1H25 results in line with our expectations

Zhonggu Logistics announced its 1H25 results: Revenue fell 6.99% YoY to Rmb5.338bn; attributable net profit rose 41.59% YoY to Rmb1.072bn, implying EPS of Rmb0.51. In 2Q25, revenue fell 6.3% YoY and rose 7.8% QoQ to Rmb2.769bn; attributable net profit rose 42.5% YoY and fell 4.1% QoQ to Rmb525mn, in line with our expectations. Excluding asset disposal income, the firm’s profit rose 76.1% YoY and 8.9% QoQ in 2Q25.

Gross margin fell QoQ and rose YoY in 2Q25, mainly due to changes in freight rates and the structure of revenue from domestic and

foreign trade. In 2Q25, the firm’s gross margin fell 4.9ppt QoQ and rose 11.9ppt YoY to 20.9%, mainly driven by fluctuations in domestic freight rates. The PDCI freight index averaged 1,157.9 points in 2Q25, down 6.0% QoQ and up 12.0% YoY. We also attribute the YoY improvement in gross margin to increased revenue contribution from higher-margin foreign trade business in 2Q25.

Trends to watch Foreign trade charter business contributed solid earnings; upbeat on domestic trade business in the 4Q25 peak season. Affected by the

bypassing of the Red Sea, changes in ocean-going fleet alliances, and limited supply of small vessels, foreign-trade container ship owners’ demand for time charters of small vessels has increased markedly YTD.

Charter rates of small vessels have risen from high levels, and charter periods have generally increased from an average of three months last year to 1-2 years or longer. Data from Alphaliner shows that the contracted charter periods of the firm’s vessels have exceeded two years since April, and a small number of its vessels have yet to be renewed in 2H25. We believe demand for small vessels will continue, and the firm can renew charters at high rates and for long periods. After renewals are completed in 2H25, the firm will lock in charters for at least two years for its foreign trade vessels, providing support for its earnings in 2025 and 2026. Freight rates in the domestic trade market have improved YoY this year, and the PDCI freight index has stabilized recently. We are upbeat on freight rates in the peak season in 4Q25 as the competitive landscape improves, which may boost the firm’s full-year earnings.

The firm pays an interim dividend and maintains a high dividend payout ratio; its dividend yield is attractive. The firm has increased its　　dividend frequency and pays an interim dividend with a payout ratio of 84%. The firm has ample cash on hand and is willing to pay dividends. As of end-June 2025, the firm had about Rmb12.35bn of cash and nearly Rmb5.43bn of net cash (cash includes wealth management products and structured deposits). Assuming a full-year dividend payout ratio of 84%, the dividend yield would be 7.9% for 2025. Assuming a full-year dividend payout ratio of 60% (the lower limit of the firm’s promise), the dividend yield would be 5.7% for 2025.

Financials and valuation

Considering the improving competitive landscape in the domestic trade market and possible higher-than-expected freight rates in the peak season, we raise our 2025 and 2026 net profit forecasts 10.5% and 16.1% to Rmb2.08bn and Rmb2.02bn. The stock is trading at 10.6x 2025e and 10.9x 2026e P/E. We maintain an OUTPERFORM rating and raise our target price 9.6% to Rmb13.87, implying 14x 2025e and 14.5x 2026e P/E and a 2025e dividend yield of 6% and offering 32.5% upside.

Risks

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