CHINA MERCHANTS ENERGY SHIPPING(601872)：STOCK OPTION INCENTIVE PLAN SHOWS MANAGEMENT‘S LONG-TERM CONFIDENCE IN FIRM

　　What's new
　　China Merchants Energy Shipping (CMES) announced its second stock option incentive plan on March 8. The firm plans to grant options corresponding to 185mn of ordinary shares (2.3% of its current equity base) to 323 senior executives and business and technology employees at an exercise price of Rmb7.31/sh (vs. Rmb7.33 at the market close on March 8), which will be unlocked in 3 years. We believe the incentive plan, which is still subject to shareholders' approval, will effectively motivate employees and align executives with the interests of shareholders.
　　Comments
　　Stock option incentive plan shows management's confidence.We believe the new incentive plan covers a wider range of employees and has higher exercising conditions than the first stock option incentive plan in 2019.
　　Wider coverage: A total of 323 employees will be granted stock options this time, accounting for 7% of staff (vs. 120 employees and 2.6% of staff in 2019). Candidates include senior managers, senior technology employees, and other core employees.
　　Higher exercising conditions: The exercising conditions of this incentive plan are based on three indicators: weighted average cash return on net assets (EOE[1]), revenue CAGR (vs. 2021), and economic value added (EVA) which is the same as the first plan. However, unlocking conditions are stricter, e.g., EOE and revenue CAGR should not be lower than the 75th percentile that of peers (vs. 50th percentile for the first plan). EOE should not be lower than 30% (vs. 12%,13% and 15% respectively for the three exercising periods of the first plan). Based on data for early 2022 and end-3Q22[2], we estimate that if EOE is 30%, EBITDA in 2022 should reach about Rmb8.8bn.
　　We believe that the incentive plan shows management's confidence in the firm's profitability and asset returns. CMES is a shipping platform owned by China Merchants Securities (CMS). The firm attaches importance to profitability and asset returns, in line with the State-owned Assets Supervision and Administration Commission of the State Council's (SASAC) efforts to encourage high-quality development and improve the quality of central state-owned enterprises' (SOEs) business operations[3].
　　CMES is less likely to be affected by cyclicality due to the fine-tuning of its business structure over the past few years; average earnings increase with fluctuations notably easing. Uncertainties continue in the global container shipping industry. That said, we think any fluctuations in Asia will be milder, and we are upbeat on earnings of firms operating in the region.
　　Meanwhile, CMES’s liquefied natural gas (LNG) shipping business continues to grow. We expect its oil tanker and dry-bulk shipping businesses to improve along with the recovery of demand in China, given tailwinds from supply sides of oil tanker and dry-bulk shipping markets.We expect earnings of the two businesses to increase. We are optimistic about the investment value of CMES in the long term, given a solid foundation and upside potential in its earnings.
　　Financials and valuation
　　We keep our 2022 and 2023 earnings forecasts unchanged, and introduce our 2024 earnings forecast of Rmb7.6bn. The stock is trading at 8.7x 2023e P/E and 1.6x 2023e P/B. We maintain OUTPERFORM and TP at Rmb9.30, implying 11x 2023e P/E and 2x 2023e P/B, offering 27% upside.
　　Risks
　　Earnings fluctuate sharply; weakening global economy weighs on shipping demand.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。