1Q earnings ahead of consensus forecast
Net profit came at RMB563m (+378% YoY). On a restated basis (i.e. 1Q16includes Cosco Dalian and its disposed dry bulk), net profit was up 3.7% YoY.Excluding RMB300m loss of dry bulk included in 1Q16, comparable earningsfor on-going operations (i.e. tankers + LNG) fell 34% YoY.
Considering that average VLCC rates in 1Q17 nearly halved vs. 1Q16, we thinkthe results are commendable. Its locked-in contracts have helped to cushionsharp drop in spot rates. The results seem also beating the Street’s estimate as1Q net profit has made up 48% of consensus full-year forecast.
Tanker cycle poised to pick up; share buyback ready to go; Buy
Although 2Q is generally the slow season for tanker, we expect CSET toremain profitable on locked-in contracts. Along with stronger 2H (4Q is thepeak season for tanker), its 2017 net profit is well positioned to meet DBe(RMB1.5bn), but beat consensus forecasts (RMB1.1bn). In the longer-run, weforesee a strong tanker upcycle, to be driven by the ballast water convention.This convention, which will be implemented in September this year, will forceship owners to scrap old fleets. Currently, nearly 20% VLCC fleets globally areabove age 15 years and we expect this portion of capacity to largely exitcoming 2-3 years.
On the corporate level, the parent group has given the green light of increasingstakes on the listco. Currently, its parent (i.e. Cosco Group) holds 38.56% stakein CSET and it intends to increase to 45% via buying back its H shares.At 0.5x P/B, we think the stock is substantially undervalued in light of5.4%/6.4% ROE for 2017/18E. Our target price of HKD6.6 is based on 0.8x P/B.Key macro risk is weaker-than-expected China growth and key companyspecificrisk is lower-than-expected VLCC rate.