Preannounced 2018 earnings down 90–96% YoY
COSCO Shipping Energy preannounced 2018 net profit attributable toshareholders at Rmb80mn–180mn （down 90%–96% YoY）， and netprofit excluding non-recurring items at Rmb20mn–120mn. The firmrecorded Rmb60mn in non-recurring profit and a net loss ofRmb268mn over 1–3Q18. The company stopped making losses andgenerated a net profit （excluding non-recurring items） of Rmb350mn–450mn in 4Q18, in line with our previous estimate. We attribute theturnaround to increased shipbreaking and a soaring freight rate in4Q18 following weak freight rates over 1–3Q18. The TCE for VLCCTD3C （from Middle East to China） rose from US$10,413/day （belowthe breakeven point） over 1–3Q18 to US$44,794/day in 4Q18.
Trends to watch
We expect the oil tanker industry to recover, and COSCO ShippingEnergy’s earnings to improve in an industry up-cycle. We believe theworst time for oil tanker supply and demand conditions is over, andexpect the average freight rate to recover going forward. Assumingthe firm owns 43 VLCC vessels in 2019, we estimate every US$10,000rise in the average TCE will boost its earnings by around Rmb1bn.
Domestic oil tanker and LNG transport businesses generate stableprofits. Domestic oil tanker business generates roughly Rmb600mn innet profit each year, thanks to strict fleet regulation in the country,and the firm’s large market share （nearly 60%）。 Given the firm’slong-term fleet contracts, we estimate its LNG transport business tocontribute around Rmb600mn earnings per year after the delivery ofall vessels in 2020. See page 3 for details.
Valuation and recommendation
We maintain our 2018 and 2019 net profit forecasts, and introduce a2020 forecast of Rmb2,076mn. Our forecasts are based on theaverage VLCC TCE of US$25,000/day （the breakeven point for thefirm’s fleet） for 2019 and US$35,000/day for 2020. A-/H-shares aretrading at 19.6x/15.6x 2019e P/E, and 0.7x/0.6x 2019e P/B. Wemaintain our BUY ratings and target prices of Rmb6.94 and HK$6.36,implying 1x/0.8x 2019e P/E, and offering 39%/47% upside.
Risks
Lower-than-expected global crude oil demand; soaring oil prices;OPEC production plunges; disappointing vessel dismantling.