1H23 results in line with our expectations
　　Pacific Basin Shipping announced its 1H23 results: Revenue fell 33.4% YoY to US$1.15bn, and attributable net profit fell 81.7% YoY to US$85mn (US$0.016/sh), in line with our expectations. In 1H23, the average Baltic Supramax Index (BSI) and Baltic Exchange Handysize Index (BHSI) fell 61.2% and 61.0% YoY, and the firm generated higher-than-industry- average freight rates thanks to its flexible and efficient operation. The time charter equivalent of its handysize and supramax carriers was US$13,030/day and US$13,700/day, higher than the industry indexes by US$4,390/day and US$3,770/day.
　　The balance sheet remains solid; net debt accounts for only 7% of　the fleet's net book value. The firm maintains a solid balance sheet structure. It invested in fleet expansion in 1H23 while repaying debt, reducing future financial expenses, and maintaining a healthy cash level.
　　The dividend yield is attractive. The firm announced an interim dividend of HK$6.4 cents/sh, accounting for 51% of the current net profit. If the firm maintains a 51% dividend payout ratio for the full year (the minimum dividend ratio is set at 50%), the current share price implies a dividend yield of 6.3%, which is attractive.
　　Trends to watch
　　Industry demand to bottom out; supply growth remains limited; supply-demand conditions in the dry bulk market to improve in the long term.
　　Demand: In 1H23, shipping rates continued to fall due to weak demand for minor bulk shipping amid slowing global economic growth and interest rate hikes in Europe and the US. However, we expect infrastructure investment to accelerate, supported by China's pro-growth policies and demand from emerging market countries such as India and Southeast Asia, thus boosting demand for the transportation of minor bulks such as nonferrous metals and timber. We expect industry demand to bottom out.Clarksons expects global dry bulk shipping demand to grow 2.0% in 2023.
　　Supply: Supply of dry bulk fleet continues to improve, laying the foundation for a stable and improving market. In July 2023, the　proportion of global dry bulk carrier orders in fleet size (by capacity) was only 7.8%, a historical low. We anticipate further room for capacity reduction amid higher environmental protection requirements. We also believe existing capacity still needs to meet requirements through renovation and speed reduction, which may further limit supply.
　　The firm continues to expand its fleet size and optimize its fleet structure, and it is making counter-cyclical investments to await
　　industry recovery. The company maintains its development strategy of replacing old handysize carriers with larger and newer vessels. In 1H23, it delivered seven vessels (including five super-large handysize carriers) and sold two nearly 20-year-old handysize carriers. We believe the optimization of the firm's fleet structure will enhance its cost competitiveness and long-term profitability.
　　Financials and valuation
　　Due to falling shipping rates, we cut our 2023 and 2024 net profit forecasts 60.0% and 53.9% to US$182mn and US$261mn. The stock is trading at 8.1x 2023e and 5.6x 2024e P/E. We maintain OUTPERFORM. Given the market’s long-term uptrend, we cut our TP 11.2% to HK$2.85 (10.7x 2023e and 7.4x 2024e P/E), offering 31.3% upside.
　　Risks
　　Global economic growth slows; China's economic recovery disappoints.