1H19 results in line with our forecast
COSCO Shipping Energy announced its 1H19 results: revenue grew39% YoY to Rmb7.14bn and net profit attributable to shareholderswas Rmb469mn （vs. a loss of Rmb217mn in 1H18） or Rmb0.12/sh, inline with the firm’s preannounced earnings range （Rmb440–500mn）。
In 2Q19, the firm’s earnings reached Rmb41mn despite a slackseason. The firm’s earnings turned positive YoY in 1H19, for possiblytwo reasons. First, the firm’s international oil shipping businessimproved significantly. Daily time charter equivalent （TCE） rate ofvery large crude carriers （VLCCs） at the TD3C route （Middle East toChina） rose 136% YoY. The firm’s gross profit from international oilshipping reached Rmb443mn and gross margin of this businesssegment rose 27.5ppt to 11%. Second, the firm’s businesses thatgenerate stable income grew steadily. The gross margin of the firm’sdomestic oil shipping business fell in 1H19, as low-gross-marginrefined oil shipping service accounted for a larger share in totalrevenue. The gross profit of this business segment remained largelyflat YoY at Rmb564mn. The firm’s LNG shipping business contributedpre-tax profit of Rmb286mn, up 38.60% YoY.
Meanwhile, the firm stepped up efforts to control costs. Its unit fuelconsumption rose 8.7% YoY in 1H19 but the growth rate of its portcharges was 8.5ppt lower than its shipping capacity growth rate. Thefirm’s average fuel procurement cost was about 4% lower thanmarket average in 1H19 thanks to its advantages in centralizedprocurement.
Trends to watch
We remain upbeat on fundamentals of oil shipping business.
Financials and valuation
We keep our 2019 and 2020 net profit forecasts unchanged atRmb1,103mn and Rmb2,248mn. The firm’s A-share is trading at 1.0x2019e P/B and 0.9x 2020e P/B, and its H-share is trading at 0.6x2019e P/B and 0.5x 2020e P/B. For its A-share, we maintainOUTPERFORM rating and TP of Rmb8.33 （1.2x 2019e P/B, 16.0%upside）。 For its H-share, we maintain OUTPERFORM rating and TP ofHK$6.36 （0.8x 2019e P/B, 42.6% upside）。 Risks: Lower-than-expectedfreight rates, shipbreaking volume and crude exports from the US.