3Q18 results in line with expectation
3Q18 revenue rose 47% YoY to Rmb3,176mn thanks to purchases ofCNPC’s oil tanker fleet. Net profit attributable to shareholders fell113% YoY to -Rmb53mn or -Rmb0.01/sh. Excluding one-offs, 3Q18losses came in at -Rmb53mn, vs. -Rmb85mn in 1Q18 and -Rmb186mnin 2Q18. Losses decreased in 3Q18 thanks to a QoQ rise in freightrates. In 1–3Q18, net profit rose 121% YoY to -Rmb268mn, withEBITDA down 29% YoY to Rmb2.499bn.
Trends to watch
Supply and demand conditions for oil tankers to improve in 2019–20, boding well for the firm’s earnings. The order book to oil tankerfleet ratio is 12%, at a trough level. We expect slow vessel delivery,low-sulphur fuel limits and an aging fleet to slow the effective tankercapacity growth. Freight rates in 4Q peak season beat expectations.
Domestic oil tanker business and LNG business to bolster earnings.
Domestic oil tanker business generates about Rmb600mn net profitp.a. thanks to the strict oil tanker regulations and the firm’s largemarket share （near 60%）。 We expect the LNG segment to contributeabout Rmb600mn profit after 2020. See page 3 for details.
Earnings forecast
We cut our 2018 earnings forecasts by 54% from Rmb266mn toRmb121mn, as the low freight rates in September may be reflected in4Q18 earnings, and the firm’s financial expenses are higher thanexpected （capitalized interest should be treated as expenses aftervessel delivery）。 We maintain 2019e earnings of Rmb1,027mn.
Valuation and recommendation
A- and H-shares are trading at 20.5x and 14.1x 2019e P/E, and 0.7xand 0.5x P/B. We assume the VLCC freight rate at the breakeven pointof US$25,000/day for 2019. We maintain our BUY ratings, and TPs ofRmb6.94 and HK$6.36. Our TPs imply 1.0x and 0.8x 2019e P/B andoffer 33% and 45% upside.
Risks
Disappointing freight rates or vessel dismantling;higher-than-expected delivery, new vessle orders or oil price hikes