the ballast water regulation, which will enter into force inSeptember this year. Nearly 20% VLCCs globally is above age 15 years and weexpect this portion of fleets to be scrapped in coming 3-5 years. While tankerrates this year might drop YoY, CSD will stay in profit, thanks to its long-termcontracts. Along with tapering off of newbuild supplies and rising scrapping onballast water regulation, we expect tanker cycle to resume upward trendstaring 2018.
Valuations and risks
We use P/B to value CSD as its earnings and cashflow are volatile. Our targetprice of HKD6.6 is based on 0.8xP/B. We think this is fair as we expect thecompany to make RMB1.5bn net profit, or 5.4% ROE in 2017. Key macro riskis weaker-than-expected China growth and key company risk is lower-thanexpectedVLCC rate.