Our top pick in the shipping space
　　Three reasons: 1） The downside risk for CSET-H looks to be minimal. YTD, thestock has largely been flattish （vs. an average +44% for the sector and +28.7%for HSCEI） and the current 0.5x P/B is largely the historical low despite continuedprofitability. 2） Upside potential appears to be considerable. The tanker cyclehas likely hit the bottom in 3Q and is poised to recover on falling newbuilddeliveries and rising scrapping. With ROE recovering to 6.3%/8.2% in 2018/19E,we expect the stock to substantially re-rate in the next 1-2 years. 3） Now seemsto be a better entry point. Both tanker rates and its earnings have likely troughedin 3Q. With YoY rates and earnings momentum reversing, history suggests thatthe stock should perform strongly. We have a target price of HK$6.60 with 45%upside potential.
　　Minimal downside risk expected
　　CSET's domestic crude oil （c. RMB450m NP in 1H17, long-term contracts; 38-44%GPM in the past three years）， LNG （RMB130m NP in 1H, 20-year+ long-termcontracts, with 16% IRRs）， and its JVs & associates （RMB125m NP in 1H, COAcontracts, with stable margins） combined could bring in c.RMB1.5bn risk-free netprofit p.a. On top of it, we estimate 10 VLCCs and one-third of its total producttankers have been locked in profitable time-charter contracts. During 3Q, despitethe lowest VLCC rates since 2013 （avg US$12k/day vs. breakeven US$30k）， CSETmanaged to remain profitable （core earnings of RMB80m） due to these locked-incontracts. The stock historically troughed at 0.4x P/B in 2013, when CSET posteda RMB2.2bn net loss, or -5.2% ROE. At 0.5x P/B currently, the stock appears tobe discounting a loss-making scenario. Given a rising proportion of contractedrevenue, we believe the chance of this happening looks to be extremely low. Evenassuming historical low VLCC rates for 2018, CSET should remain profitable, perour analysis.
　　Considerable upside potential
　　The tanker cycle has likely already hit the bottom in 3Q, when the VLCC rate fellto US$6k/day, the lowest since 2013. Owing to the depressed market, scrappinghas picked up （8 VLCCs or 2.4m dwt scrapped in 2H so far vs. 0.3m dwt in1H） and this, along with a seasonal uptick in demand and peaking out of newsupplies, has lifted VLCC rates to US$30k lately. Looking into the next 2-3 years,we expect the cycle to continue to improve. Newbuild supplies should continue