1Q26 results in line with our expectations

Zhonggu Logistics announced its 1Q26 results: Revenue rose 0.38% YoY and fell 5.15% QoQ to Rmb2,579mn. Attributable net profit fell 3.63% YoY and 10.77% QoQ to Rmb527mn, in line with our expectation. We attribute the YoY and QoQ decline in net profit in 1Q26 to: 1) High base from 1Q25 caused by sset disposal income of Rmb93mn from the sale of vessels. Excluding non-recurring gains and losses, recurring net profit rose 11.89% YoY to Rmb494mn. FX gains declined amid renminbi appreciation in 1Q26 (financial expenses excluding interest expenses and income rose Rmb134mn YoY and Rmb68mn QoQ in 1Q26).

Gross margin rose YoY and QoQ in 1Q26. The firm's gross margin rose 7.5ppt YoY and 6.4ppt QoQ to 33.3%. We attribute the higher gross margin to falling operating costs, which fell 9.9% YoY and 13.5% QoQ to Rmb1.715bn in 1Q26.The firm's expense ratio improved, with selling and G&A expenses falling 12.7% and 4.6% QoQ.

Trends to watch

Supply and demand conditions in the small vessel market remain strong; foreign-charter shipping profit to support earnings in the next two years; dividends attractive. Foreign-charter shipping rates continued to rise. According to Clarksons, one-year time charter rates for 4,250TEU and 1,700TEU container ships were US$60,250/day and US$29,250/day as of end-April, up 4.8% and 7.3% YoY and up 10.6% and 1.7% from the beginning of the year.

Supply and demand conditions remain strong in the small vessel market. According to Clarksons, as of end-April, 28.4% and 30.4% of container ships under 3kTEU and 3k–6kTEU were older vessels over 20 years old, while backlog orders accounted for 12.6% and 20.1% of total shipping capacity. The firm's foreign-charter vessel orders are largely booked through 2027– 2028. We believe the foreign-charter business will support the firm's earnings in 2026 and 2027. Based on the 60% minimum dividend assumption and our earnings forecasts, we estimate the dividend yield will be 5.3% in 2026 and 6.2% in 2026 based on the same dividend ratio as last year (70%).

Financials and valuation

We keep our 2026 and 2027 net profit forecasts unchanged at Rmb2.02bn and Rmb2.19bn. The stock is now trading at 11.3x 2026e and 10.4x 2027e P/E. We maintain OUTPERFORM amd TP of Rmb13.87, implying 14.4x 2026e and 13.3x 2027e P/E, offering 28.1% upside.

Risks

Geoeconomic changes; a slowing in global economic growth.