2019 results in line with our forecast
COSCO Shipping Energy announced 2019 results: revenue rose 13.4%YoY to Rmb13.72bn, and net profit attributable to shareholdersincreased 454% YoY to Rmb414mn (Rmb0.1/sh). This is in line withthe company’s previous guidance. COSCO recorded a loss ofRmb151mn in 4Q19, mainly because its wholly owned subsidiary,COSCO Shipping Tanker (Dalian), was put on the Specially DesignatedNationals and Blocked Persons List by the US Treasury Department’sOffice of Foreign Assets Control. COSCO Dalian was removed from thesanctions list on January 31, 2020 (Eastern time, US). However, themarket still has concerns over whether the firm’s ships have resumednormal operations, which we believe could present upside potentialto market expectation.
By segment, international oil shipping’s gross profit totaledRmb620mn (GP margin of 8.4%), and Rmb1.27bn for domestic oilshipping (GP margin of 25% vs. 27% in 2018). Before-tax profit fromLNG shipping segment surged 48% YoY to Rmb603mn, reflecting newvessels.
Trends to watch
We believe oil-shipping demand directly depends on oil productionrather than oil consumption, and oil-producing countries areincreasing oil production to compete for market share. We believeoil inventories could grow rapidly and demand and trading are likelyto increase for floating storage.
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Stable earnings contribution from domestic and LNG shipping.
Financials and valuation
We raise our 2020 and 2021 earnings forecasts 65% and 11% toRmb2.61bn and Rmb2.47bn, as freight rates beat expectation. TheH-shares are trading at 0.5x 2020 P/B and A-shares at 0.9x. Wemaintain an OUTPERFORM rating for the A- and H-shares, with targetprices for the A-shares at Rmb8.92 (1.2x 2020e P/B), offering 26%upside and for the H-shares at HK$5.2 (0.6x 2020e P/B), offering 41%upside.
Risks
Oil-producing countries reach new agreement to cut production; oilcompanies reduce capex.