Preannounced 2023 attributable net profit up 112.77-167.67% YoY COSCO SHIPPING Energy Transportation preannounced its 2023

results, estimating that its 2023 attributable net profit surged about 112.77-167.67% to Rmb3.1-3.9bn, and in 4Q23, attributable net profit reached the range of -Rmb614mn to Rmb186mn.

The firm’s results missed our expectations, mainly due to estimated provisions for a non-operating net loss of Rmb750mn in 2023 (due to non- routine repairs of vessels, investment losses from overseas associates, estimated losses from third-party claims, etc.). The firm estimates that net profit excluding non-operating income soared 180.37-237.89% YoY to Rmb3.9-4.7bn, and 4Q23 recurring net profit at Rmb576mn to Rmb1.38bn, implying a QoQ change of a 36.2% decline to a 52.3% increase.

By business, gross profit of the foreign trade business jumped YoY, while the domestic trade and LNG businesses grew steadily. The firm

estimates that gross profit of its foreign trade business grew about 188% YoY to Rmb4.2bn in 2023, implying gross profit of Rmb711mn in 4Q23 (-54.2% YoY and -0.4% QoQ). The firm estimates that the average freight rate of very large crude oil carriers (VLCCs) saw a QoQ change of a 26.3% decline to a 15.0% increase in 4Q23.

The firm estimates that gross profit of the domestic business rose about 17.9% YoY to Rmb1.5bn in 2023, implying gross profit of Rmb383mn in 4Q23 (+31.6% YoY and -8.2% QoQ). The firm estimates that the liquefied natural gas (LNG) business contributed Rmb790mn to attributable net profit in 2023, up 18.4% YoY, with the contribution at Rmb173mn in 4Q23.

Trends to watch In the long term, we expect the average freight rate to rise amid an

industry up-cycle. We believe the oil tanker market is likely to see low growth in supply in the next 2-3 years (ratio of VLCC orders to shipping capacity was 2.56% in January 2024), laying a foundation for a cyclical uptrend in the industry. Clarksons forecasts that demand may grow 4.3% and 2.8% and supply may increase 0.7% and 1.2% over 2024-2025, implying the gap between supply and demand will decline 3.6ppt and 1.6ppt.

According to our previous estimates, the gap between supply and demand may fall 6.5ppt in 2024 if the impact of the Red Sea crisis

persists throughout the year. VLCC freight rates have averaged US$48,744/day since 1Q24, down slightly by 5% QoQ from 4Q23, but still higher than historical levels during the traditional slack season. We expect the gap between supply and demand in the industry will boost average freight rate YoY, thereby enhancing the firm's earnings.

Financials and valuation

As the firm charged provisions for high non-operating losses, we lower our earnings forecasts 32.5% to Rmb3.51bn for 2023 and 6.9% to Rmb5.95bn for 2024. We introduce our 2025 earnings forecast of Rmb7.03bn. A- shares are trading at 10.3x 2024e and 8.7x 2025e P/E, and H-shares at 5.2x 2024e and 4.3x 2025e P/E. We maintain OUTPERFORM ratings for both A-shares and H-shares. We maintain our A-share TP at Rmb18.2 (14.6x 2024e and 13.8x 2025e P/E with 41.4% upside), and our H-share TP at HK$10.75 (6.4x 2024e and 6.1x 2025e P/E with 44.5% upside).

Risks

Falling global crude oil demand; changes in navigation risks in the Red Sea region; oil-producing countries cutting production.