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On June 27, the Ministry of Finance issued further clarifications regarding provisions under the Company Law (effective July 1, 2024) on the use of capital reserves to offset company losses. The clarifications specify the following:

1) The maximum loss offset shall be limited to the amount required to bring the audited negative undistributed profit as of the prior fiscal year- end to zero; 2) the sequence of offsets shall follow the order of first applying the discretionary reserve, then the statutory reserve, and finally the capital reserve; 3) eligible capital reserves for loss offsetting include those arising from capital contributions (monetary or non-monetary assets by shareholders) or capital injections through debt assumption or forgiveness. The notice also outlines requirements for shareholder meeting deliberations and information disclosure procedures.

Comments

The negative undistributed profit of the parent company limits Nanjing Tanker Corporation’s ability to pay dividends, though we believe the company may be closer to resuming dividends once the detailed rules are clarified. As of 1Q25, the parent company reported an undistributed profit loss of Rmb1.42bn, narrowing by Rmb160mn from end-2024. According to the company’s previous announcement, if it meets the requirements to use its capital reserve to offset losses, it plans to use the reserve to pay dividends to investors as soon as possible after covering the losses, thereby enhancing shareholder returns and supporting valuation improvement.

Supply of MR vessels-the firm’s main vessel type-remains relatively tight, and we expect average freight rates to rise amid an industry up-cycle. According to Clarksons, backlog orders for MR vessels currently account for 16.2% of total shipping capacity, while vessels over 20 years old make up 15%, with most new orders intended to replace aging ships. In addition, we believe that tightening US sanctions on shadow fleets (which primarily consist of small- and medium-sized tankers transporting Russian oil), stricter environmental regulations, and an aging fleet leading to efficiency losses will constrain the effective　shipping capacity of MR vessels. As a result, we expect the industry cycle to continue trending upward.

On the demand side, as refineries in the Asia-Pacific continue to come online in 2026 and 2027 and the European economy gradually recovers, we expect increased east-to-west transportation of refined oil products and longer shipping distances to further support average freight rates.

Upbeat on YoY and HoH improvement in refined oil freight rates in 2H25. Due to a high base in 1H24 caused by the Red Sea bypass, the average freight rate for MR vessels on package routes in the Asia-Pacific has declined 50.5% YTD. However, freight rates have risen recently due to geopolitical changes in the Middle East.

Looking ahead, we expect refined oil freight rates to improve both YoY and QoQ in 3-4Q25. Geopolitical-driven crude oil price fluctuations may further boost demand for refined oil transportation. Additionally, transportation demand is likely to rise QoQ during the peak travel season in Europe and the US in July and August, and during the peak operating season of domestic refineries in 4Q25. As freight rates fell to low levels in 2H24, we remain upbeat on the growth potential of refined oil shipping rates in 2H25, especially in 4Q25.

Financials and valuation

As refined oil freight rates have been lower than expected YTD, we cut our 2025 earnings forecast by 11.9% to Rmb1.33bn. We maintain our target price and OUTPERFORM rating, given the rising sector risk premium. Our target implies 13.4x 2025e and 11.7x 2026e P/E, offering 27.1% upside. The stock is trading at 10.5x 2025e and 9.2x 2026e P/E. The firm’s debt- to-asset ratio remains low at 15.1% (end-2024), and its current P/B of 1.1 provides a margin of safety.

Risks

Geopolitical changes; slowing global economic growth.