2023 results miss our expectations

China Merchants Energy Shipping announced its 2023 results: Revenue fell 12.88% YoY to Rmb25.88bn, and attributable net profit fell 4.92% YoY to Rmb4.84bn, implying EPS of Rmb0.6. In 4Q23, revenue fell 15.6% YoY or rose 13.7% QoQ to Rmb6.86bn, and attributable net profit fell 11.6% YoY or rose 9.2% QoQ to Rmb1.08bn, missing our expectations, weattribute this to the lower oil shipping freight rate in 4Q23.

In 4Q23, the oil tanker shipping business witnessed a steady growth in earnings; dry bulk and container shipping improved QoQ; the LNG shipping business expanded steadily. In 4Q23, net profit from thetanker shipping business fell 19.2% YoY or rose 40% QoQ to Rmb736mn, mainly due to seasonal changes in shipping rates. In 4Q23, net profit from the dry bulk shipping sector rose 195.7% YoY or 57.7% QoQ to Rmb333mn, mainly driven by a significant rise in shipping rates of large vessels in 4Q23 (the average Baltic Exchange Capesize Index rose 88.7% YoY or 108.7% QoQ).

In 4Q23, the container shipping segment's net profit fell 3.2% YoY or rose 34.7% QoQ to Rmb236mn, and the average Shanghai Containerized Freight Index of Southeast Asia shipping routes fell 31.3% YoY or rose 26.1% QoQ, while that of Japan routes fell 1.2% YoY or 3.3% QoQ. In 4Q23, net profit from the ro-ro shipping business was Rmb49mn, flat YoY and down 45.9% QoQ. Liquefied natural gas (LNG) companies have expanded their shipping capacity and launched new projects. At the end of December 2023, CMES LNG Shipping Company Limited secured orders for the independent production of eight vessels and held stakes in projects involving 10 carriers.

Trends to watch

The oil shipping sector has upside potential; a diversified business portfolio offers growth potential and weak cyclicality. Over the nextthree years, we expect the oil shipping sector to see an upward cycle, with only one or five very large crude carriers (VLCCs) to be delivered in 2024 and 2025. We expect the average freight rate of VLCCs to rise year by year amid low supply growth. The firm's VLCC fleet has the largest shipping capacity in the world, and we see a strong upside in earnings.

The dry bulk shipping business is witnessing slow supply growth, and we expect an upside if demand marginally improves. The container shipping business faces pressure on the supply side, but strong demand in Asia YTD should bolster this segment's full-year earnings, in our view. The ro-ro and LNG shipping business's expanding capacity should boost the firm's long-term growth. We believe the firm has solid earnings and long-term investment value.

Financials and valuation

Given the lower bunker price YTD, we lower our 2024 revenue 11.2% to28.29bn, and due to better-than-expected oil and dry bulk shipping rates YTD, we raise our 2024 net profit forecast 2.9% to Rmb6.77bn and introduce our 2025 net profit forecast at Rmb7.35bn. The stock is trading at 9.3x 2024e P/E and 8.5x 2025e P/E. Maintain OUTPERFORM. As rising average freight rates have boosted valuations, we raise our TP 11.6% to Rmb9.6/sh, implying 11.5x 2024e and 10.6x 2025e P/E, offering 24.5% upside.

Risks

Falling global crude oil consumption demand; geopolitical changes; significant increase in VLCC orders.