CHINA MERCHANTS ENERGY SHIPPING(601872)：EARNINGS IN LINE;OIL SHIPPING BUSINESS TO BOOST EARNINGS

　　2022 results in line with our expectations
　　China Merchants Energy Shipping announced its 2022 results: Revenue rose 21.69% YoY to Rmb29.71bn, and net profit attributable to shareholders rose 40.92% YoY to Rmb5.09bn, or Rmb0.61/sh. Excluding non-recurring gains and losses （i.e., disposal of non-current assets and government subsidies）， recurring net profit grew 157.23% YoY in 2022, in line with our expectations.
　　Coordinated development of multiple business segments. In 2022, revenue from the oil shipping business rose 82.8% YoY to Rmb7.03bn, and GM rose 27.29ppt YoY to 18.31%, mainly due to the significant rise in average freight rates for VLCC and Aframax in 2022.
　　For the dry bulk cargo shipping segment, revenue rose 3.4% YoY to Rmb11.76bn. GM fell 2.22ppt YoY to 20.97%, mainly due to falling freight rates. However, the firm still managed to increase average TCE of its fleet by 6% YoY in 2022 （the BDI Index fell 34.3% YoY） thanks to its efficient and flexible operations.
　　For the container shipping business, revenue rose 29.06% YoY to Rmb7.12bn and GM rose 3.25ppt YoY to 35.68%, as the average freight rate increased YoY in 2022 （CCFI rose 7.5% YoY）。
　　As for other areas, revenue from the ro-ro shipping business rose 20.55% YoY with GM at 10.98%. The firm is actively expanding its LNG business. It ordered 23 new LNG vessels in 2022 and won bids for several transportation projects such as CNOOC Phase II.
　　Trends to watch
　　Oil shipping supply tightens; demand still unmet; freight rates to fluctuate and rise amid industry up-cycle. Clarksons expects demand to grow 7.2% YoY and supply to grow 2% YoY in 2023. During the upward trend of average freight rates, although short-term fluctuations of spot freight rates may weigh on share prices, spot freight rates may still fluctuate around average freight rates. As a result, the short-term lows of freight rates may trend upward. Freight rates of VLCCs averaged US$60,000/day in 1Q23, and we expect seasonal demand to further boost freight rates as the peak season arrives in 2H23.
　　After adjusting its business structure in the past few years, the company has become less cyclical, and its average earnings have risen and become much less volatile than in the past. Despite uncertainties, we believe the intra-Asia container shipping business will be less volatile and its earnings will remain supported. The LNG shipping business continues growing. The ro-ro business is expanding, and the firm has signed contracts for the confirmed purchase of two dual-fuel ro-ro vessels, as well as the option to buy four vessels. The firm expects the ships to be delivered in 2025-2026. We believe supply conditions are favorable for oil shipping and dry bulk cargo, and that earnings will gradually increase along with the demand recovery in China. Given downside support for earnings as well as upside potential, we believe this stock offers long-term investment value.
　　Financials and valuation
　　We keep our earnings forecasts unchanged. The stock is trading at 8.4x 2023e and 7.6x 2024e P/E. We maintain OUTPERFORM rating and target price of Rmb9.3/sh, implying 11.0x 2023e and 9.9x 2024e P/E, offering 31.5% upside.
　　Risks
　　China’s economic recovery disappoints; weakening global economy weighing 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。