1H20 earnings preannounced to grow 497–540% YoYCOSCO Shipping Energy preannounced 1H20 attributable net profitmay grow 497–540% YoY to Rmb2.81–3.01bn. This implies 2Q20 netprofit may grow over 5,000% to Rmb2.13–2.33bn （under CASreporting） on a low base, proving the company’s earnings upside andbeating our expectation of Rmb2.0bn. According to the firm: 1） theoil tanker business markedly improved, with average TCE of VLCCTD3C rising 304% YoY to US$82,200/day – the firm secured shippingcontracts amid high freight rates by leveraging its advantages in scale;2） domestic trade largely returned normal in 2Q20; 3） profit fromLNG transportation increased as the fleet expanded; at end-June, thenumber of LNG vessels in operation rose by six YoY to 36 vessels.
Trends to watch
Positive factors emerge; upbeat on performance in peak season.
Officials at the OPEC + meeting on July 15 agreed to slow the oiloutput reduction from 9.7mn bbl/day to 7.7mn bbl/day in August,implying MoM output growth of 2mn bbl/day （or daily incrementaldemand of one VLCC）。 We estimate rising spot volume may improvesupply and demand conditions in the near term. 4Q is usually a peakseason, and freight rates usually start to rise in early-October.
Optimistic on up-cycle in oil tanker market. The orderbook/fleetratio is low at 8% and new orders are down 50% YoY to 10 vessels.
Meanwhile, the proportion of older vessels aged above 15-years-oldreached 24% due to the peak of vessel delivery in 2000–2005. Wethus expect supply to drop in the next 3 years （VLCC new vesseldelivery should drop 37%, 35%, and 61% YoY in 2020–2022 based onthe orderbook）， paving the way for a sector up-cycle ahead.
Domestic trade and LNG business contribute stable returns.
Domestic oil tanker capacity is strictly regulated; the firm boastsabout 60% market share with stable freight rates （COA contractsaccount for over 90%） and annual earnings contribution of aboutRmb600mn. In addition, LNG vessels have secured long-termcontracts, and we estimate their 2020 earnings contribution couldreach about Rmb600mn amid new vessel delivery.
Valuation and recommendation
COSCO Shipping Energy A-share is trading at 7.5x 2020e P/E and 0.9xP/B, and H-share at 3.6x P/E and 0.4x P/B. Maintain earningsforecasts and OUTPERFORM for A-share and H-share with TPsunchanged at Rmb9.63 （1.2x 2020e P/B with 37% upside） andHK$5.60 （0.6x 2020e P/B with 46% upside）。 Risks: Crude oil outputcut larger and/or longer lasting than we expected; sharp increase inorders for new vessels.