2019 earnings expected to grow 290.5-366.7% YoY
The company preannounced its 2019 attributable net profit may rise 290.5-366.7% YoY to Rmb410-490mn, thanks to a better relationship between supply and demand in the oil tanker market. The daily time charter equivalent （TCE） rate of very large crude carriers （VLCCs） on the TD3C route （Middle East to China） rose 109% YoY to US$39,387/day.
We expect the firm to record a loss of Rmb93-173mn in 4Q19, in contrast with its Rmb583mn attributable net profit in 1-3Q19. On September 25, 2019, the firm’s wholly-owned subsidiary COSCO Shipping Tanker （Dalian） was put on the Specially Designated Nationals And Blocked Persons List by the US Treasury Department’s Office of Foreign Assets Control, resulting in lower-than-expected 4Q19 earnings （we haven’t factored in impact of the event in our previous earnings forecasts）。
Trends to watch
Fundamentals continuing improving in oil tanker market; US-China trade deal to bring positives. We are upbeat about the market over 2020-2021. For supply, we expect new-vessel delivery to decline （68 VLCC delivered in 2019 and five delivered in 2020 YTD）。 Without considering future orders, 37 VLCC are scheduled to be delivered in 2020, and 26 in 2021, resulting deliveries declining 38% and 38% YoY in 2020 and 2021. For demand, we expect US crude oil exports to continue rising amid rising transportation capacity of pipelines and terminals. According to the Phase I China-US economic and trade agreement, China would purchase no less than US$52.4bn energy products above the corresponding 2017 baseline amount from the US over 2020-2021 （US$18.5bn in 2020 and US$33.9bn in 2021）。 We expect crude oil and liquefied natural gas to play important roles.Watch further progress of sanction on COSCO subsidiary 。
Valuation and recommendation
Given the preannouncement, we lower our 2019 and 2020 earnings forecasts 61% and 35% to Rmb472mn and Rmb1.58bn, and introduce a 2021 earnings forecast at Rmb2.22bn. The firm’s A-share is trading at 0.8x 2020e P/B and H-share at 0.4x 2020e P/B. We maintain OUTPERFORM and TP for its A-share at Rmb7.76 （1x 2020e P/B, 31% upside） and for its H-share at HK$4.8 （0.55x 2020e P/B, 40% upside）。
Risks
Lower-than-expected TCE rates, uncertainty in China-US relationship.