1Q24 results in line with our expectations

Zhonggu Logistics announced its 1Q24 results: Revenue fell 8.2% YoY and 11.6% QoQ to Rmb2.79bn. Attributable net profit reached Rmb389mn, implying EPS of Rmb0.19 (-36.3% YoY and -26.0% QoQ). Excluding gains from ship sales, the firm booked a profit of Rmb316mn in 1Q24 (-35.7% YoY and -27.3% QoQ).

Government subsidies fell markedly YoY and QoQ in 1Q24 due to delayed government tax rebates. Excluding income from ship sales and government subsidies, recurring net profit fell 17.0% YoY and rose 3.8% QoQ to Rmb284mn in 1Q24. The firm's 1Q24 results are in line with our expectations. Revenue and earnings fell YoY and QoQ, due to falling freight rates in the industry, in our view. The average Panasia China Domestic Container Freight Index (PDCI) fell 26.8% YoY and 4.8% QoQ in 1Q24.

1Q24 freight volume rises; GM improves QoQ. In 1Q24, the firm's freight volume in the domestic trade market rose 7.45% YoY to 3.22mn TEU. Its weighted average domestic shipping capacity rose 2.39% YoY, with freight volume growing faster than capacity growth. Meanwhile, the firm’s loading rate increased YoY, which we believe reflects its improved operational capability of its domestic fleet.

In 1Q24, the firm's GM rose 1.7ppt QoQ to 16.4%. We believe the increase in shipping capacity in the export market has boosted GM, and its operational capability in the domestic trade market rose QoQ.

Trends to watch

The firm has launched all of its new large vessels, and we expect its earnings to improve further as its operational capabilities improve. As of end-April 2024, the firm had launched all of its 18 new large vessels. We believe the firm may improve its profitability through measures such as optimizing routes, increasing loading rate, and cutting costs (e.g. falling vessel charter cost) in 2024. We expect its GM to improve further. We note that recent freight rates are steadily rising in the export market. We think this may indirectly ease the pressure from the shift of shipping capacity from export market to domestic trade market and boost income from vessel leasing in the export market.

Supply of new shipping capacity limited; demand to benefit from shift from bulk shipping to container shipping in long term. We note that there is little new container shipping capacity in the domestic trade　market in 2024. Meanwhile, we believe that it is unlikely that the transport capacity will return from export market to domestic trade market, since the freight rates for foreign trade have improved.

We expect market demand to increase in the long term, driven by the shift from bulk shipping to container shipping. Data from yearbooks for the port industry shows the containerization rate of cargo throughput at ports in China was about 20.5% in 2021, compared with over 50% in developed countries. The proportion was even lower for coal transport at low single digits. We believe the market share of container transport may continue to increase, as container shipping is an efficient mode of transportation.

Financials and valuation

We keep our earnings forecasts unchanged. The stock is trading at 11.7x 2024e and 10.8x 2025e P/E. We maintain an OUTPERFORM rating and TP of Rmb11.5, implying 14.8x 2024e and 13.7x 2025e P/E, offering 26.1% upside. The firm has ample cash on hand. As of March 31, 2024, the firm had cash of around Rmb10.3bn (including wealth management products and structured deposits), with net cash of nearly Rmb4bn. We assume a dividend payout ratio of 70% for 2024, implying a dividend yield of 6.0% for 2024. If the dividend payout ratio remains at 88% as in 2023, the dividend yield for 2024 would be 7.5%.

Risks

Transport capacity shifting from export market to domestic trade market; domestic economic growth slows.