1Q25 results beat our expectations

Zhonggu Logistics announced its 1Q25 results: Revenue fell 7.8% YoY and 8.7% QoQ to Rmb2.57bn. Attributable net profit reached Rmb547mn, implying an EPS of Rmb0.26, up 40.7% YoY and down 24.7% QoQ. The firm’s results beat our expectations, as the firm booked asset disposal income of about Rmb93mn. Excluding asset disposal income, the firm’s attributable net profit was Rmb0.48bn. We attribute the YoY earnings growth to higher profit from the foreign trade segment and higher gross profit thanks to lower operating cost.

Trends to watch

Vessel rents for foreign trade continued to rise. We believe demand for small vessels operated by the firm may increase further in the foreign trade market. We expect the foreign trade business to support solid earnings in 2025. Foreign trade rents of small vessels have been rising since the beginning of 2024, with one-year rents of 4,250TEU and 2,500TEU vessels up 105.4% and 84.9% YoY as of April 25. According to the United States Trade Representative, small vessels of less than 4,000TEU are exempt from US port fees, and we think rents of small vessels operated by the firm may remain high amid continuously tight supply in the foreign trade market.

Data from Alphaliner shows that the firm’s foreign trade vessel charters signed since the beginning of 2025 have higher rents and longer terms than last year . Considering that the firm has put more ships into its foreign trade business this year than last year, we expect the foreign trade business to contribute more profit in 2025 and support its steady earnings growth.

Supply-demand conditions of domestic trade to improve YoY in 2025; demand to benefit from the shift from bulk shipping to container shipping in the long term. Freight rates for domestic trade have improved YoY since the beginning of 2025, and the YTD average of PDCI increased 7.7% YoY as of April 25 (last week). We expect domestic trade supply-demand conditions to improve in 2025 compared with last year. On the supply side, we expect domestic trade freight rates to improve YoY in 2025, given limited repatriation of domestic trade capacity amid high rents for foreign-trade vessels. Meanwhile, we expect the company’s demand to　benefit from improving domestic demand.

In the long term, we believe the shift from bulk shipping to container shipping will continue amid domestic companies’ efforts to reduce logistics costs and promote the intermodal transport of railway and waterway, boosting long-term demand growth for the industry and the company.

The firm has ample cash on hand and maintains a high dividend payout ratio, making its dividend attractive. As of end-2024, the firm had Rmb12.3bn cash on hand and nearly Rmb5.7bn net cash (cash includes wealth management products and structured deposits), implying ample cash and a high willingness to pay dividends. Its dividend payout ratios reached 73.5%, 88.0% and 90.4% in 2022-2024. Assuming the dividend level in 2024 is maintained in 2025, we estimate that the dividend yield would be 7.8% in 2025, or 5.1% if the dividend payout ratio is 60%, at the lower limit of the pledged range.

Financials and valuation

We keep our 2025 and 2026 net profit forecasts unchanged at Rmb1.88bn and Rmb1.74bn. The stock is trading at 12.0x 2025e and 13.0x 2026e P/E. Given rising market preference for sectors with high dividends, we maintain an OUTPERFORM rating and raise our target price 10% to Rmb12.65, implying 14.1x 2025e and 15.3x 2026e P/E, offering 17.6% upside.

Risks

Geopolitical changes; falling vessel rents for foreign trade; the shift of shipping capacity to domestic trade; slowing domestic economic growth.